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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended October 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to ________
Commission file number 0-20686
UNIROYAL TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 65-0341868
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two North Tamiami Trail, Suite 900
Sarasota, Florida 34236-5568
(Address of principal executive offices) (Zip Code)
(941) 361-2100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (29,405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of November 30, 2000, the aggregate market value of the voting stock held by
non-affiliates of the registrant (assuming for this purpose that all directors
and officers of the registrant and all holders of 5% or more of the common stock
of the registrant are affiliates) was approximately $104,190,000 based on the
closing price for the stock on November 30, 2000.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ X ] No [ ]
As of November 30, 2000, 25,444,859 shares of the registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the registrant's definitive proxy statement to be issued
in connection with the registrant's annual meeting of stockholders to be held in
2001.
Item 1. Business
General
Uniroyal Technology Corporation ("Uniroyal") is a leader in
the development, manufacture and sale of a broad range of materials
employing compound semiconductor technologies, plastics and specialty
chemicals used in the production of consumer, commercial and industrial
products.
We are organized into three primary business segments:
Compound Semiconductor and Optoelectronics, Coated Fabrics and
Specialty Adhesives.
The Compound Semiconductor and Optoelectronics segment
manufactures wafers, epitaxial wafers and package-ready dies used in
high brightness light emitting diodes ("HB-LEDs"), and in power or
microwave semiconductors. It was formerly known as the Optoelectronics
segment until May 31, 2000 when we changed the name of the segment to
the Compound Semiconductor and Optoelectronics segment to reflect the
acquisition of the business of Sterling Semiconductor, Inc.
("Sterling").
The Coated Fabrics segment manufactures a wide selection of
plastic vinyl coated fabrics for use in furniture and seating
applications.
The Specialty Adhesives segment manufactures liquid adhesives
and sealants for use in the commercial roofing industry and in the
manufacture of furniture, truck trailers and recreational vehicles.
The Compound Semiconductor and Optoelectronics businesses are
in the development stage and are in the beginning stages of commercial
production.
The Coated Fabrics and Specialty Adhesives businesses are
leading suppliers in their markets because of their ability to provide
specialized materials with performance characteristics customized to
the end user and their ability to provide technical and customer
support in connection with the use of their products in manufacturing.
Uniroyal is a Delaware corporation. Our principal executive
offices are located at Two North Tamiami Trail, Suite 900, Sarasota,
Florida 34236, and our telephone number at that address is (941)
361-2100.
Recent Developments
On December 24, 1999, we entered into a definitive agreement
to sell certain net assets of our High Performance Plastics segment for
$217,500,000 in cash to Spartech Corporation ("Spartech"). The
transaction closed on February 28, 2000, and resulted in cash proceeds
of $208,976,000 net of certain transaction costs and preliminary
purchase price adjustments (the "Spartech Sale"). The ultimate purchase
price adjustments have not been agreed to by both parties. We estimate,
and have provided for, an ultimate reduction in purchase price of
approximately $5,100,000, which would result in a loss of the
$5,000,000 holdback as well as an additional payment from us to
Spartech of approximately $100,000. In addition to what we have
provided for, Spartech is seeking an additional purchase price
reduction up to approximately $4,237,000. We believe the ultimate
resolution of the purchase price adjustment should not have a material
adverse effect on the results of operations, cash flows or financial
position. After consideration of the estimated purchase price
adjustments of $5,100,000, we recorded a gain on the sale of
approximately $55,821,000 (net of taxes of approximately $38,146,000).
The High Performance Plastics segment manufactured specialty and
general purpose thermoplastic sheet, injection molding resins, color
concentrates, extruded profiles and fabricated acrylic sheet for the
aerospace, marine, specialty and general purpose markets as well as
acrylic rods and tubes.
On May 31, 2000, we acquired Sterling, a Virginia corporation,
which is a developer and manufacturer of silicon carbide ("SiC")
semiconductor wafer substrates, related semiconductor devices and
substrates with epitaxial thin film coatings. In addition to offering
SiC wafers for sale, Sterling sells a limited product line of epitaxial
thin film coatings, the active materials used in making functioning
electronic devices, on SiC wafers. In connection with the acquisition
of Sterling, we filed a registration statement to register the shares
of common stock acquired in a private placement by certain former
security holders of Sterling who are the selling stockholders.
Coated Fabrics Segment
The Coated Fabrics segment accounted for approximately $33.7
million (49%) of our net sales from continuing operations for the
fiscal year ended October 1, 2000. It is a leading manufacturer of
vinyl coated fabrics. The coated fabrics are durable, stain resistant,
cost-effective alternatives to leather and cloth coverings. The
segment's product lines include the well-known Naugahyde(R) brand name
in vinyl coated fabric products.
The Coated Fabrics segment previously made products for the
automobile manufacturing industry, which accounted for approximately 2%
of total net sales of the segment for fiscal 2000. The segment's
automotive products line consisted of plastic vinyl coated fabrics and
vinyl laminated composites used by manufacturers and custom fabricators
in the production of vehicle seat coverings, door panels, arm rests,
consoles and instrument panels. On October 17, 1997, we agreed to sell
certain assets of the automotive operations of the Coated Fabrics
segment located at our Port Clinton, Ohio facility for approximately
$5.3 million plus the value of purchased inventories and plus or minus
adjustments contingent upon the transfer of certain automobile
programs. We received $4.9 million in July 1998 and received
approximately $1.5 million during fiscal 1999. During fiscal 1999 and
1998, we recognized approximately $667,000 and $512,000, respectively,
of income relating to the sale of the automotive operations. We ceased
production and closed the Port Clinton facility in November 1998. The
Port Clinton real property is listed as held for sale at October 1,
2000 and is expected to be sold in fiscal 2001.
General
The Coated Fabrics segment's Naugahyde(R) vinyl coated fabrics
products have various performance characteristics. We sell these
products in various markets depending upon the performance
characteristics required by end users. For example, for recreational
products which are used outdoors, such as boats, personal watercraft,
golf carts and snowmobiles, the segment sells a Naugahyde(R) product
that is designed primarily for weatherability. It also manufactures
Naugahyde(R) products that can withstand powerful cleaning agents,
which are widely used in hospitals and other medical facilities. Flame
and smoke retardant Naugahyde(R) vinyl coated fabrics are used for a
variety of commercial and institutional furniture applications,
including hospital furniture and school bus seats.
The segment has a state-of-the-art production line which
produces coated fabrics in more than 600 colors and 45 textures and
patterns.
Competition
The Coated Fabrics segment competes with respect to its
Naugahyde(R) products primarily on the basis of style, color and
quality, as well as price and customer service through technical
support and performance characteristics which meet customer needs.
The segment's principal competitors with respect to its
Naugahyde(R) products are:
o C. G. Spradling & Company;
o Morbern, Inc.; and
o OMNOVA Solutions (formerly a part of GenCorp, Inc.).
Marketing
A predecessor of the segment introduced the segment's coated
fabrics products more than 50 years ago. Today, we market these
products under several nationally recognized brand names, including
NAUGAHYDE(R), NAUGAFORM(R) and DURAN(R). We market our cleaning
agent-resistant coated fabrics under the name BEAUTYGARD(R), and our
flame and smoke retardant coated fabrics under the brand name FLAME
BLOCKER(R).
We market and sell our coated fabrics primarily through 12
national sales representatives, who are employees of Uniroyal, and
independent sales representatives. In the furniture manufacturing
market, we generally sell our coated fabrics through our sales
representatives and to distributors who sell to furniture
manufacturers, upholsterers and fabric distributors. Approximately 31%
of the segment's non-automotive market sales in fiscal 2000 were to
distributors.
Representative customers and end users of the Coated Fabrics
segment include:
o Bombardier, Inc.;
o Club Car, Inc.;
o Deere & Co.;
o Freightliner Corporation;
o Harley-Davidson, Inc.;
o Kawasaki Heavy Industries, Inc.;
o Lazy-Boy, Incorporated;
o Michigan Seat Co.;
o Monaco Coach Corporation;
o Okamoto USA, Inc.;
o Polaris Industries, Inc.;
o Shelby Williams Industries, Inc.; and
o Yamaha Motor Corporation, USA.
