EX-2 4 edgnotes2002.txt NOTES TO THE 2002 ANNUAL REPORT CONSOLIDATED BALANCE SHEETS December 29, December 30, (Dollars in Thousands) 2002 2001 ------------ ---------- ASSETS Current Assets: Cash and Cash Equivalents $ 22,300 $ 20,891 Short-Term Investments 6,628 -- Accounts Receivable, Less Allowance for Doubtful Accounts of $1,102 and $1,363 32,959 27,460 Accounts Receivable, Joint Ventures 1,414 5,123 Inventories: Raw Materials 5,525 10,003 In-Process and Finished 14,218 16,805 Less LIFO Reserve (1,674) (1,433) ---------- ---------- Total Inventories 18,069 25,375 Current Deferred Income Taxes 4,985 5,041 Other Current Assets 1,320 1,026 ---------- ---------- Total Current Assets 87,675 84,916 ---------- ---------- Notes Receivable (Note M) 12,000 -- Property, Plant and Equipment, Net of Accumulated Depreciation of $90,285 and $90,015 99,883 98,454 Investments in Unconsolidated Joint Ventures (Note D) 21,860 16,116 Penison Assets 8,951 6,308 Goodwill and Other Intangible Assets (Note C) 22,204 13,588 Other Assets 5,128 4,427 ----------- ---------- Total Assets $ 257,701 $ 223,809 =========== ========== 26 December 29, December 30, (Dollars in Thousands) 2002 2001 ----------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts Payable $ 10,125 $ 12,009 Accrued Employee Benefits and Compensation 10,414 6,974 Accrued Income Taxes Payable 8,249 6,337 Taxes, Other than Federal and Foreign Income 542 441 Other Accrued Liabilities 5,450 3,931 ---------- --------- Total Current Liabilities 34,780 29,692 ---------- --------- Long-Term Debt -- 1,315 Noncurrent Deferred Income Taxes 8,308 8,152 Noncurrent Pension Liability 22,658 12,371 Noncurrent Retiree Health Care and Life Insurance Benefits 6,197 6,052 Other Long-Term Liabilities 2,720 3,165 Commitments and contingencies (Note J) -- -- Shareholders' Equity: Capital Stock, $1 Par Value (Notes A & I): Authorized Shares 50,000,000; Issued Shares 15,856,748 and 15,739,184 15,857 15,739 Additional Paid-In Capital 36,600 35,351 Retained Earnings 148,045 129,438 Accumulated Other Comprehensive Loss, Net of Tax (Note I) (4,693) (4,030) Treasury Stock (360,487 and 382,900) (Note A) (12,771) (13,436) ---------- --------- Total Shareholders' Equity 183,038 163,062 ---------- --------- Total Liabilities and Shareholders' Equity $ 257,701 $ 223,809 ========= ========= The accompanying notes are an integral part of the consolidated financial statements. 27 CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands, Except Per Share Amounts) 2002 2001 2000 ---------- ---------- ---------- Net Sales $ 219,438 $ 216,037 $ 248,215 Cost of Sales 150,183 149,179 165,710 Selling and Administrative Expenses 39,335 39,247 40,529 Acquistion/Restructuring Costs (Notes J & M) 2,150 1,995 -- Research and Development Expenses 13,596 12,570 12,493 ---------- -------- -------- Total Costs and Expenses 205,264 202,991 218,732 ---------- -------- -------- Operating Income 14,174 13,046 29,483 Other Income less Other Charges (Note D) 10,861 7,953 7,838 Interest Income (Expense), Net (226) (20) 313 ---------- --------- -------- Income Before Income Taxes 24,809 20,979 37,634 Income Taxes 6,202 5,245 10,914 ---------- --------- -------- Net Income $ 18,607 $ 15,734 $ 26,720 ========== ========= ======== Net Income Per Share (Notes A & I): Basic $ 1.20 $ 1.03 $ 1.79 ---------- --------- -------- Diluted $ 1.16 $ .98 $ 1.69 ---------- --------- -------- Shares Used in Computing (Notes A & I): Basic 15,470,697 15,274,479 14,896,227 ---------- ---------- ---------- Diluted 16,023,273 16,001,965 15,848,736 ---------- ---------- ---------- The accompanying notes are an integral part of the consolidated financial statements. 28 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in Thousands, Accumulated Except Other Com- Capital Additional prehensive Share- Stock Capital Paid-In Retained Income Treasury holders' Amounts) Stock Capital Earnings (Loss) Stock Equity ---------------------------------------------------------- Balance at January 2, 2000 $15,047,552 $ 27,383 $ 86,984 $ 438 $(13,436) $116,417 ---------------------------------------------------------- Comprehensive Income: Net Income for 2000 26,720 26,720 Other Comprehensive Loss (2,641) (2,641) ----------- Total Comprehensive Income 24,079 Stock Options Exercised 513,511 3,120 3,633 Stock Issued to Directors 12,993 1,000 1,013 Shares Reacquired and Cancelled (88,486) (2,848) (2,936) Tax Benefit on Stock Options Exercised 3,607 3,607 ---------------------------------------------------------- Balance at December 31, 2000 $15,485,570 $ 32,262 $113,704 $(2,203) $(13,436) $145,813 ---------------------------------------------------------- Comprehensive Income: Net Income for 2001 15,734 15,734 Other Comprehensive Loss (1,827) (1,827) -------- Total Comprehensive Income 13,907 Stock Options Exercised 307,051 2,519 2,826 Stock Issued to Directors 11,571 459 470 Shares Reacquired and Cancelled (65,008) (2,032) (2,097) Tax Benefit on Stock Options Exercised 2,143 2,143 ---------------------------------------------------------- Balance at December 30, 2001 $15,739,184 $35,351 $129,438 $(4,030) $(13,436) $163,062 ---------------------------------------------------------- Comprehensive Income: Net Income for 2002 18,607 18,607 Other Comprehensive Loss (633) (633) ------- Total Comprehensive Income 17,944 Stock Options Exercised 152,177 1,697 1,849 Stock Issued to Directors 6,908 319 326 Shares Reacquired and Cancelled (41,521) (1,262) (1,303) Treasury Stock Issuance (139) 665 526 Tax Benefit on Stock Options Exercised 634 634 ---------------------------------------------------------- Balance at December 29, 2002 $15,856,748 $ 36,600 $148,045 $(4,693) $(12,771) $183,038 ========================================================== The number of shares is equal to the dollar amount of the capital stock ($1 par value). ---------- The accompanying notes are an integral part of the consolidated financial statements. 29 CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: 2002 2001 2000 ------------------------------------------- Net Income $ 18,607 $ 15,734 $ 26,720 Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: Depreciation and Amortization 13,571 13,712 12,507 Expense (Benefit) for Deferred Income Taxes 2,561 (395) 3,299 Equity in Undistributed Income of Unconsolidated Joint Ventures, Net (8,705) (3,123) (5,945) Loss (Gain) on Disposition of Assets 860 (103) 546 Noncurrent Pension and Postretirement Benefits 2,954 1,489 1,215 Other, Net (274) (584) 376 Changes in Operating Assets and Liabilities Excluding Effects of Acquisition and Disposition of Assets: Accounts Receivable (10,207) 13,158 (11,946) Inventories 3,627 4,771 (7,465) Prepaid Expenses (170) 14 (436) Accounts Payable and Accrued Expenses 3,203 (5,658) 4,843 ------------------------------------------ Net Cash Provided by Operating Activities 26,027 39,015 23,714 CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Capital Expenditures (22,682) (18,032) (22,744) Acquisition of Business (8,060) (2,000) (252) Disposition of Business 10,300 -- -- Proceeds from Repayments of Loans to Joint Ventures 5,000 -- -- Investment in Notes Receivable (1,500) -- -- Purchase of Short-Term Investments (6,628) -- -- Proceeds from Sale of Property, Plant and Equipment -- 225 83 Investment in Unconsolidated Joint Ventures and Affiliates 2,962 (1,417) (1,592) ------------------------------------------ Net Cash Used in Investing Activities (20,608) (21,224) (24,505) CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Proceeds from Short- and Long-Term Borrowings 4,463 1,830 296 Repayments of Debt Principal (6,522) (9,733) -- Repayment of Life Insurance Loans (3,087) -- -- Proceeds from Disposition of Treasury Stock 526 -- -- Proceeds from Sale of Capital Stock - Net 673 729 697 ----------------------------------------- Net Cash (Used in)Provided by Financing Activities (3,947) (7,174) 993 Effect of Exchange Rate Changes on Cash (63) 174 (57) ----------------------------------------- Net Increase in Cash and Cash Equivalents 1,409 10,791 145 Cash and Cash Equivalents at Beginning of Year 20,891 10,100 9,955 ----------------------------------------- Cash and Cash Equivalents at End of Year $ 22,300 $ 20,891 $ 10,100 ========================================= Supplemental Disclosure of Noncash Investing Activities: Note received from sale of business $ 10,500 Escrow associated with divestiture of business $ 200 Receivable for closing balance sheet adjustment $ 509 The accompanying notes are an integral part of the consolidated financial statements. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- NOTE A-ACCOUNTING POLICIES ---------- ORGANIZATION: ---------- Rogers Corporation manufactures specialty materials, which are sold to targeted markets around the world. These specialty materials are grouped into three distinct business segments (see Note K). High Performance Foams include urethane foams, silicone materials, and polyolefin foams. These foams are sold principally to manufacturers in the communications, computer, imaging, transportation, and consumer markets. Printed Circuit Materials include circuit board laminates for high frequency printed circuits, flexible circuit board laminates for flexible interconnections, and industrial laminates for shielding of radio and electromagnetic interference. Printed Circuit Materials are sold principally to printed circuit board manufacturers and equipment manufacturers for applications in the computer, communications, and consumer markets. Polymer Materials and Components are composed of elastomer components, nitrophyl floats, electroluminescent lamps, nonwoven materials, and bus bars for power distribution. Polymer Materials and Components are sold principally to the imaging, transportation, consumer, and communications markets. PRINCIPLES OF CONSOLIDATION: ---------- The consolidated financial statements include the accounts of Rogers Corporation and its wholly-owned subsidiaries ("the Company"), after elimination of significant intercompany accounts and transactions. CASH EQUIVALENTS: ---------- Highly liquid investments with original maturities of three months or less are considered cash equivalents. These investments are stated at cost, which approximates market value. SHORT-TERM INVESTMENTS: ---------- Short-term investments represent investments in fixed and floating rate financial instruments with maturities of twelve months or less from time of purchase. They are classified as held-to-maturity as the Company has the ability and intent to hold these investments to the maturity date and they are recorded at amortized cost. The fair market value of held-to-maturity securities approximates amortized cost at December 29, 2002. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES: ---------- The Company accounts for its investments in and advances to unconsolidated joint ventures, all of which are 50% owned, using the equity method. FOREIGN CURRENCY TRANSLATION: ---------- All balance sheet accounts of foreign subsidiaries are translated at rates of exchange in effect at each year-end, and income statement items are translated at the average exchange rates for the year. Resulting translation adjustments are made directly to a separate component of shareholders' equity. Currency transaction adjustments are reported as income or expense. 31 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 based upon historical trends and current market assessments. INVENTORIES: ---------- Inventories are valued at the lower of cost or market. Certain inventories, amounting to $3,302,000 at December 29, 2002, and $8,720,000 at December 30, 2001, or 18% and 34% of total Company inventories in the respective periods, are valued by the last-in, first-out ("LIFO") method. The decrease in 2002 resulted primarily from the divestiture of the Moldable Composites Division ("MCD"). The cost of the remaining portion of the inventories was determined principally on the basis of standard costs, which approximate actual first-in, first-out ("FIFO") costs. PROPERTY, PLANT AND EQUIPMENT: ---------- Property, plant and equipment is stated on the basis of cost, including capitalized interest. For financial reporting purposes, provisions for depreciation are calculated on a straight-line basis over the following estimated useful lives of the assets: Years -------------------------------------------- Buildings 20 -- 45 Building improvements 10 -- 25 Machinery and equipment 5 -- 15 Office equipment 3 -- 10 GOODWILL AND INTANGIBLE ASSETS: ---------- Goodwill, representing the excess of the cost over the net tangible and identifiable assets of acquired businesses, is stated at cost. Prior to 2002, goodwill was being amortized on a straight-line method over periods ranging from 10-40 years. Beginning with the first quarter of 2002 the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. The statement requires that these assets be reviewed for impairment at least annually. All other intangible assets are amortized over their estimated useful lives. Upon the adoption of SFAS No. 142, the Company reviewed the assets for impairment during the second quarter of 2002 and at year-end. Based on the assessments, management has deemed that there has been no impairment. Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its estimated fair value. Fair values are primarily established using a discounted cash flow methodology. The determination of discounted cash flows is based on the businesses' strategic plans and long- range planning forecasts. The revenue growth rates included in the plans are management's best estimates based on current and forecasted market conditions, and the profit margin assumptions are projected by each segment based on the current cost structure and anticipated cost reductions. If different assumptions were used in these plans, the related undiscounted cash flows used in measuring impairment could be different and additional impairment of assets might be required to be recorded. Purchased patents and licensed technology are capitalized and amortized on a straight-line basis over their estimated useful lives, generally from 2 to 17 years. 32 The following table presents the Company's results of operations to exclude amounts no longer being amortized under SFAS No. 142: (Dollars in Thousands, except per share amounts) 2002 2001 2000 ------------------------------ Reported net income $18,607 $15,734 $26,720 Adjustment: Goodwill amortization - 765 851 ------------------------------ Adjusted net income $18,607 $16,499 $27,571 Basic net income per share Reported $ 1.20 $ 1.03 $ 1.79 Adjusted 1.20 1.08 1.85 Diluted net income per share Reported $ 1.16 $ .98 $ 1.69 Adjusted 1.16 1.03 1.74 ENVIRONMENTAL AND PRODUCT LIABILITY: --------- Environmental investigatory, remediation, operating, and maintenance costs are accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of currently available facts with respect to each individual site, including existing technology, current laws and regulations, and prior remediation experience. Where no amount within a range of estimates is more likely, the minimum is accrued. For sites with multiple potential responsible parties, the Company considers its likely proportionate share of the anticipated remediation costs and the ability of the other parties to fulfill their obligations in establishing a provision for those costs. Liabilities with fixed or reliably determinable future cash payments are discounted. Accrued environmental liabilities are only reduced by potential insurance reimbursements when they have been confirmed or received from the insurance company. Product liability claims are accrued on the occurrence method based on insurance coverage and deductibles in effect at the date of the incident and management's assessment of the probability of loss when reasonably estimable. FAIR VALUE OF FINANCIAL INSTRUMENTS: ---------- Management believes that the carrying values of financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and accrued liabilities approximate fair value as a result of the short-term maturities of these instruments. CONCENTRATION OF CREDIT RISK: ---------- The Company extends credit on an uncollateralized basis to almost all customers. Concentration of credit and geographic risk with respect to accounts receivable is limited due to the large number and general dispersion of accounts which constitute the Company's customer base. The Company periodically performs credit evaluations of its customers. At December 29, 2002 and December 30, 2001, there were no customers accounting for greater than ten percent of the Company's accounts receivable. The Company has not experienced significant credit losses on customer's accounts. The Company invests its excess cash principally in investment grade government and corporate debt securities. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. These guidelines are periodically reviewed and modified 33 to reflect changes in market conditions. The Company has not experienced any significant losses on its cash equivalents or short-term investments. INCOME TAXES: ---------- The Company recognizes income taxes under the liability method. No provision is made for U.S. income taxes on the undistributed earnings of consolidated foreign subsidiaries because such earnings are substantially reinvested in those companies for an indefinite period. Provision for the tax consequences of distributions, if any, from consolidated foreign subsidiaries is recorded in the year the distribution is declared. 