Manufacturing Facilities
We manufacture our coated fabrics products at our facility
located in Stoughton, Wisconsin. The segment ceased manufacturing at
the facility in Port Clinton, Ohio on November 11, 1998. We own both of
these facilities. The Port Clinton facility is listed as held for sale
and is expected to be sold in fiscal 2001.
Raw Materials
The principal raw materials for the segment's coated fabrics
are casting paper, knit fabric, PVC plastic resins and plasticizers. We
have multiple sources for these materials.
Specialty Adhesives Segment
The Specialty Adhesives segment accounted for approximately
$31.6 million (46%) of our total net sales from continuing operations
for fiscal 2000.
General
The Specialty Adhesives segment comprises three general
product lines: roofing adhesives and sealants, industrial adhesives and
sealants and mirror mastics and sealants. The segment is one of the
leading manufacturers of adhesives for fully-bonded, EPDM commercial
roofs. We support Firestone Building Products Company, a division of
Bridgestone/Firestone, Inc. ("Firestone"), an industry leader in the
supply of Rubber Gard(R) EPDM single ply membrane, with a full line of
bonding, splice, primer and sealer products. Approximately 64% of the
segment's fiscal 2000 sales were roofing product shipments to
Firestone. The fully-bonded adhesive products sold to Firestone pass
through a rigorous development and production qualification process,
resulting in an applied roof capable of withstanding exposure to
environmental extremes. The segment also produces and sells more than
200 industrial and commercial mirror adhesives and sealants under the
brand names of Silaprene(R), Hydra Fast-En(R), Gunther Ultra/Bond(R),
Gunther Extra/Build(R), SolidSeal(R) and SolidBond(R). We market these
products to the transportation (non-automotive), furniture, foam
fabrication and commercial mirror installation industries.
We have increased the size of the segment's industrial sales
force, introduced new Silaprene(R) products and packaging that feature
the well-recognized brand name, and expanded the segment's Hydra
Fast-En(R) adhesive line of water-based adhesives to position it to
capitalize on opportunities created by increasingly stringent
government legislation regarding health and safety requirements.
The segment sells splice and bonding adhesives for the EPDM
rubber roofing market exclusively to Firestone pursuant to a five-year
contract which was entered into in fiscal 1995 and extended on June 9,
1998, by an additional 34 months to expire on December 31, 2002. Under
the terms of the Firestone agreement, Firestone is obligated to
purchase from the segment a minimum of 80% of its annual volume
requirements of splice and bonding adhesives for the EPDM rubber
roofing market. In fiscal 2000, 1999 and 1998, Firestone purchased 64%,
68% and 67%, respectively, of the segment's total net sales of
adhesives and sealants for such periods. Sales to Firestone during the
fiscal year ended October 1, 2000, represented approximately 30% of
Uniroyal's net sales from continuing operations for such fiscal year.
The loss of Firestone as a customer would have an adverse effect on the
Specialty Adhesives segment and Uniroyal.
Competition
As to our adhesives and sealants, we compete principally on
the basis of price and the performance characteristics of our products.
Under our agreement with Firestone, Firestone is obligated to purchase
a minimum of 80% of its annual volume requirements of splice and
bonding adhesives for the EPDM rubber roofing market from us. However,
we compete with other suppliers for marginal sales to Firestone.
The segment's principal competitors in the adhesives and
sealants market for EPDM rubber roofing applications are:
o Adco Technologies, Inc.;
o Ashland Chemical Company; and
o ITW TACC/Illinois Tool Works, Inc.
Carlisle Syntec Systems manufactures these adhesives primarily
for its own single-ply roofing system and consequently competes
indirectly with the segment.
In the industrial adhesives and sealants markets, the
segment's primary competitors include:
o Imperial Adhesives, division of Sovereign Specialty
Chemicals, Inc.;
o Manus Products, Inc.;
o Minnesota Mining and Manufacturing Corporation;
o Palmer Products Corp.; and
o Sika Corporation.
Marketing
We market the segment's industrial adhesives and sealants
under the brand names Silaprene(R) and Hydra Fast-En(R). We market the
segment's water-based adhesives under the brand name Hydra Fast-En(R).
The segment's Silaprene(R) products have established name recognition
in and are important in the recreational vehicle and truck trailer
manufacturing markets. Hydra Fast-En(R) water-based adhesives are
beginning to establish market share in the foam fabrication, plastic
fabrication, recreational vehicle and marine markets. Recognized
trademarks in the mirror and glass industry are Gunther Ultra/Bond(R),
Gunther Extra/Build(R), Prime-N-Seal(TM), Gunther Premier(R), Mirror &
More Cleaner(TM) and Seal-Kwik(TM).
We market the segment's roofing adhesives and sealants under
Firestone's brand names. We indirectly hold an important position in
the splice adhesives and bonding adhesives market through Firestone,
which controls a significant market share of the EPDM rubber roofing
market.
We market the segment's industrial adhesives and sealants
throughout the United States and Canada primarily to manufacturers
through a network of 200 authorized distributors, 19 independent
representatives and five sales representatives located throughout the
United States and Canada. Pursuant to our obligation under the
Firestone agreement, we do not market the segment's splice and bonding
adhesives for the EPDM rubber roofing market.
The segment's roofing adhesives business is seasonal,
increasing in the warmer months of the year due to an increase in
roofing and other construction activities in such months, and is
sensitive to adverse weather conditions.
Manufacturing Facility
On July 17, 1996, we acquired a manufacturing facility in
South Bend, Indiana consisting of approximately 240,000 square feet for
$1.8 million and spent an additional $6.7 million for building
renovations, new equipment and moving expenses. The move was completed
on February 18, 1997 and the South Bend facility now provides a modern
and efficient manufacturing plant.
Raw Materials
The division's adhesives and sealants use a variety of raw
materials such as rubber, resins and solvents, which are generally
available from multiple sources. The division's principal suppliers of
such raw materials and containers include:
o Ashland Chemical;
o Bayer Corporation;
o Caraustar Industrial and Consumer Products Group/Caraustar;
o Citgo Petroleum Corporation;
o Cleveland Steel Container Corp.;
o DuPont Dow Elastomers;
o Elementis Specialty Polymers;
o Schenectady International; and
o Sun Chemical Company, Inc.
We have long-term supply agreements with:
o Cleveland Steel Container Corp.;
o Caraustar Industrial and Consumer Products Group/Caraustar;
o Elementis Specialty Polymers; and
o Sun Chemical Company, Inc.
We believe that adequate supplies of raw materials for our
adhesives and sealants will be available to the division from alternate
suppliers. However, if the division is required to use alternate
suppliers, production could be affected while the raw materials
produced by such alternate suppliers are qualified by the division to
meet the product specifications of its customers.
Compound Semiconductor and Optoelectronics Segment
Optoelectronics Business
In February 1998, Uniroyal and Emcore Corporation formed a
joint venture (Uniroyal Optoelectronics, LLC) to manufacture, sell and
distribute HB-LED wafers and package-ready dies. Uniroyal owns, through
a wholly-owned subsidiary, the majority interest in the joint venture
company. The Optoelectronics joint venture started operations in the
second quarter of fiscal 2000 and has a limited operating history. It
is projected that the joint venture will reach commercial production
levels in the first half of fiscal 2001. As of October 1, 2000, the
Optoelectronics joint venture had an accumulated deficit of
approximately $21.0 million. It incurred net losses of approximately
$16.2 million in fiscal 2000. We expect the venture to continue to
incur losses for the next year.
General
HB-LEDs are solid state compound semiconductor devices that
emit light. The global demand for HB-LEDs is experiencing rapid growth
because HB-LEDs have a long useful life, consume approximately 10% of
the power consumed by incandescent or halogen lighting and improve
display visibility. The segment expects to provide the lighting
industry with both InGaN (blue and green) and AlInGaP (red, orange,
yellow) products. Applications for HB-LEDs include traffic signals,
automotive applications, miniature lamps, flat panel displays and
indoor/outdoor signs.
Competition
The HB-LED marketplace, according to industry data sources,
grew 54% in 1999 over the previous year and industry data sources
forecast substantial growth each year for the foreseeable future.