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. NET INCOME PER SHARE: ---------- The following table sets forth the computation of basic and diluted earnings per share: (Dollars in Thousands, Except Per Share Amounts) 2002 2001 2000 -------------------------------------------- Numerator: Net income $ 18,607 $ 15,734 $ 26,720 Denominator: Denominator for basic earnings per share - weighted-average shares 15,470,697 15,274,479 14,896,227 Effect of stock options 552,576 727,486 952,509 -------------------------------------------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 16,023,273 16,001,965 15,848,736 ============================================ Basic earnings per share $ 1.20 $ 1.03 $ 1.79 ============================================ Diluted earnings per share $ 1.16 $ .98 $ 1.69 ============================================ STOCK SPLIT: ------------ To help widen the distribution and enhance the marketability of the Company's capital stock, the Board of Directors effected a two-for-one stock split in the form of a 100% stock dividend on May 12, 2000. Treasury Stock was not doubled. All references in the financial statements to the number of shares and per share amounts have been restated to reflect the increased number of capital shares outstanding. 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. Actual results could differ from those estimates. HEDGING ACTIVITY: ---------- The Company, on occasion, uses derivative instruments, including swaps, forward contracts, and options, to manage certain foreign currency and interest rate exposures. Derivative instruments are viewed as risk management tools by the Company and are not used for trading or speculative purposes. Derivatives used for hedging purposes must be designated and effective as a hedge of the identified risk exposure at the inception of the contract. Accordingly, changes in fair value 34 of the derivative contract must be highly correlated with changes in the fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract. Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. The standard requires that all derivative instruments be recorded on the balance sheet at fair value. Derivatives used to hedge foreign currency denominated balance sheet items are reported directly in earnings along with offsetting transaction gains and losses on the items being hedged. Derivatives used to hedge forecasted cash flows associated with foreign currency commitments or forecasted commodity purchases are accounted for as cash flow hedges. Gains and losses on derivatives designated as cash flow hedges are recorded in other comprehensive income and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions. The ineffective portion of all hedges, if any, is recognized currently in earnings. The adoption of SFAS No. 133 did not have a material impact on the Company's consolidated results of operations, financial position, or cash flows. ADVERTISING COSTS: ---------- Advertising is expensed as incurred and amounted to $1,303,000, $1,694,000, and $2,128,000 for 2002, 2001, and 2000, respectively. TREASURY STOCK: ---------- From time to time the Company's Board of Directors authorizes the repurchase, at management's discretion, of shares of the Company's capital stock. The most recent regular authorization was approved on August 17, 2000 and provided for the repurchase of up to an aggregate of $2,000,000 in market value of such stock. On October 24, 2001, the Company's Board of Directors authorized, at management's discretion, the repurchase of shares of the Company's capital stock in order to provide participants in the Rogers Corporation Global Stock Ownership Plan For Employees (see Note I), an employee stock purchase plan, with shares of such stock. This is just one of the ways shares can be provided to plan participants. In 2002, 22,413 shares of Treasury Stock were used to fund the Company's obligation for the Rogers Corporation Global Stock Ownership Plan For Employees. At December 29, 2002 and December 30, 2001, Treasury Stock totaled 360,487 and 382,900 shares, respectively, and is shown at cost on the balance sheet as a reduction of Shareholders' Equity. STOCK-BASED COMPENSATION: ------------------------ Under various plans, the Company may grant stock and stock options to directors, officers, and other key employees. Stock-based compensation awards are accounted for using the intrinsic value method prescribed in APB 25 "Accounting for Stock Issued to Employees" and related interpretations. Stock-based compensation costs for stock options are not reflected in net income as all options granted under the plans had an exercise price equal to market value of the underlying common stock on the date of the grant. Stock-based compensation costs for stock awards are reflected in net income over the awards' vesting period. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized in the financial statements for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 2002, 2001, and 2000, consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below: 35 (Dollars in Thousands, Except Per Share Amounts) 2002 2001 2000 Net income, as reported $ 18,607 $ 15,734 $ 26,720 Less: Total stock-based compensation expense determined under Black-Scholes option pricing model, net of related tax effect 2,283 2,965 2,486 -------------------------------- Pro forma net income $ 16,324 $ 12,769 $ 24,234 -------------------------------- Basic earnings per share: As Reported $ 1.20 $ 1.03 $ 1.79 Pro Forma 1.06 .84 1.63 -------------------------------- Diluted earnings per share: As Reported $ 1.16 $ .98 $ 1.69 Pro Forma 1.01 .80 1.62 -------------------------------- The effects on pro forma net income and earnings per share of expensing the estimated fair value of stock options are not necessarily representative of the effects on reported net income for future years, due to such things as the vesting period of the stock options, and the potential for issuance of additional stock options in future years. An average vesting period of three years was used for the assumption regarding stock options issued in 2002, 2001, and 2000. Regular options granted to officers and other key U.S. employees usually become exercisable in one-third increments beginning on the second anniversary of the grant date. RECENT ACCOUNTING STANDARDS: ----------- In July 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with earlier application encouraged. The Company will adopt SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002, and it does not expect that the adoption of the Statement will have a significant impact on the Company's financial position or results of operations. On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", which amends the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and Accounting Principles Board ("APB") Opinion No. 28, "Interim Financial Reporting". SFAS No. 148 requires expanded disclosures within the Company's Summary of Significant Accounting Policies and within the Company's condensed consolidated interim financial information filed on Form 10-Q. SFAS No. 148's annual disclosure requirements are effective for the fiscal year ending December 29, 2002. SFAS No. 148's amendment of the disclosure requirements of APB Opinion No. 28 is effective for financial reports containing condensed consolidated financial statements for interim periods beginning after December 15, 2002. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others," ("FIN 45"). FIN 45 requires that each guarantee meeting the characteristics described in the Interpretation be recognized and initially measured at fair value and requires additional disclosures. FIN 45's disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002 and the initial recognition and measure- 36 ment provisions are applicable on a prospective basis to guarantees issued or modified after December 15, 2002. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin ("ARB") No. 51", ("FIN 46"). FIN 46 clarifies the application ARB No. 51, "Consolidated Financial Statements," to certain entities in which equity investors 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 consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003, and to existing variable interest entities in the interim period beginning after June 15, 2003. The Company is reviewing FIN 46 to determine its impact, if any, on future reporting periods. NOTE B-PROPERTY, PLANT AND EQUIPMENT ------------- (Dollars in Thousands) December 29, December 30, 2002 2001 ------------ ------------ Land $ 5,433 $ 5,265 Buildings and improvements 61,905 60,839 Machinery and equipment 83,357 94,484 Office equipment 17,242 16,209 Installations in process 22,231 11,672 ------------ ------------ 190,168 188,469 Accumulated depreciation (90,285) (90,015) ------------ ------------ $ 99,883 $ 98,454 ============ ============ Depreciation expense was $13,521,000 in 2002, $12,947,000 in 2001, and $11,656,000 in 2000. Interest costs incurred during the years 2002, 2001, and 2000 were $695,000, $1,070,000, and $1,080,000, respectively, of which $0 in 2002, $57,000 in 2001, and $457,000 in 2000 were capitalized as part of the cost of plant and equipment additions. NOTE C-GOODWILL AND OTHER INTANGIBLE ASSETS ------------- Identifiable intangible assets and goodwill are comprised of the following: (Dollars in Thousands) December 29, December 30, 2002 2001 ------------ ------------ Goodwill $17,990 $15,364 Trademarks and patents 1,579 339 Technology 4,200 -- Covenant not to compete 600 -- ------------ ------------ 24,369 15,703 Accumulated amortization (2,165) (2,115) ------------ ------------ Goodwill and other intangible assets $22,204 $13,588 ============ ============ Amortization expense for 2002, 2001, and 2000 amounted to $50,000, $765,000, and $851,000, respectively. Estimated amortization expense during each of the next 5 years is expected to be between $50,000 and $100,000. 37 The changes in the carrying amount of goodwill for the year ended December 29, 2002, by segment, is as follows: (Dollars in Thousands) Polymer High Printed Materials Performance Circuit and Foams Materials Components Total ---------------------------------------------- Balance as of December 30, 2001 $ 8,500 $ 6,100 $ 764 $15,364 Polyolefin foam acquisition (Note M) 2,626 -- -- 2,626 ---------------------------------------------- Balance as of December 29, 2002 $11,126 $ 6,100 $ 764 $17,990 ============================================== NOTE D-SUMMARIZED FINANCIAL INFORMATION OF UNCONSOLIDATED JOINT VENTURES AND RELATED PARTY TRANSACTIONS ---------- The Company has four joint ventures, each 50% owned, which are accounted for by the equity method. Equity income of $8,705,000, $3,123,000, and $5,945,000 for 2002, 2001 and 2000, respectively, is included in other income less other charges on the consolidated statements of income. Each of the joint ventures is described below: Fiscal Joint Venture Location Business Segment Year-End Durel Corporation U.S. Polymer Materials and Components December 31 Rogers Inoac Corporation ("RIC") Japan High Performance Foams October 31 Polyimide Laminate Systems, LLC ("PLS") U.S. Printed Circuit Materials December 31 Rogers Chang Chun Technology Co., LTD. ("RCCT") Taiwan Printed Circuit Materials December 31 The summarized financial information for these joint ventures is included in the following tables. Note that there is a difference between the Company's investment in unconsolidated joint ventures and its one-half interest in the underlying shareholders' equity of the joint ventures due primarily to three factors. First, the Company's major initial contribution to two joint ventures was technology that was valued differently by the joint ventures than it was on the Company's books. Secondly, one of the joint ventures had a negative retained earnings balance for a period of time. Lastly, the translation of foreign currency at current rates differs from that at historical rates. Correspondingly, there is a difference between the Company's recorded income from unconsolidated joint ventures and a 50% share of the income of those joint ventures. 38 SUMMARIZED INFORMATION FOR JOINT VENTJURES (Dollars in Thousands) December 29, December 30, 2002 2001 ------------ ------------ Current Assets $ 44,386 $ 39,843 Noncurrent Assets 30,218 33,213 Current Liabilities 24,412 25,309 Noncurrent Liabilities 668 11,344 Shareholders' Equity 49,524 36,403 (Dollars in Thousands) Year Ended ----------------------------------------------- December 29, December 30, December 31, 2002 2001 2000 ------------ ------------ ------------ Net Sales $136,861 $121,763 $138,006 Gross Profit 50,836 33,050 39,809 Net Income 17,790 5,928 11,608 Other Information: (Dollars in Thousands) 2002 2001 2000 ------------ ------------ ------------ Commission Income from PLS $ 3,601 $ 3,811 $ 3,430 50% Loan Guarantee for Durel Corporation -- 3,877 4,286 Loan to Durel Corporation -- 5,000 6,500 Durel Corporation, which had a 50% loan guarantee from the Company, met its obligations under the financing arrangement during the second half of 2002. No payments were required and no losses were incurred under this guarantee by the Company. Durel repaid its loan in full to the Company during 2002. The arrangement expired in September of 2002 and was not extended. This guarantee was terminated with the repayment of this debt. Sales made to unconsolidated joint ventures were immaterial in all years presented above. 39 NOTE E-PENSIONS AND OTHER POSTRETIREMENT BENEFIT PLANS ---------- PENSIONS: ---------- The Company has two qualified noncontributory defined benefit pension plans covering substantially all U.S. employees. The Company also has established a nonqualified unfunded noncontributory defined benefit pension plan to restore certain retirement benefits that might otherwise be lost due to limitations imposed by federal law on qualified pension plans. In addition, the Company sponsors three unfunded defined benefit health care and life insurance plans for retirees. The following provides a reconciliation of benefit obligations, plan assets, and funded status of the plans: Other Pension Benefits Postretirement Benefits (Dollars -------------------------------------------------------- in Thousands) 2002 2001 2000 2002 2001 2000 -------------------------------------------------------- Components of net periodic benefits cost: Service cost $ 2,518 $ 2,120 $ 1,641 $ 389 $ 282 $ 228 Interest cost 5,571 4,897 4,643 407 359 331 Expected return on plan assets (6,191) (5,819) (5,644) -- -- -- Amortizations and deferrals 969 509 485 (5) (92) (117) Amortization of transition asset (137) (199) (352) -- -- -- Curtailment (Gain) /Loss 613 -- -- (213) -- -- --------------------------------------------------------- Net periodic benefit costs $ 3,343 $ 1,508 $ 773 $ 578 $ 549 $ 442 ========================================================= Change in plan assets: Fair value of plan assets at beginning of year $65,160 $63,304 $61,383 $ -- $ -- $ -- Actual return on plan assets (4,474) 4,943 4,724 -- -- -- Employer contributions 3,449 381 356 433 486 518 Benefit payments (3,593) (3,468) (3,160) (433) (486) (518) --------------------------------------------------------- Fair value of plan assets at end of year $60,542 $65,160 $63,303 $ -- $ -- $ -- ========================================================= Change in benefit obligation: Benefit obligation at beginning of year $74,090 $66,867 $56,555 $ 5,654 $ 4,332 $ 3,395 Service cost 2,518 2,120 1,641 389 282 228 Interest cost 5,571 4,897 4,643 407 359 332 Actuarial losses 9,571 2,483 5,271 524 1,167 895 Benefit payments (3,644) (3,468) (3,160) (433) (486) (518) Curtailment (1,742) -- -- (213) -- -- Plan amendments 2,468 1,189 1,917 -- -- -- ---------------------------------------------------------- Benefit obligation at at end of year $88,832 $74,088 $66,867 $ 6,328 $ 5,654 $ 4,332 ========================================================== Reconciliation of funded status: Funded status $(28,291) $(8,929) $(3,564) $(6,328) $(5,654) $(4,332) Unrecognized net gain/(loss) 22,783 4,506 1,304 (369) (899) (2,158) Unrecognized prior service cost 4,734 3,848 3,168 -- -- -- Unrecognized transition asset (314) (670) (1,025) -- -- -- ---------------------------------------------------------- Accrued Benefit cost at end of year $(1,088) $(1,245) $ (117) $(6,697) $(6,553) $(6,490) =========================================================== Amounts recognized in the Balance Sheet consist of: Prepaid benefit cost $ 4,294 $ 2,752 $ 3,638 $ -- $ -- $ -- Accrued benefit liability (22,521) (12,235) (9,538) (6,697) (6,553) (6,490) Intangible asset 4,657 3,556 2,769 -- -- -- Deferred tax asset 4,744 1,779 1,145 -- -- -- Accumulated other comprehensive loss 7,738 2,903 1,869 -- -- -- ----------------------------------------------------------- Net amount recognized at end of year $(1,088) $(1,245) $ (117) $(6,697) $(6,553) $(6,490) =========================================================== 40 In accordance with FASB Statement No. 87, the Company has recorded an additional minimum pension liability for underfunded plans of $17,138,000 and $8,238,000 for 2002 and 2001, respectively, 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 taxes. Other Pension Benefits Postretirement Benefits ------------------------------------------------------------------------------ Assumptions as of year-end: 2002 2001 2002 2001 ------------------------------------------------------------------------------ Discount rate 6.75% 7.25% 6.75% 7.25% Rate of compensation increase 4.00% 4.00% -- -- The expected long-term rates of investment return