The principal competitors for HB-LEDs and our Optoelectronics
business include:
o Cree, Inc.;
o Hewlett Packard Corporation;
o LumiLeds Lighting, a joint venture between Agilent
Technologies and Philips Lighting;
o Nichia Chemical Industries, Ltd.;
o Siemens AG's subsidiary, Osram;
o Toshiba Corporation; and
o Toyoda Gosei Co. Ltd.
Marketing
We market our optoelectronics products generally through an
executive sales approach, relying predominantly on the efforts of
senior management for domestic sales. Sales in Japan, Taiwan, Hong Kong
and Europe are conducted by distributors and independent sales
representatives.
Manufacturing Facility
We lease a state-of-the-art 77,000 square foot plant in Tampa,
Florida for manufacturing epitaxial wafers and package-ready dies for
use in HB-LEDs. We completed the initial build-out during fiscal 1999
at a cost of approximately $11.0 million. Additional machinery and
equipment of approximately $11.0 million and $10.0 million were
purchased during fiscal 2000 and 1999, respectively. During fiscal
2000, we incurred approximately $12.7 million of start-up costs that
are included in selling and general administrative expenses.
We doubled the production capacity for HB-LEDs in blue and
green colors at a cost of approximately $4.0 million. In addition, we
are developing plans to build out additional capacity for HB-LEDs in
blue and green colors at our Tampa, Florida facility. We expect to
complete the additional capacity build-out within approximately one
year. Additional reactors for blue and green HB-LEDs will be staged in
thereafter to further increase the production capacity for the blue and
green colors. We estimate the cost for completion of this additional
capacity build out at $25.0 million.
Research and Development
In fiscal 2000, we committed to develop our own internal
research and development program rather than rely on our joint venture
partner. During fiscal 2000 and the first quarter of fiscal 2001, we
have added five research and development scientists. Current expansion
efforts at our Tampa facility include a state-of-the-art research and
development center.
Raw Materials
We depend on a limited number of suppliers for certain raw
materials, components and equipment used in the Optoelectronics
business, including certain key materials and equipment used in our
wafering, polishing, epitaxial deposition, device fabrication and
device test processes. In addition, the availability of these
materials, components and equipment to us is dependent in part on our
ability to provide our suppliers with accurate forecasts of our future
requirements. We endeavor to maintain ongoing communication with our
suppliers to guard against interruptions in supply and, to date,
generally have been able to obtain adequate supplies in a timely manner
from our existing sources. However, any interruption in the supply of
these key materials, components or equipment could have a significant
adverse effect on our operations.
Semiconductor Business
General
On May 31, 2000, we acquired Sterling for stock and employee
stock options valued at approximately $40.6 million. Sterling is a
developer and manufacturer of SiC semiconductor wafer substrates (or
foundations) and substrates with epitaxial thin film coatings.
"Epitaxy" is a thin film on the substrate wafer. Sterling's SiC wafer
business was originally based on proprietary technology developed in
the former Soviet Union (the "Russian technology") and licensed to
Sterling. Sterling has been producing and selling SiC wafers since the
first quarter of 1997 and producing and selling wafers with epitaxial
thin films since January 1999. Sterling sells these products to
corporate, government and university programs that use SiC for
developing and producing electronic components.
SiC is unique in that semiconductor devices made from it can
operate at high temperatures, high voltages and high frequencies, and
it can enable electro-optical applications in the blue light spectrum.
For certain electronic applications, SiC has greater heat resistance
and better electrical properties than silicon and gallium arsenide
("GaAs"), which are the primary substrates used in the semiconductor
industry. We believe these properties are important to advancing
technology in wireless communications, automobiles, industrial process
controls and optoelectronics, especially for applications that exceed
the capabilities of silicon and GaAs.
Sterling's current product line consists of 4H and 6H polytype
SiC wafers in diameters of 34.9 mm and 50.8 mm, which are used by
semiconductor manufacturers as substrates for research and for
developing semiconductor devices. Epitaxial layers of material with
different electrical characteristics are grown on these substrates to
be the foundation for subsequent fabrication of completed devices.
Sterling also produces SiC wafers with silicon carbide epitaxial layers
for those device producers who do not have epitaxial capability.
Sterling is also exploring strategic relationships with specialized
device manufacturers to provide the silicon carbide chips that they
will package into completed devices.
Most of Sterling's customers who intend to use SiC for power,
communications or high temperature applications must buy wafers with
epitaxy. Epitaxy on SiC wafers is an essential first step toward making
SiC devices, as the properties of the thin films determine the function
of the semiconductor device. For instance, whether the semiconductor
will be used in, among other things, heat sensors, light emitters or
communications devices is determined by the film's properties. We
believe that Sterling has the necessary technology platform to increase
capacity to meet the needs of its SiC wafer customers, as well as to
produce semiconductor devices. We expect to begin selling prototype SiC
semiconductor device components in the future.
Sterling's current production capability is partly
attributable to its acquisition in September 1998 of certain assets and
technology from Advanced Technology Materials, Inc. ("ATMI"), including
a license to the ISO-9002 certified SiC wafer production process in
Danbury, Connecticut. ISO is known internationally as the designation
for world-class manufacturing facilities. ISO standards require that
rigorous operational criteria be met and maintained, and provide
important reliability assurances to customers. ATMI had been producing
SiC wafers primarily for internal research and development with limited
sales to other companies. The acquisition of ATMI's production
equipment provides Sterling with additional capacity to fulfill larger
orders for SiC wafers. The acquisition also complements, and expands
Sterling's current production process.
Competition
The semiconductor industry is intensely competitive and is
characterized by rapid technological change, price erosion and intense
foreign competition. While Cree, Inc. ("Cree") has historically been
Sterling's chief competitor with respect to SiC wafer sales, a few
other companies have recently begun offering small quantities of SiC
wafer products or have announced plans to do so. Such companies may
develop new or enhanced products that are more effective than any that
Sterling has developed or may develop. These companies may also develop
technology that produces commercial products with characteristics
similar to SiC-based products, but at a lower cost. We believe that
present and future competitors will aggressively pursue the development
and sale of competing products. The result of this increased
competition could mean lower prices for Sterling's products, reduced
demand for our products and a corresponding reduction in our ability to
recover development, engineering and manufacturing costs.
Marketing and Sales
We actively market our Sterling products through targeted
mailings, telemarketing, select advertising and attendance at trade
shows and the Internet. We generally use an executive sales approach,
relying predominantly on the efforts of senior management and a small
direct sales staff for sales within the United States. Sales in Europe,
Japan, Korea and Taiwan are conducted by distributors with a long
history of selling materials to customers in the semiconductor
industry. We believe that this approach is preferable to direct sales
overseas in view of its current customer base and product mix.
Intellectual Property
Currently, our SiC production process, including the Sterling
and ATMI technology, is not patented. In evaluating whether to seek
patent protection, Sterling considered the view held by some in the
industry that process patents are easy to circumvent with engineering,
and that infringement is difficult to detect and enforce. Given the
small number of entities in the world active in SiC technology, and the
technical complexity of the process, we believe that disclosing
technology in a patent could potentially harm the business in a way
that would offset any perceived benefit of the patent. As a result, we
retain our SiC crystal growth process as a trade secret and seek to
maintain it, along with its other trade secrets, in confidence through
appropriate non-disclosure agreements with employees and others to whom
the information is disclosed. We cannot make assurances these
agreements will provide meaningful protection against unauthorized
disclosure or use of our confidential information or that our
proprietary technology and know-how will not otherwise become known or
independently discovered by others.
Our current licenses include a license to the Russian
technology through the year 2046. This licensing agreement covers the
manufacture and sale of SiC wafers worldwide under the technical
direction of the Russian scientists who developed the technology. The
license from ATMI is exclusive and worldwide until a 2% royalty up to a
maximum of $1.0 million has been paid. The ownership of the ATMI
technology would then transfer to Sterling.
Cree entered into a licensing agreement with North Carolina
State University in 1987. This agreement granted Cree an exclusive
license to several patents related to silicon carbide, including one
specifically related to SiC crystal growth. Cree, Northrop Grumman and
other companies continue to patent various aspects of SiC technology
and device products. We regularly monitor SiC intellectual property
developments, with the assistance of counsel, in order to avoid
infringement and to execute our own patenting strategy. Further, we
have applied for trademarks.