were assumed to be 9.00% for the pension plan covering unionized hourly employees for both years. The expected rate is 9.00% in 2002 and 9.50% in 2001 for the other pension plan in each year presented. The Company has two pension plans with accumulated benefit obligations in excess of plan assets in 2002 and only one plan in 2001. Amounts applicable are: 2002 2001 ---------------------------------------------------------------------------- Projected benefit obligation $88,319 $18,240 Accumulated benefit obligation 78,435 17,831 Fair value of plan assets 60,542 11,888 OTHER POSTRETIREMENT BENEFITS: ---------- The assumed health care cost trend rate of increase was 5.0% for 2001 - 2002 and it was increased to 8.5% for 2003. The rate was assumed to decrease gradually to 5.0% for 2008 and remain at that level thereafter. The health care cost trend rate assumption has the following effect on the amounts reported: increasing the assumed health care cost trend rates by one percentage point for each future year would increase the accumulated postretirement benefit obligation as of the beginning of 2003 by $373,000 and the aggregate of service cost and interest cost components of net periodic postretirement benefit cost for fiscal 2002 by $84,000; decreasing the assumed rates by one percentage point would decrease the accumulated postretirement benefit obligation at the beginning of 2003 by $350,000 and the aggregate of service cost and interest cost components of net periodic postretirement benefit cost for fiscal 2002 by $73,000. NOTE F-EMPLOYEE SAVINGS AND INVESTMENT PLAN ---------- The Company sponsors the Rogers Employee Savings and Investment Plan ("RESIP") for domestic employees. Prior to 2003, the plan allowed such employees to contribute up to 18% of their compensation through payroll deductions. Effective January 1, 2003, the plan limitation of 18% on employee pretax contributions has been eliminated. Employees are now able to defer a percentage or flat amount they choose, up to the yearly IRS limit, which is $12,000 in 2003. Currently up to 5% of an eligible employee's annual pre-tax contribution is matched at a rate of 50% by the Company. In 2002 and 2001, 100% of the Company's matching contribution was invested in Company stock. RESIP related expense amounted to $813,000 in 2002, $934,000 in 2001, and $859,000 in 2000, including Company matching contributions of $813,000, $903,000, and $813,000, respectively. 41 Also effective January 1, 2003, the Company has implemented the Economic Growth and Tax Relief Reconciliation Act ("EGTRRA") Age 50 Catch Up provision. Participants that will reach age 50 (or older) by December 31, 2003 are eligible to contribute an additional $2,000 in 2003. For those employees participating in the EGTRRA, the maximum amount that can be contributed to the RESIP in 2003 will be $14,000. There is no company match for the EGTRRA. NOTE G-DEBT ---------- LONG-TERM DEBT: ---------- The Company has an unsecured multi-currency revolving credit agreement with two domestic banks and can borrow up to $50,000,000, or the equivalent in certain other foreign currencies. Amounts borrowed under this agreement are to be paid in full by December 8, 2005. The rate of interest charged on outstanding loans can, at the Company's option and subject to certain restrictions, be based on the prime rate or at rates from 50 to 112.5 basis points over a Eurocurrency loan rate. The spreads over the Eurocurrency rate are based on the Company's leverage ratio. Under the arrangement, the ongoing commitment fee varies from 30.0 to 37.5 basis points of the maximum amount that can be borrowed, net of any outstanding borrowings and the maximum amount that beneficiaries may draw under outstanding letters of credit. There were no borrowings pursuant to this arrangement at December 29, 2002 and December 30, 2001. The loan agreement contains restrictive covenants primarily related to total indebtedness, interest expense, capital expenditures and net worth. The Company is in compliance with these covenants. The Company had designated a 390,200,000 Belgian franc loan as a hedge of its net investment in its foreign subsidiaries in Belgium (US$9,100,000 at December 31, 2000). On July 6, 2001, the Company repaid the debt at the then current Belgian franc rate, amounting to US$8,200,000. During the years 2001 and 2000, the Company recorded US$900,000 and US$600,000, respectively, of net gains related to the hedge in other comprehensive income. In September 2001, Rogers N.V., a Belgian subsidiary of the Company, signed an unsecured revolving credit agreement with a European bank. Under this arrangement Rogers N.V. now can borrow up to 6,200,000 Euro. Amounts borrowed under this agreement are to be repaid in full by May 1, 2005. The rate of interest charged on outstanding loans is based on the Euribor plus 25 basis points. At December 29, 2002, Rogers N.V. had no borrowings under this agreement. At December 30, 2001, Rogers N.V. had borrowings of 1,487,361 Euro (US$1,315,000) under this agreement. INTEREST PAID: ---------- Interest paid during the years 2002, 2001, and 2000, was $698,000, $1,050,000, and $1,132,000, respectively. RESTRICTION ON PAYMENT OF DIVIDENDS: ---------- Pursuant to the multi-currency revolving credit loan agreement, the Company cannot make a cash dividend payment if a default or event of default has occurred and is continuing or shall result from the cash dividend payment. NOTE H-INCOME TAXES ---------- Consolidated income before income taxes consists of: (Dollars in Thousands) 2002 2001 2000 --------------------------------------------------------------------- Domestic $ 20,488 $ 13,144 $ 30,263 International 4,321 7,835 7,371 --------------------------------------------------------------------- $ 24,809 $ 20,979 $ 37,634 ==================================== 42 The income tax expense (benefit) in the consolidated statements of income consists of: (Dollars in Thousands) Current Deferred Total ------------------------------------- 2002: Federal $ 2,946 $ 1,844 $ 4,790 International 615 621 1,236 State 80 961 76 ------------------------------------- $ 3,641 $ 2,561 $ 6,202 ===================================== 2001: Federal $ 3,029 $(1,093) $ 1,936 International 1,951 1,533 3,484 State 26 (201) (175) -------------------------------------- $ 5,006 $ 239 $ 5,245 ====================================== 2000: Federal $ 5,050 $ 2,507 $ 7,557 International 2,665 299 2,964 State (100) 493 393 -------------------------------------- $ 7,615 $ 3,299 $10,914 ====================================== Deferred tax assets and liabilities as of December 29, 2002 and December 30, 2001, respectively, are comprised of the following: (Dollars in Thousands) December 29, December 30, 2002 2001 ------------ ------------ Deferred tax assets: Accruals not currently deductible for tax purposes: Accrued employee benefits and compensation $ 7,211 $ 4,655 Accrued postretirement benefits 2,105 2,021 Other accrued liabilities and reserves 2,807 2,699 Tax credit carry-forwards 2,531 3,232 -------------------------------- Total deferred tax assets 14,654 12,607 Less deferred tax asset valuation allowance 506 384 -------------------------------- Net deferred tax assets 14,148 12,223 -------------------------------- Deferred tax liabilities: Depreciation and amortization 13,711 14,141 Investments in joint ventures, net 3,713 1,064 Other 47 129 -------------------------------- Total deferred tax liabilities 17,471 15,334 -------------------------------- Net deferred tax liability $(3,323) $(3,111) ================================ Deferred taxes are classified on the consolidated balance sheet at December 29, 2002 and December 30, 2001 as a net short-term deferred tax asset of $4,985,000 and $5,041,000, respectively, and a net long-term deferred tax liability of $8,308,000 and $8,152,000, respectively. Income tax expense differs from the amount computed by applying the United States Federal statutory income tax rate to income before income tax expense. The reasons for this difference are as follows: 43 (Dollars in Thousands) 2002 2001 2000 -------------------------------- Tax expense at Federal statutory income tax rate $ 8,683 $ 7,342 $13,172 International tax rate differential (619) 409 334 Net U.S. tax (foreign tax credit) on foreign earnings (926) (1,058) (799) General business credits (582) (400) (537) Nontaxable foreign sales income (1,120) (1,213) (861) State income taxes, net of Federal benefit 114 102 256 Valuation allowance change 122 (375) (294) Other 530 438 (357) --------------------------------- Income tax expense $ 6,202 $ 5,245 $10,914 ================================= In December 2002, the Belgian government enacted a tax rate decrease effective for years ending in 2003 and later. All ending deferred