Research and Development
We believe that our ability to improve our position in the
semiconductor industry will depend on our ability to enhance existing
products and to continue developing new products incorporating the
latest improvements in SiC technology. Accordingly, we are committed to
continuing to invest in research and development. Historically,
government agencies have funded a significant portion of Sterling's
research and development activities and account for most of Sterling's
total revenues. A description of certain of Sterling's current research
and development projects is included under "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
In addition, Sterling has been awarded certain government
contracts for SiC wafers, epitaxy and device research and development,
primarily through the Small Business Innovation Research ("SBIR")
program. Since its inception, through October 1, 2000, Sterling has
been awarded SBIR and similar contracts totaling approximately $2.2
million, and there is a backlog of SBIR and similar contracts with
expected revenues of approximately $2.0 million. Additionally, in
August 1999, Sterling was awarded a Department of Defense Title III
contract for approximately $3.0 million over three years to establish
world class merchant manufacturing capabilities and to develop the
capacity to produce and ship 75,000 square inches of three-inch
diameter wafers during the last contract year. This contract requires
Sterling to demonstrate the feasibility of four-inch diameter wafers by
the end of the contract term.
Raw Materials
We depend on a limited number of suppliers for certain raw
materials, components and equipment used in SiC products, including
certain key materials and equipment used in crystal growth, wafering,
polishing, epitaxial deposition, device fabrication and device test
processes. We generally purchase these limited source items pursuant to
purchase orders and have no guaranteed supply arrangements with our
suppliers. In addition, the availability of these materials, components
and equipment to us is dependent in part on our ability to provide our
suppliers with accurate forecasts of our future requirements. We
endeavor to maintain ongoing communication with our suppliers to guard
against interruptions in supply and, to date, have been able to obtain
adequate supplies in a timely manner from our existing multiple
sources. However, any interruption in the supply of these key
materials, components or equipment could have a significant adverse
effect on Sterling's operations.
Manufacturing Facility
Sterling's primary facilities and executive offices are
located in Sterling, Virginia. At this location, we conduct research
and development in SiC crystal growth and SiC epitaxy. We have our main
production facility at Danbury, Connecticut, where we manufacture SiC
in an ISO-9002 certified facility and perform research and development.
We lease both of these facilities.
In September 2000, we entered into a lease agreement for the
construction of a 50,000 square foot new manufacturing facility
approximately two miles from our current Virginia location.
Construction has started at the site, and we expect the structure and
interior build-out to be completed during 2001. We expect to relocate
our Virginia operations to this facility when it is completed, and
begin consolidating our Connecticut operations in the facility as well.
General
Employees
The Company has approximately 440 employees, including
approximately 180 hourly wage employees and 260 salaried employees. We
believe that at the present time our workforce is adequate to conduct
our business and that our relations with employees are generally
satisfactory.
The Company is a party to two collective bargaining
agreements. At our coated fabrics manufacturing facility located in
Stoughton, Wisconsin, approximately 140 hourly employees are covered by
an agreement expiring on September 17, 2001 with Local 1207 of P.A.C.E.
(formerly known as the United Paperworkers International Union). A
separate agreement expiring on April 25, 2003 with the United Steel
Workers of America, United Rubber Workers Division (the "USWA") covers
approximately 40 hourly wage employees at our adhesives and sealants
manufacturing facility located in South Bend, Indiana.
Richard D. Kimbel, the former President of United Rubber
Workers Union Local 65 (Mishawaka), is a director of the Company.
Trademarks and Patents
We own and control patents, trade secrets, trademarks, trade
names, copyrights and confidential information, which in the aggregate
are material to our business. We are not materially dependent, however,
upon any single patent or trademark. We have several trademarks that
have wide recognition and are valuable to our business. Among the
trademarks that are of material importance to us are NAUGAHYDE(R),
NAUGAFORM(R), DURAN(R), SILAPRENE(R), HYDRA FAST-EN(R), GUNTHER
ULTRA/BOND(R) and GUNTHER EXTRA/BUILD(R). Our trademarks are registered
in the United States and in a number of foreign jurisdictions with
terms of registration expiring generally between 2000 and 2010. No
trademark registration of material importance to us expired during
fiscal 2000. We intend to renew in a timely manner all those trademarks
that are required for the conduct of our business. We also hold 13
patents and pending patents worldwide.
We use the trade name and trademark "Uniroyal" pursuant to a
license from Uniroyal Goodrich Licensing Services, Inc.
Research and Development
We are actively engaged in research and development programs
designed to develop new products, manufacturing processes, systems and
technologies and to enhance our existing products and processes.
Research and development is conducted within each of our business
segments. Investment in research and development has been an important
factor in establishing and maintaining our competitive position in many
of the specialized niche markets in which our products are marketed.
For example, our research and development efforts have led to the
development of water-based adhesives (see "Business Segments -
Specialty Adhesives"). We spent approximately $1.6 million for research
and development during fiscal 2000 compared to approximately $1.1
million during fiscal 1999.
We currently employ a staff of 31 individuals in connection
with our research and development efforts. The individuals include
chemists, process development engineers and laboratory technicians and
are responsible for new product development and improvement of
production processes. The allocation of research and development staff
among our business segments is as follows: 18 at Compound Semiconductor
and Optoelectronics, seven at Coated Fabrics and six at Specialty
Adhesives.
Backlog
At October 1, 2000, we had backlog orders from continuing
operations aggregating approximately $12.4 million, as compared to
approximately $8.8 million as of September 26, 1999. We presently
anticipate that all backlog orders will be filled within the next 12
months. Backlog orders for each of our business segments were as
follows as of the indicated dates:
October 1, September 26,
2000 1999
---------- -------------
(in thousands)
Coated Fabrics $ 3,187 $ 4,434
Specialty Adhesives 5,264 4,394
Compound Semiconductor and
Optoelectronics 3,929 -
--------- ---------
Total $ 12,380 $ 8,828
========= =========
Environmental Matters
We are subject to federal, state and local laws and
regulations designed to protect the environment and worker health and
safety. Management emphasizes compliance with such laws and regulations
and has instituted programs throughout our Company to provide education
and training in compliance at and auditing of all our facilities.
Whenever required under applicable law, we have implemented product or
process changes or invested in pollution control systems to ensure
compliance with such laws and regulations.
In fiscal 2000, 1999 and 1998, the amount of capital
expenditures related to environmental matters was immaterial and the
amount of such expenditures is expected to be immaterial in fiscal
2001. In the future, as the requirements of applicable law impose more
stringent controls at our facilities, expenditures related to
environmental and worker health and safety are expected to increase.
While we do not currently anticipate having to make any material
capital expenditures in order to comply with these laws and
regulations, if we are required to do so, such expenditures could have
a material impact on our earnings or competitive position in the
future.
Pursuant to a 1992 settlement agreement with the United States
Environmental Protection Agency (the "EPA"), the United States
Department of the Interior and the States of Wisconsin and Indiana (the
"EPA Settlement Agreement") in the event that the United States,
Wisconsin or Indiana asserts a claim against us for response costs
associated with pre-petition disposal activities at certain sites, the
governmental party will be entitled to pursue its claim in the ordinary
course, and we will be entitled to assert all of our defenses. However,
if and when we are held liable, and if the liability is determined to
arise from pre-petition disposal activities of its predecessors, we may
pay the liability in discounted "plan dollars" (i.e., the value of the
consideration that the party asserting such claim would have received
if the liability were treated as a general unsecured claim under the
Plan of Reorganization of our predecessors). Such payment may be made
in cash or in the Company's stock, or a combination thereof, at our
option. Claims arising from real property owned by us are not affected
by the EPA Settlement Agreement.
In connection with our acquisition of the manufacturing
facility in South Bend, Indiana on July 17, 1996, we assumed the costs
of remediation of soil and groundwater contamination resulting from the
leaking of solvents used in the operation of the plant by its former
owner. We are conducting the remediation voluntarily pursuant to an
agreement with the Indiana Department of Environmental Management. We
estimate that such remediation will cost approximately $1.0 million
over a five-to-seven-year period. In connection with our acquisition of
the facility, we placed in escrow, in accordance with the terms of the
purchase agreement, $1.0 million of the $1.8 million purchase price to
be applied to such remediation costs. Through fiscal 2000, we have
incurred costs of approximately $688,000 in connection with such
remediation.
In October 1996, the EPA sent us a General Notice and Special
Notice of Liability concerning the Refuse Hideaway Landfill Superfund
Site at Middleton, Wisconsin. While a unit of Uniroyal, Inc. is
believed to have sent non-hazardous waste to the site between 1978 and
1984, we are not aware that the Uniroyal, Inc. unit sent any hazardous
materials to the site. We have entered into an Administrative Order on
Consent with the EPA and a Potentially Responsible Parties Agreement
with certain other potentially responsible parties. We do not presently
anticipate any material liability in connection with the site, and in
any event, if we are found to have liability in connection with the
site, such liability will be subject to the terms of the EPA Settlement
Agreement. In August 2000, the Department of Justice of the State of
Wisconsin approved in principle a resolution of the liabilities of the
Company and other potentially responsible parties that would require
future payment by the Company of less than $10,000. Such settlement is
subject to successful completion of the negotiation of a consent decree
between the State of Wisconsin and the EPA.
In connection with the Spartech Sale, the Company conducted
environmental assessments on two of the plants of the High Performance
Plastics segment in compliance with the laws of the states of
Connecticut and New Jersey relating to transfers of industrial real
property. The asset purchase agreement provided that Spartech could
defer taking title to certain parcels of real property until the
Company provides evidence that environmental contamination had been
remediated to the satisfaction of Spartech. The environmental
assessment of the Connecticut property indicated that a separate parcel
purchased by the Company in 1995 was contaminated with total petroleum
hydrocarbons, DDT and other pesticide chemicals. The Company has
removed approximately 60% of the soil on the property at a cost of
approximately $1,600,000. The Company has retained environmental
consultants to review its options with regard to the remaining soil on
the premises. At October 1, 2000, the Company has estimated the cost to
clean up the remaining contamination at the Connecticut site to
approximate $1,000,000. The environmental assessment of the Hackensack,
New Jersey facility is still underway. At October 1, 2000, the Company
has estimated the clean-up cost to approximate $60,000. At October 1,
2000, the estimates for environmental clean-up costs are included in
the net liabilities of discontinued operations. Spartech has agreed to
lease the parcels for a nominal amount until after remediation is
complete.
Based upon information available as of October 1, 2000, we
believe that the costs of environmental remediation for which we may be
liable have either been adequately reserved for or are otherwise
unlikely to have a material adverse effect on our operations, cash
flows or financial position.
History of Company
Our businesses trace their origins to a number of predecessor
companies which eventually were reorganized pursuant to the Third
Amended Plan of Reorganization under the Bankruptcy Code for Polycast
Technology Corporation and Its Affiliated Debtors (as subsequently
modified, the "Plan of Reorganization").
A substantial portion of the thermoplastic sheet business of
the High Performance Plastics segment, which was sold in fiscal 2000,
as well as the businesses of the Coated Fabrics segment and the
Specialty Adhesives segment (formerly the Specialty Foams and Adhesives
segment), originated in the chemical and plastics operations of the
U.S. Rubber Company (later known as Uniroyal, Inc. ("Uniroyal"). These
operations were conducted by segments of Uniroyal until 1985, when
Uniroyal Plastics Company, Inc. ("UPC") was formed by Uniroyal as a
wholly-owned subsidiary to hold these operations. In October 1986, The
Jesup Group, Inc. ("Jesup") indirectly, through its wholly-owned
subsidiary, Uniroyal Plastics Acquisition Corp. ("UPAC"), acquired UPC
from Uniroyal. Following its acquisition of UPC, Jesup combined the
thermoplastic sheet operations acquired from UPC with its existing
thermoplastic sheet and acrylic sheet, rod and tube businesses in a
subsidiary known as Polycast Technology Corporation ("Old Polycast").
Jesup also transferred what is now the Coated Fabrics segment of the
Company's business into Uniroyal Engineered Products, Inc. ("Old UEP")
and the adhesives and sealants business of what is now its Specialty
Adhesives segment into Uniroyal Adhesives and Sealants Company, Inc.
("Old UAS"). The assets of the specialty foam business were transferred
from UPC to Ensolite, Inc. ("Old Ensolite"). Old Polycast, Old UEP, Old
Ensolite and Old UAS are referred to herein as the "Predecessor
Companies." UPC is currently in bankruptcy liquidation and was an
affiliate of the Predecessor Companies. UPAC's plan of reorganization
was substantially implemented in November 1993.
In October and November 1991, the Predecessor Companies and
one other subsidiary of Jesup filed voluntary bankruptcy petitions with
the United States Bankruptcy Court for the Northern District of
Indiana, South Bend Division (the "Bankruptcy Court") for relief under
Chapter 11 of Title 11 of the United States Code, as amended (the
"Bankruptcy Code").
The plan of reorganization of the Predecessor Companies was
substantially consummated on September 27, 1992. Pursuant to the Plan
of Reorganization, each of the Predecessor Companies transferred
substantially all of its assets to a newly organized subsidiary with a
name that was substantially identical to the name of its corresponding
Predecessor Company. In exchange, each of these new subsidiaries,
including Polycast Technology Corporation ("Polycast"), Uniroyal
Engineered Products, Inc. ("UEP"), Uniroyal Adhesives and Sealants
Company, Inc. ("UAS") and Ensolite, Inc. ("Ensolite"), agreed to assume
certain of the liabilities of its corresponding Predecessor Company. In
addition, we issued, or authorized for issuance, 19,150,000 (post-split
basis) shares of our Common Stock to holders of allowed unsecured
claims against the Predecessor Companies and 50 shares of Series A
Preferred Stock and 50 shares of Series B Preferred Stock to the
Pension Benefit Guaranty Corporation (the "PBGC"). The Bankruptcy Court
issued its final decree closing the bankruptcy of the Predecessor
Companies on September 27, 1999.
On June 7, 1993, in conjunction with the public offering of
our 11.75% Senior Secured Notes, we merged each of our operating
subsidiaries into the Company. In May 1993 we called and repurchased
from the PBGC all of the outstanding shares of Series A Preferred Stock
and 15 shares of the outstanding shares of Series B Preferred stock. On
December 16, 1996, we repurchased an additional 15 shares of such
stock, and on February 4, 1997, we repurchased the remaining 20 shares
of preferred stock. On November 13, 1997, the Company, certain officers
and directors of the Company and certain other persons purchased all of
the common stock held by the PBGC.
On April 14, 1998, we transferred all of the assets of our
High Performance Plastics segment to a newly created wholly-owned
subsidiary, High Performance Plastics, Inc. (HPPI). On that same day
HPPI, as borrower, entered into a credit agreement with Uniroyal HPP
Holdings, Inc. (the parent of HPPI and a wholly-owned subsidiary of the
Company), the Company and certain banks, including Fleet National Bank.
The credit agreement provided, among other things, for the borrowing by
HPPI of an aggregate principal amount of up to $110.0 million. On April
14, 1998, HPPI paid approximately $95.0 million to the Company. We used
this amount to defease the outstanding 11.75% Senior Secured Notes due
June 1, 2003, including the call premium and interest accrued through
the call date and to pay down its revolving line of credit with CIT.
The redemption of the outstanding Senior Secured Notes was completed by
June 1, 1998 at a call premium of 4.41%.
On February 28, 2000, we sold substantially all of the assets
of our High Performance Plastics segment to Spartech Corporation. See
"Business - General - Recent Developments."
Certain Business Risks and Uncertainties
General
Possible Volatility of Stock Price
The market price of our common stock has been and may continue
to be subject to wide fluctuations. Factors affecting the stock price
may include:
o variations in our operating results and our competitors from
quarter to quarter;
o changes in earnings estimates by securities analysts;
o market conditions in the compound semiconductor, coated
fabrics and specialty adhesives industries; and
o general economic conditions.
Our stock price has fluctuated widely. For example, between
the first quarter of 1999 and the first quarter of 2000, the high and
low sale prices of our common stock fluctuated between approximately
$3.625 and $6.313 per share. From the first quarter of 2000 to the end
of the fourth quarter of 2000, the high and low sale prices of our
common stock fluctuated between approximately $4.406 and $36.438 per
share. The prices have been adjusted to give effect to the 100% stock
dividend declared on March 10, 2000 for stockholders of record on March
20, 2000. The current market price of our common stock may not be
indicative of future market prices, and investors may not be able to
sustain or increase the value of their investment in the common stock.