tax balances attributable to Belgian operations were restated from the 40.17% tax rate to the new 33.99% tax rate for U.S. GAAP purposes to reflect this change. The 2002 international tax rate differential includes this reduction to the deferred international tax expense of $813,000, net of the current international tax expense in excess of the U.S. statutory tax rate of $194,000. The tax credit carry-forwards consist of general business credits of $990,000 that begin to expire in 2017 and alternative minimum tax credits of $1,541,000 that have no expiration date. The deferred tax asset valuation allowance increased by $122,000 and decreased by $375,000 during 2002 and 2001, respectively. The increase in 2002 resulted primarily from operating losses in China that did not generate a tax benefit and the decrease in 2001 resulted primarily from the Company's utilization of foreign tax credits on undistributed profits from its Japanese joint venture. The Company recognized a U.S. deferred tax asset in 2002 and 2001 of $2,080,000 and $1,319,000, respectively. The recognition was determined to be more likely than not based on the availability and amount of recoverable taxes paid in the Federal carry-back period. Undistributed international earnings, on which United States income tax had not been provided, before available tax credits and deductions, amounted to $22,864,000 at December 29, 2002, $19,569,000 at December 30, 2001, and $15,429,000 at December 31, 2000. Tax has not been provided on these undistributed earnings as it is the Company's practice and intention to continue to reinvest these earnings. Income taxes paid were $1,471,000, $2,918,000, and $3,598,000, in 2002, 2001, and 2000, respectively. NOTE I-SHAREHOLDERS' EQUITY AND STOCK OPTIONS ---------- Components of Other Comprehensive Loss consist of the following: (Dollars in Thousands) 2002 2001 2000 ----------------------------------- Foreign currency translation adjustments $ 4,172 $ (793) $ (923) Change in minimum pension liability, net of $2,963 and $634 in taxes in 2002 and 2001 (4,835) (1,034) (1,718) ------------------------------------ Other comprehensive loss $ (663) $(1,827) $(2,641) ==================================== 44 Accumulated balances related to each component of Accumulated Other Comprehensive Loss are as follows: (Dollars in Thousands) December 29, December 30, 2002 2001 --------------------------------- Foreign currency translation adjustments $ 3,045 $(1,127) Minimum pension liability, net of $4,742 and $1,779 in taxes in 2002 and 2001 (7,738) (2,903) --------------------------------- Accumulated balance $(4,693) $(4,030) ================================= Under various plans the Company may grant stock options to officers and other key employees at exercise prices that range as low as 50% of the fair market value of the Company's stock as of the date of grant. To date virtually all such options have been granted at an exercise price equal to the fair market value of the Company's stock as of the date of grant. In general, regular employee options become exercisable over a four-year period from the grant date and expire ten years after the date of grant. Stock option grants are also made to non-employee directors, generally on a semi-annual basis. For such stock options, the exercise price is equal to the fair market value of the Company's stock and they are immediately exercisable and expire ten years after the date of grant. Stock grants in lieu of cash compensation are also made to non-employee directors. Shares of capital stock reserved for possible future issuance are as follows: December 29, December 30, 2002 2001 ----------------------------------- Shareholder Rights Plan 20,323,964 20,385,363 Stock options 3,663,642 3,824,145 Rogers Employee Savings and Investment Plan 169,044 169,044 Rogers Corporation Global Stock Ownership Plan For Employees 477,587 500,000 Long-Term Enhancement Plan 115,308 115,308 Stock to be issued in lieu of deferred compensation 41,635 37,682 ----------------------------------- Total 24,791,180 25,031,542 =================================== The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants: 2002 2001 2000 ------------------------------ Risk-free interest rate 1.83% 4.67% 5.14% Dividend yield 0% 0% 0% Volatility factor 36.3% 33.6% 33.2% Weighted-average expected life 6.1 years 6.1 years 6.1 years A summary of the status of the Company's stock option program at year-end 2002, 2001, and 2000, and changes during the years ended on those dates is presented below: 45 2002 2001 2000 ------------------------------------------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Stock Options Shares Price Shares Price Shares Price ------------------------------------------------------------ Outstanding at beginning of year 2,314,821 $20.04 2,357,214 $17.12 2,518,850 $12.00 Granted 528,560 26.07 270,809 33.24 429,479 32.56 Exercised (152,177) 12.15 (307,051) 9.19 (513,511) 6.94 Cancelled (3,167) 30.44 (6,151) 22.84 (77,604) 5.12 ------------------------------------------------------------ Outstanding at end of year 2,688,037 $21.66 2,314,821 $20.04 2,357,214 $17.12 ============================================================ Options exercisable at end of year 1,807,673 1,668,843 1,496,710 ============================================================ Weighted-average fair value of options granted during year $ 9.38 $13.97 $13.97 ============================================================ The following table summarizes information about stock options outstanding at December 29, 2002: Options Outstanding Options Exercisable Weighted- Average Weighted- Weighted- Number Remaining Average Number Average Range of Exercise Outstanding Contractual Exercise Exercisable Exercise Prices at 12/29/02 Life in Years Price at 12/29/02 Price ----------------------------------------------------------------------------- $3 to $11 206,370 1.6 $ 8.28 206,370 $ 8.28 $12 to $28 1,829,229 6.4 $18.79 1,301,781 $16.42 $29 to $43 652,438 8.2 $33.95 299,522 $34.01 ----------------------------------------------------------- $3 to $43 2,688,037 6.5 $21.66 1,807,673 $18.40 =========================================================== In 2001, shareholders approved the Rogers Corporation Global Stock Ownership Plan For Employees, an employee stock purchase plan. The plan provides for the issuance of up to 500,000 shares of Company stock. Shares may be purchased by participating employees through payroll deductions that are made during prescribed offering periods with the actual purchases made at the end of each offering period. Currently, shares may be purchased at 85% of the stock's closing price at the beginning or end of each offering period, whichever is lower and other rules have been established for participation in the plan. NOTE J-COMMITMENTS AND CONTINGENCIES ---------- LEASES: ---------- The Company's principal noncancellable operating lease obligations are for building space and vehicles. The leases generally provide that the Company pay maintenance costs. The lease periods range from one to five years and include purchase or renewal provisions at the Company's option. The Company also has leases that are cancellable with minimal notice. Lease expense was $1,481,000 in 2002, $1,320,000 in 2001, and $1,084,000 in 2000. Future minimum lease payments under noncancellable operating leases at December 29, 2002, aggregate $1,800,000. Of this amount, annual minimum payments are $880,000, $462,000, $257,000, $64,000, and $48,000 for years 2003 through 2007, respectively. CONTINGENCIES: ---------- The Company is subject to federal, state, and local laws and regulations concerning the environment and is currently engaged in proceedings related to such matters. 