Competition
The coated fabrics, specialty adhesives, compound
semiconductor and optoelectronics industries, in general, are highly
competitive. Many of our competitors have substantially greater
resources than we do. Oversupply and intense price competition
periodically characterize the coated fabrics and specialty adhesives
industries.
We believe that our reputation for high quality products,
innovative technology and strong customer technical service permits us
to compete successfully in the markets that we presently serve.
However, we may not be able to continue to compete successfully in such
markets or to apply such strengths successfully to additional markets.
In addition, new entrants may come into the markets that we serve.
Companies may offer products based on alternative technologies and
processes that may be superior to ours in price, performance or
otherwise.
Joint Venture with Emcore Corporation
We own, through a wholly-owned subsidiary, the majority
interest in a joint venture company established with Emcore Corporation
for the production of HB-LEDs. The joint venture company and the
business of Sterling (100% owned by us) comprise our Compound
Semiconductor and Optoelectronics business segment. The joint venture
company is governed by a board of managers with representatives from
both Emcore and Uniroyal. Certain decisions must be approved by both
parties to the joint venture, which means we will be unable to direct
extraordinary changes in the operation of the joint venture without the
agreement of Emcore. If Uniroyal and Emcore are unable to agree on
important issues, the business of the joint venture may be delayed or
interrupted, which may materially and adversely affect our business,
financial condition and results of operations.
We have devoted and will be required to continue to devote
significant funds and technologies to the joint venture to develop and
enhance its products. In addition, the joint venture requires that some
of Uniroyal's employees devote much of their time to the joint
venture's projects. This could place a strain on Uniroyal's management
and financial employees. If the joint venture is unsuccessful in
developing and marketing its products, our business, financial
condition and results of operations may be materially and adversely
affected.
If the joint venture is successful, we share only a portion of
the benefits in accordance with our 51% ownership interest in the joint
venture.
Dependence on Management
The continued success of Uniroyal depends in part on our
ability to retain certain members of senior management. In particular,
we are highly dependent on the management services of Howard R. Curd,
our Chairman of the Board and Chief Executive Officer, Robert L. Soran,
our President and Chief Operating Officer, and George J. Zulanas, Jr.,
our Executive Vice President and Chief Financial Officer. While we have
entered into employment agreements with Messrs. Curd, Soran and
Zulanas, there can be no assurance that such employees will not leave
or compete with Uniroyal. Failure to retain senior management could
have a material adverse effect on our business, financial condition and
results of operations.
Dependence on Key Personnel
The continued success of Uniroyal depends in part on our
ability to attract and retain certain key personnel, including
scientific, operational and management personnel. For example, some of
the equipment used in the production of HB-LEDs and SiC products must
be modified before it is put to use, and only a limited number of
employees possess the expertise needed to perform these modifications.
Furthermore, the number of individuals with experience in the
production of HB-LEDs and SiC products is limited. Accordingly, the
future success of the Compound Semiconductor and Optoelectronics
segment depends in part on retaining those individuals who are already
employees.
The competition for attracting and retaining employees,
especially scientists for the Compound Semiconductor and
Optoelectronics segment, is intense. Because of this intense
competition for these skilled employees, we may be unable to retain our
existing personnel or attract additional qualified employees in the
future. Specifically, we may experience increased costs in order to
attract and retain skilled employees. Failure to retain senior
management and skilled employees and attract additional qualified
employees could have a material adverse effect on our business,
financial condition and results of operations.
Intellectual Property
Trade Secrets. Our success and competitive position depend on
protecting our trade secrets and other intellectual property.
Particularly with respect to the business of our Compound Semiconductor
and Optoelectronics segment, including Sterling, our strategy is to
rely more on trade secrets than patents to protect our manufacturing
and sales processes and products, but reliance on trade secrets is only
an effective business practice insofar as trade secrets remain
undisclosed and a proprietary product or process is not reverse
engineered or independently developed. We take certain measures to
protect our trade secrets, including executing non-disclosure
agreements with our employees, joint venture partners, customers and
suppliers. If parties breach these agreements or the measures we take
are not properly implemented, we may not have an adequate remedy.
Disclosure of our trade secrets or reverse engineering of our
proprietary products, processes or devices could materially and
adversely affect our business, financial condition and results of
operations.
Patent Protection
Although we currently hold nine U.S. patents, these patents do
not protect any material aspects of the current or planned commercial
versions of our products for our Compound Semiconductor and
Optoelectronics business segment. We are actively pursuing patents on
some of our recent inventions, but these patents may not be issued.
Even if these patents are issued, they may be challenged, invalidated
or circumvented. In addition, the laws of certain other countries may
not protect our intellectual property to the same extent as U.S. laws.
Other companies may hold or obtain patents on inventions or
may otherwise claim proprietary rights to technology necessary to our
business, especially with respect to the business of our Compound
Semiconductor and Optoelectronics segment. We cannot assure you that
third parties will not attempt to assert infringement claims against us
with respect to our current or future products, including our core
products. We cannot predict the extent to which such assertions may
require us to seek licenses or, if required, whether such licenses will
be offered or offered on acceptable terms or that disputes can be
resolved without litigation. Litigation against us or any of our
customers could impair our ability to sell our products. Litigation to
determine the validity of infringement claims alleged by third parties
could result in significant expense to us and divert the efforts of our
technical and management personnel, whether or not the litigation is
ultimately determined in our favor. We cannot predict the occurrence of
future intellectual property claims that could prevent us from selling
products, result in litigation or give rise to indemnification
obligations or damage claims.
Protracted Product Qualification Periods
Many of the markets in which we compete are characterized by
long lead times for new products requiring significant working capital
investment by us and extensive testing, qualification and approval by
our customers and the end users of products. We face a significant risk
that we will incur significant costs for research and development,
manufacturing equipment, training, facility-related overhead and other
expenses to develop such products, only to have our customers or end
users not select them.
Even if our products are eventually approved and purchased by
customers and end users, our investment may fail to generate revenues
for several years while we develop and test such products.
Environmental Considerations
Our operations are subject to extensive federal, state and
local laws and regulations: (1) controlling the discharge of materials
into the environment or otherwise relating to the protection of the
environment; and (2) regulating conditions which may affect the health
and safety of workers.
The operation of any manufacturing plant in the industries in
which we participate entails risks under such laws and regulations,
many of which provide for substantial fines and criminal sanctions for
violation. For example, our manufacturing processes involve the use of
certain hazardous raw materials, including, but not limited to,
ammonia, phosphine and arsene. If the control systems are unsuccessful
in preventing a release of these materials into the environment or
other adverse environmental conditions occur, we could experience
interruptions in our operations and incur substantial remediation and
other costs. We believe that our current legal and environmental
compliance and safety programs adequately address such concerns and
that we are in substantial compliance with applicable laws and
regulations. However, compliance with, or any violation of, current and
future laws or regulations could require us to make material
expenditures or otherwise have a material adverse effect on our
business, financial condition and results of operations.
Risks Associated with Acquisition Strategy
We are actively pursuing strategic acquisitions in the
compound semiconductor industry. Our business, operating results and
financial condition could be negatively impacted if we are unable to
integrate businesses we acquire. We may not achieve the anticipated
benefits from any acquisition unless we successfully combine the
acquired businesses with those of Uniroyal in a timely and efficient
manner. The integration of acquisitions could require substantial
attention from our management. The diversion of the attention of
management, and any difficulties encountered in the transition process,
could negatively impact Uniroyal's business, operating results and
financial condition. In addition, the process of integrating various
businesses could cause the interruption of, or a loss of momentum in,
the activities of some or all of these businesses as well as our
ongoing business.
Dividends
We have never paid any cash dividends on the common stock. The
payment of any future dividends will be subject to the discretion of
our Board of Directors and will depend on our results of operations,
financial position and capital requirements, general business
conditions, legal restrictions on the payment of dividends and other
factors our Board of Directors deems relevant. We can give no assurance
that we will pay a dividend in the future.
Historical Performance No Indication
The historical share prices and earnings performances of
Uniroyal are not necessarily indicative of Uniroyal's future share
price or earnings results.
Anti-Takeover Provisions
Provisions of Uniroyal's charter documents may have the effect
of delaying or preventing a change in control of Uniroyal or its
management, which could have a material adverse effect on the market
price of the common stock. These include provisions:
o eliminating the ability of stockholders to take actions by
written consent; and
o limiting the ability of stockholders to raise matters at a
meeting of stockholders without giving advance notice.
Anti-takeover provisions may adversely effect the stock price
and make it more difficult for a third party to acquire Uniroyal.
In addition, the Board of Directors has authority to issue up
to 1,000 shares of preferred stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of these shares
without any further vote or action by the stockholders. The rights of
the holders of common stock will be subject to, and could be adversely
affected by, the rights of the holders of any preferred stock that
Uniroyal may issue in the future. The issuance of preferred stock,
while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of
Uniroyal's outstanding voting stock, thereby delaying, deferring or
preventing a change in control of Uniroyal.
Uniroyal's Stockholder Rights Plan has certain anti-takeover
effects. The plan grants to holders of common stock the right, when
exercisable, to purchase from Uniroyal a fraction of a share of
Uniroyal's series C preferred stock. This right will cause substantial
dilution to a person or group that attempts to acquire Uniroyal without
conditioning the offer on the rights being redeemed or a substantial
number of rights being acquired.
Risk Factors Associated with Uniroyal's Specialty Adhesives
and/or Coated Fabrics Business Segments
Labor Relations
We are a party to two collective bargaining agreements. During
July 1999, negotiations with the United Steel Workers of America,
United Rubber Workers Division, in connection with the collective
bargaining agreement covering the hourly wage employees at our
adhesives and sealants manufacturing facility located in South Bend,
Indiana, broke down, and a strike ensued for approximately three weeks.
The strike did not have a material adverse effect on operations of the
Specialty Adhesives business segment.
Although we believe our relationships with employees are good,
we can give no assurance that we will successfully negotiate the hourly
wages and/or benefits of employees at two of our facilities when the
applicable collective bargaining agreements expire. Moreover, the wages
and/or benefits we may agree upon might adversely affect the segments'
profitability. Furthermore, if we were the subject of another strike,
we could incur significant costs.
Maturity of Business Sectors
Our Specialty Adhesives and Coated Fabrics segments compete in
mature business sectors. We believe the key to generating growth in
such sectors (besides acquiring other businesses) is to introduce new
products or product innovations that address unsatisfied market needs.
We believe we will need to continue to significantly increase revenues
from product sales and increase profitability in these sectors. We
further believe that significant investment in product development
and/or acquisitions or a combination thereof over the mid-term is
necessary to do so. We can give no assurance that we will have
resources available for, or otherwise be successful in, any efforts to
achieve such growth.
Customer Concentration
Our Specialty Adhesives business segment sells splice and
bonding adhesives for the rubber roofing market exclusively to
Firestone Building Products Company. Approximately 64% of this
segment's fiscal 2000 sales and 30% of Uniroyal's net sales were
roofing product shipments to Firestone. The loss of Firestone as a
customer would have an adverse effect on the Specialty Adhesives
segment and Uniroyal.
Seasonality
The roofing adhesives business of the Specialty Adhesives
segment is seasonal. It increases in the warmer months of the year due
to an increase in commercial roofing and other construction activities
in such months, and is sensitive to adverse weather conditions.
Cyclicality
The recreational vehicle, marine and roofing markets among
others in which the Coated Fabrics and Specialty Adhesives segments
compete are sensitive to changes in general economic conditions which
affect demand for the commercial and consumer items that the Coated
Fabrics and Specialty Adhesives business segments manufacture.
Risk Factors Associated with Uniroyal's Compound Semiconductor
and Optoelectronics Business Segment
Operating Results Depend on Development of New Products
The future success of the Compound Semiconductor and
Optoelectronics segment depends on our ability to develop new products
and technology in the optoelectronics and SiC industries. We must
introduce new products in a timely and cost-effective manner and secure
production orders from our customers. The development of new HB-LED and
SiC products is a highly complex process. The successful development
and introduction of these products depends on a number of factors,
including the following:
o achievement of technology breakthroughs required to make
commercially viable devices;
o the accuracy of our predictions of market requirements and
evolving standards;
o acceptance of our new product designs;
o our ability to recruit and retain qualified research and
development personnel;
o timely completion of product designs and development;
o our ability to develop repeatable processes to manufacture
new products in sufficient quantities for commercial sales;
o acceptance of the products of the Compound Semiconductor and
Optoelectronics segment's customers by the market; and
o consistent cost-effective manufacturing processes.
If any of these or other factors become problematic, we may
not be able to develop and introduce these new products in a timely or
cost-effective manner.
Limited Operating History and Operating Losses
The Compound Semiconductor and Optoelectronics business
segment is in the development stage and has a limited operating
history. The segment will face risks and difficulties as an early stage
business in a high growth and rapidly evolving industry. Some of the
specific risks and difficulties for the segment include the following:
o building out our operational infrastructure;
o expanding our sales structure and marketing programs;
o increasing awareness of our products;
o providing services to our customers that are reliable and
cost-effective;
o responding to technological development or product offerings
by competitors; and
o attracting and retaining qualified personnel.
As of October 1, 2000, the Optoelectronics joint venture had
an accumulated deficit of approximately $21.0 million. It incurred
losses of approximately $16.2 million in fiscal 2000. We expect the
joint venture to continue to incur losses. As of December 31, 1999
(prior to the acquisition of Sterling by us), Sterling's accumulated
deficit was approximately $4.9 million. It incurred losses of
approximately $3.1 million in calendar year 1999 (Sterling's fiscal
year was a calendar year end prior to its acquisition by Uniroyal).
Since its acquisition by us, Sterling has incurred losses of $788,000
prior to intangible and goodwill amortization and the recognition of
acquired in-process research and development. We expect Sterling to
continue to incur losses. To support the segment's growth, we have
increased our expense levels and our investments in inventory and
capital equipment. As a result, we will need to significantly increase
revenues and profit margins for the Compound Semiconductor and
Optoelectronics segment to become and stay profitable. If the segment's
sales and profit margins do not increase to support the higher levels
of operating expenses and if its new product offerings are not
successful, our business, financial condition and results of operations
could be materially and adversely affected.
Production and Expansion Risks
The Compound Semiconductor and Optoelectronics segment is
experiencing rapid growth. We have added a significant number of new
employees to our Compound Semiconductor and Optoelectronics business.
We have a newly-constructed plant in Tampa, Florida to manufacture
epitaxial wafers and package-ready dies for use in HB-LEDs. We began
limited production at our Tampa facility in the Spring of 2000.
However, equipment difficulties have delayed commercial production at
this facility. We expect to reach commercial production levels in the
first half of fiscal 2001, although we cannot be certain that we will
do so. We are planning to build additional capacity at the Tampa
facility within the next year. We are also planning to expand the
physical facilities for Sterling in the next year. Expansion activities
such as these are subject to a number of risks, including the
following:
o unforeseen environmental or engineering problems relating to
the existing facilities;
o unavailability or late delivery of the advanced, and often
customized, equipment used in the production of the
segment's products;
o attracting and retaining qualified personnel;
o work stoppages and delays; and
o delays in bringing production equipment on-line.
This growth has placed and will continue to place a
significant strain on our management, financial, sales and other
employees and on our internal systems and controls. If we are unable to
effectively manage the rapid growth of the Compound Semiconductor and
Optoelectronics segment, our business, financial condition and results
of operations could be materially and adversely affected.
Rapid Changes in Technology
The Compound Semiconductor and Optoelectronics segment
competes in markets characterized by rapid technological change,
evolving industry standards and continuous improvements in products.
Due to constant changes in these markets, its future success depends on
our ability to improve our manufacturing processes and tools and our
products. To remain competitive, we must continually introduce
manufacturing tools with higher capacity and better production yields.
Because we generally are unable to predict the amount of time
required and the costs involved in achieving certain research,
development and engineering objectives, actual development costs could
exceed budgeted amounts, and estimated product development schedules
could be extended. Our business, financial condition and results of
operations could be materially and adversely affected if with respect
to the Compound Semiconductor and Optoelectronics business:
o we are unable to improve our existing products on a timely
basis;
o our new products are not introduced on a timely basis;
o we incur budget overruns or delays in our research and
development efforts; or
o our new products experience reliability or quality problems.