46 The Company is currently involved as a potentially responsible party ("PRP") in two cases involving waste disposal sites, both of which are Superfund sites. These proceedings are at a stage where it is still not possible to estimate the cost of remediation, the timing and extent of remedial action which may be required by governmental authorities, and the amount of liability, if any, of the Company alone or in relation to that of any other PRPs. Where it has been possible to make a reasonable estimate of the Company's liability, a provision has been established. Insurance proceeds have only been taken into account when they have been confirmed by or received from the insurance company. Actual costs to be incurred in future periods may vary from these estimates. Based on facts presently known to it, the Company does not believe that the outcome of these proceedings will have a material adverse effect on its financial position. In addition to the above proceedings, the Company has worked with the Connecticut Department of Environmental Protection ("CT DEP") related to certain polychlorinated biphenyl ("PCB") contamination in the soil beneath a section of cement flooring at its Woodstock, Connecticut facility. The Company completed clean-up efforts in 2000, monitored the site in 2001, and will continue to monitor the site for the next two years. On the basis of estimates prepared by environmental engineers and consultants, the Company recorded a provision of $2,200,000 prior to 1999 and based on updated estimates provided an additional $400,000 in 1999 for costs related to this matter. Prior to 2000, $1,300,000 was charged against this provision. In 2000, 2001, and 2002 expenses of $900,000, $100,000, and $200,000 were charged, respectively, against the provision. The remaining amount in the reserve is primarily for testing, monitoring, sampling and any minor residual treatment activity. Management believes, based on facts currently available, that the balance of this provision is adequate to complete the project. In this same matter the United States Environmental Protection Agency ("EPA") alleged that the Company improperly disposed of PCBs. An administrative law judge found the Company liable for this alleged disposal and assessed a penalty of approximately $300,000. The Company reflected this fine in expense in 1998 but disputed the EPA allegations and appealed the administrative law judge's findings and penalty assessment. The original findings were upheld internally by the EPA's Environmental Appeals Board, and the Company placed that decision on appeal with the District of Columbia Federal Court of Appeals in 2000. In early January of 2002, the Company was informed that the Court of Appeals reversed the decision. As a result of this favorable decision, the $300,000 reserve for the fine was taken into income in 2001. However, subsequent to the favorable decision by the Court of Appeals, the EPA continued to pursue this issue and settlement discussions with the EPA were more protracted and difficult than originally anticipated. As such, the Company recorded $325,000 for legal and other costs associated with this matter in 2002. On January 16, 2003, a settlement agreement was signed with the EPA. The costs associated with the settlement will not exceed the provision recorded, which included a cash settlement payment to the government of $45,000 plus a commitment to undertake some energy-related environmental improvements at its facilities, as well as assistance to the Woodstock, Connecticut Fire Department for emergency preparedness. Management believes, based on the facts currently available, that the provision recorded in 2002 is adequate to cover the requirement of the settlement. On February 7, 2001, the Company entered into a definitive agreement to purchase the Advanced Dielectric Division ("ADD") of Tonoga, Inc. (commonly known as Taconic), which operates facilities in Petersburgh, New York and Mullingar, Ireland. On May 11, 2001, the Company announced that active discussions with Taconic to acquire the ADD business had been suspended and it was not anticipated that the acquisition would occur. Accordingly, $1,500,000 in costs associated with this potential acquisition were written off during the second quarter. On October 23, 2001, the Company terminated the acquisition agreement. On October 24, 2001, Taconic filed a breach of contract lawsuit against the Company in the United States District Court for the District of Connecticut seeking damages in the amount of 47 $25,000,000 or more, as well as specific performance and attorneys' fees. In September 2002, a confidential settlement agreement concerning all matters raised in this litigation was negotiated and entered into. The settlement had no material impact on the current period results. There recently has been a significant increase in certain U.S. states in asbestos-related product liability claims against numerous industrial companies. The Company has been named, along with hundreds of other industrial companies, as a defendant in some of these cases. The Company strongly believes it has valid defenses to these claims and intends to defend itself vigorously. In addition, the Company believes that it has sufficient insurance to cover all costs associated with these claims. Based upon past claims experience and available insurance coverage, management believes that these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows. In addition to the above issues, the nature and scope of the Company's business bring it in regular contact with the general public and a variety of businesses and government agencies. Such activities inherently subject the Company to the possibility of litigation, including environmental and product liability matters that are defended and handled in the ordinary course of business. The Company has established accruals for matters for which management considers a loss to be probable and reasonably estimable. It is the opinion of management that facts known at the present time do not indicate that such litigation, after taking into account insurance coverage and the aforementioned accruals, will have a material adverse effect on the financial position of the Company. NOTE K-BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION ---------- The Company has nine business units and four joint ventures. The business units and joint ventures have been aggregated into three reportable segments: High Performance Foams, Printed Circuit Materials, and Polymer Materials and Components. Each segment has common management oversight, share common infrastructures, and each offers different products and services. High Performance Foams: This segment consists of three business units and one joint venture. The products produced by these operations consist primarily of high-performance urethane, silicone and polyolefin foams that are designed to perform to predetermined specifications where combinations of properties are needed to satisfy rigorous mechanical and environmental requirements. These materials are sold worldwide and for the most part are sold to fabricators and original equipment manufacturers. Printed Circuit Materials: There are three business units and two joint ventures in this segment. Laminate materials, that are primarily fabricated by others into circuits which are then used in electronics equipment for transmitting, receiving, and controlling electrical signals, are the products produced by these operations. These products tend to be proprietary materials which provide highly specialized electrical and mechanical properties to meet the demands imposed by increasing speed, complexity, and power in analog, digital, and microwave equipment. These materials are fabricated, coated and/or customized as necessary to meet customer demands and are sold worldwide. Polymer Materials and Components: This segment is comprised of three business units and one joint venture. The products produced by these operations consist primarily of molded elastomer components, power distribution components, electroluminescent lamps and nonwoven materials. These products have been engineered to provide special performance characteristics to suit a wide range of markets and applications. These products are sold worldwide to a varied customer base. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on operating income of the respective business units. 48 The principal manufacturing operations of the Company are located in the United States, Europe and Asia. The Company markets its products throughout the United States and sells in foreign markets directly, through distributors and agents, and through its 50% owned joint ventures in Asia. Approximately 55%, 57%, and 54% of total sales were to the electronics industry in 2002, 2001, and 2000, respectively. Approximately 33%, 34%, and 27% of the Company's sales of products manufactured by U.S. divisions were made to customers located in foreign countries in 2002, 2001, and 2000, respectively. This includes sales to Europe of 12%, 17%, and 12%, sales to Asia of 18%, 15%, and 12%, and sales to Canada of 2%, 1%, and 1% in 2002, 2001, and 2000, respectively. The electronics industry accounted for approximately 62%, 63%, and 67% at December 29, 2002, December 30, 2001 and December 31, 2000, respectively, of the total accounts receivable due from customers. Accounts receivable due from customers located within the United States accounted for 45%, 71%, and 74% of the total accounts receivable owed to the Company at the end of 2002, 2001 and 2000, respectively. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Receivables are generally due within 30 days. Credit losses relating to customers have been minimal and have been within management's expectations. Inter-segment and inter-area sales, which are generally priced with reference to costs or prevailing market prices, are not material in relation to consolidated net sales and have been eliminated from the sales data reported in the following tables. BUSINESS SEGMENT INFORMATION (Dollars in Thousands) High Printed Polymer Performance Circuit Materials and Foams Materials Components Total -------------------------------------------------------- 2002: Net sales $ 65,084 $ 82,419 $ 71,935 $ 219,438 Operating income 8,052 4,802 1,320 14,174 Total assets 59,520 135,062 63,119 257,701 Capital expenditures 13,877 7,072 1,733 22,682 Depreciation 1,996 6,700 4,825 13,521 Joint venture equity income (loss) 1,778 (351) 7,278 8,705 ======================================================== 2001: Net sales $ 49,745 $ 88,342 $ 77,950 $ 216,037 Operating income 4,583 6,170 2,293 13,046 Total assets 44,908 101,539 77,362 223,809 Capital expenditures 955 15,242 1,835 18,032 Depreciation 2,165 6,152 4,630 12,947 Joint venture equity income (loss) 1,557 (428) 1,994 3,123 ======================================================== 2000: Net sales $ 58,877 $ 100,701 $ 88,637 $ 248,215 Operating income 11,191 12,189 6,103 29,483 Total assets 44,171 93,809 83,534 221,514 Capital expenditures 1,185 15,122 6,437 22,744 Depreciation 2,106 5,306 4,244 11,656 Joint venture equity income 994 -- 4,951 5,945 ======================================================== 49 Information relating to the Company's operations by geographic area is as follows: Europe United (primarily (Dollars in Thousands) States Belgium) Asia Total ---------------------------------------------- 2002: Net sales $ 163,127 $ 41,834 $ 14,477 $ 219,438 Long-lived assets 91,274 34,707 1,234 127,215 ============================================== 2001: Net sales $ 165,321 $ 45,913 $ 4,803 $ 216,037 Long-lived assets 90,129 26,340 -- 116,469 ============================================== 2000: Net sales $ 192,885 $ 50,261 $ 5,069 $ 248,215 Long-lived assets 91,333 19,347 -- 110,680 ============================================== Net sales are attributed to the business unit making the sale. Long-lived assets are attributed to the location of the asset. The net assets of wholly-owned foreign subsidiaries were $30,268,000 at December 29, 2002, $23,691,000 at December 30, 2001, and $9,698,000 at December 31, 2000. Net income of these foreign subsidiaries was $2,744,000 in 2002, $4,819,000 in 2001, and $4,399,000 in 2000, including net currency transaction gains (losses) of $2,000 in 2002, $117,000 in 2001, and $61,000 in 2000. NOTE L-RESTRUCTURING COSTS ---------- In 2002, the Company incurred restructuring charges of $2,150,000. These charges were associated solely with the severance benefits for 62 employees of which 48 had been terminated prior to year-end. The remaining employees were notified prior to year-end. The separation date of these residual employees will occur on varied dates in 2003. These workforce reductions were initiated in order to appropriately align resources with the Company's business requirements, given varied ongoing operational initiatives, including non-strategic business unit consolidations, plant rationalizations, outsourcing low value production and/or moving it to lower production cost environments, and support function reorganizations to streamline administrative activities. As of December 29, 2002, the balance in the accrual for these charges was $1,600,000. Management believes based on current estimates the provision recorded in 2002 will be adequate to cover the future costs of these restructuring activities. In 2001 the Company incurred a restructuring charge in the amount of $500,000. This amount was primarily related to severance benefits for the termination of 19 employees in the Printed Circuit Materials segment which was associated with the merging of two business units within that segment. All employees had been terminated prior to year-end and the balance of the accrual was $25,000 as of December 30, 2001. NOTE M-ACQUISITIONS/DIVESTITURES ---------- As of December 31, 2001 (the beginning of fiscal year 2002), the Company acquired certain assets of the high performance foam business of Cellect LLC ("Cellect")for approximately $10,000,000 in cash, plus a potential earn-out in five years based upon performance. While there is no contractual limitation on the earn-out, the actual earn-out will be determined and effected by the sales and profitability growth through 2006 as compared to the base year of 2001. These assets included intellectual property rights, machinery and equipment, inventory, and customer lists for 50 portions of the Cellect plastomeric and elastomeric high performance polyolefin foam business. The acquisition was accounted for as a purchase pursuant to SFAS No. 141, "Business Combinations." As such, the purchase price has been allocated to property, plant and equipment and intangible assets based on their respective fair values at the date of acquisition. The following table summarizes the estimated fair values of the acquired assets on the date of acquisition: Purchase price $10,000,000 Acquisition costs 226,000 ----------- 10,226,000 Less identified tangible/intangible assets: Property, plant and equipment 1,600,000 Trademarks 1,200,000 Technology 4,200,000 Covenant not-to-compete 600,000 ------------ 7,600,000 ------------ Goodwill $ 2,626,000 ============ Of the intangible assets acquired, only the covenant not-to-compete is considered to not have an indefinite life. Accordingly, the remaining intangibles will not be amortized, but will be reviewed for impairment on an annual basis. The amortization period for the covenant not-to-compete is 3 years and amortization commences in 2007, subsequent to the completion of the earn-out period. On November 18, 2002, the Company completed the divestiture of its Moldable Composites Division ("MCD"), located in Manchester, Connecticut. MCD, which was included in the Company's Polymer Materials and Components segment, was sold to Vyncolit North America Inc., a subsidiary of the Perstorp Group, Sweden. Under the terms of the agreement, the Company will receive a total of approximately $21,000,000 for the business assets (excluding the intellectual property) and a five-year royalty stream from the intellectual property license. Half of the $21,000,000 was paid in cash upon consummation of the transaction. A Note Receivable, which bears interest at the rate of LIBOR plus 1%, was provided for the remainder of the sales price which will be paid over a five-year period. There was no material gain or loss on the sale transaction. 51 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS ---------- Board of Directors and Shareholders Rogers Corporation ---------- We have audited the accompanying consolidated balance sheets of Rogers Corporation and subsidiaries as of December 29, 2002 and December 30, 2001, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three fiscal 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 consolidated financial position of Rogers Corporation and subsidiaries at December 29, 2002 and December 30, 2001, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 29, 2002, in conformity with accounting principles generally accepted in the United States. As discussed in Note A to the consolidated financial statements, effective December 31, 2001, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." ERNST & YOUNG LLP 52 Providence, Rhode Island February 4, 2003 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) ---------- (Dollars in Thousands, Except Per Share Amounts) Basic Diluted Net Manufacturing Net Net Income Net Income Quarter Sales Profit Income Per Share Per Share --------------------------------------------------------------------------- 2002 Fourth $ 51,516 $ 17,853 $ 5,422 $ .35 $ .34 Third 56,034 17,463 4,770 .31 .30 Second 57,330 17,696 4,531 .29 .28 First 54,558 16,243 3,884 .25 .24 --------------------------------------------------------------------------- 2001 Fourth $ 48,094 $ 14,611 $ 3,900 $ .25 $ .24 Third 51,031 15,792 3,219 .21 .20 Second 53,162 15,801 1,894 .12 .12 First 63,750 20,654 6,721 .44 .42 --------------------------------------------------------------------------- CAPITAL STOCK MARKET PRICES ---------- The Company's capital stock is traded on the New York Stock Exchange. The following table sets forth the composite high and low closing prices during each quarter of the last two years on a per share basis. 2002 2001 -------------------------------------------------------------------- Quarter High Low High Low -------------------------------------------------------------------- Fourth $ 26.39 $ 20.65 $ 35.80 $ 27.80 Third 28.85 23.35 31.30 24.95 Second 35.80 26.25 35.60 23.90 First 34.00 27.20 42.00 31.75 --------------------------------------------------------------------