Dependence on Key Suppliers
We depend on a limited number of suppliers for certain raw
materials, components and equipment used in the Compound Semiconductor
and Optoelectronics segment, including certain key materials and
equipment used in our wafering, polishing, epitaxial deposition, device
fabrication and device test processes. In addition, the availability of
these materials, components and equipment to us is dependent in part on
our ability to provide our suppliers with accurate forecasts of our
future requirements. We endeavor to maintain ongoing communication with
our suppliers to guard against interruptions in supply and, to date,
generally have been able to obtain adequate supplies in a timely manner
from our existing sources. However, any interruption in the supply of
these key materials, components or equipment could have a significant
adverse effect on our operations.
Difficulty in Manufacturing Products
The manufacture of the Compound Semiconductor and
Optoelectronics segment's products is a highly complex and precise
process. We are working to manufacture all of our HB-LED epitaxial
wafers and dies at our Tampa, Florida facility. Minute impurities,
difficulties in the production process, defects in the layering of the
wafers' and dies' constituent compounds, wafer breakage or other
factors can cause a substantial percentage of wafers and dies to be
rejected or numerous dies on each wafer to be non-functional. These
factors can result in lower than expected production yields, which
would delay product shipments and could materially and adversely affect
our operating results. Because the majority of the manufacturing costs
for the Optoelectronics business are relatively fixed, the number of
shippable dies per wafer for a given product is critical to the
segment's financial results. Additionally, because we manufacture most
of our HB-LEDs at our facility in Tampa, Florida, any interruption in
manufacturing resulting from fire, natural disaster, equipment failures
or otherwise could materially and adversely affect the Compound
Semiconductor and Optoelectronics segment's business, financial
condition and results of operations.
A new facility for the Sterling operations is under
construction in Sterling, Virginia. The new facility will allow for a
significant expansion of Sterling's current operations. Construction
delays and or new equipment delivery delays could prolong our expansion
efforts and adversely affect our operating results.
Item 2. Properties
The following table sets forth the location, size, general
character and nature of the Company's facilities:
SQUARE FEET GENERAL CHARACTER
LOCATION AND ENTITY OF FACILITY OF PROPERTY LEASED OR OWNED
- ------------------- ----------- ------------------ ----------------
Corporate
- ---------
Sarasota, Florida 11,000 Corporate offices Leased
Stirling, New Jersey 50,000 Previously manufactured acrylic sheet, Owned
rods & tubes - currently for sale
Port Clinton, Ohio 240,000 Previously manufactured coated fabrics Owned
products - currently for sale
Coated Fabrics Segment
- ----------------------
Stoughton, Wisconsin 198,275 Manufacture of coated fabrics products Owned
Specialty Adhesives Segment
- ---------------------------
South Bend, Indiana 240,000 Manufacture of adhesives and sealants Owned
Compound Semiconductor and
Optoelectronics Segment
- --------------------------
Danbury, Connecticut 4,735 Manufacture of SiC wafers Leased
Tampa, Florida 77,000 Manufacture of epitaxial wafers and
package-ready die Leased
Carol Stream, Illinois 12,000 Development of optoelectronic devices Leased
Sterling, Virginia 50,000 Future manufacturing site for SiC wafers Leased
Sterling, Virginia 14,000 Research and development, SiC technology Leased
Item 3. Legal Proceedings
By letter dated January 30, 1998, the Denver Regional Office
of the U.S. Federal Trade Commission ("FTC") notified us that it was
conducting a non-public investigation into our acquisition of the
Townsend Plastics Division of Townsend Industries in September 1997.
The purpose of the investigation was to determine whether the
transaction violated Section 7 of the Clayton Act, 15 U.S.C. Section
18, Section 5 of the Federal Trade Commission Act, 15 U.S.C. Section
45, or any other law enforced by the FTC. While no formal termination
of the preceding has been issued, the Company was unofficially informed
in April 2000, that the investigation was discontinued. The Townsend
business was sold to Spartech in February, 2000.
We are involved in certain proceedings in the ordinary course
of our business which, if determined adversely to the Company would, in
our opinion, not have a material adverse effect on the Company or our
operations.
In connection with its reorganization, the Company entered
into a number of settlement agreements, including certain agreements
relating to environmental matters. See "Item 1. Business - History of
the Company - Predecessor Companies."
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of fiscal
2000 to a vote of security holders, through the solicitation of proxies
or otherwise.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Prior to the effective date of the Plan of Reorganization,
none of the Company's common stock, par value $.01 per share (the
"Common Stock"), was issued, and consequently there was no public
market for the Common Stock. The Common Stock was admitted to trading
on the NASDAQ National Market System ("NASDAQ") on September 28, 1992
and trades under the symbol "UTCI." At the close of trading on November
30, 2000, the price per share of Common Stock was $7.00.
As of November 30, 2000, there were 1,125 holders of record of
shares of Common Stock.
The following table sets forth the high and low sales price
per share of the Company's Common Stock as reported by NASDAQ for the
indicated dates. The prices have been adjusted to give effect to the
two-for-one stock split declared on March 10, 2000 for stockholders of
record on March 20, 2000:
Fiscal Year Ended Fiscal Year Ended
October 1, 2000 September 26, 1999
---------------------------------------- ----------------------------------------
Quarter High Low High Low
------- --------- ---------- --------- ---------
First $ 13.180 $ 4.406 $ 5.375 $ 4.500
Second $ 36.438 $ 10.281 $ 5.125 $ 3.969
Third $ 26.875 $ 10.250 $ 4.969 $ 3.625
Fourth $ 18.875 $ 11.000 $ 6.313 $ 4.750
We have never paid cash dividends on our common stock. The
payment of any future dividends will be subject to the discretion of
the Board of Directors of Uniroyal and will depend on our results of
operations, financial position and capital requirements, general
business conditions, legal restrictions on the payment of dividends and
other factors our Board of Directors deem relevant. We currently do not
anticipate paying cash dividends on the common stock in the foreseeable
future.
Item 6. Selected Financial Data
The following historical financial data as of October 1, 2000
("Fiscal 2000") and September 26, 1999 ("Fiscal 1999") and for each of
the three years in the period ended October 1, 2000 have been derived
from consolidated financial statements of the Company audited by
Deloitte & Touche LLP and contained elsewhere in this Form 10-K. The
selected historical financial data presented below as of September 27,
1998 ("Fiscal 1998"), September 28, 1997 and September 29, 1996 and for
the fiscal years ended September 28, 1997 and September 29, 1996 have
been derived from audited financial statements of the Company. All of
the financial data set forth below should be read in conjunction with
the Consolidated Financial Statements and related notes and other
financial information contained in this Form 10-K.
SELECTED FINANCIAL DATA
(in thousands, except share and per share data)
Fiscal Year Ended
------------------- ------------------ ------------------- ------------------ --------------
October 1, September 26, September 27, September 28, September 29,
2000 1999 1998 1997 1996
------------------- ------------------ ------------------- ------------------ --------------
Operating Data:
Net sales $ 68,253 $ 71,214 $ 92,036 $ 89,677 $ 94,278
Depreciation and other amortization (1) 8,145 3,505 3,618 4,117 6,163
(Loss) income before interest,
income taxes, minority interest,
discontinued operations and
extraordinary item (45,834) (2,682) 6,708 47 (19,720)
Interest income (expense) - net 1,075 (778) (2,163) (3,233) (4,082)
Income tax benefit (expense) 26,182 2,520 (2,443) 928 8,313
(Loss) income before minority
interest, discontinued operations
and extraordinary item (18,577) (940) 2,102 (2,258) (15,489)
Minority interest 7,918 2,191 199 - -
(Loss) income from continuing
operations before discontinued
operations and extraordinary item (10,659) 1,251 2,301 (2,258) (15,489)
Income from discontinued operations,
net of income tax expense 57,346 4,269 5,726 2,637 1,088
Extraordinary loss - - (5,637) - -
Net income (loss) $ 46,687 $ 5,520 $ 2,390 $ 379 $ (14,401)
Income (loss) per common share -
basic: (2), (3)
(Loss) income from continuing
operations $ (0.43) $ 0.05 $ 0.09 $ (0.09) $ (0.60)
Income from discontinued
operations 2.30 0.18 0.21 0.10 0.04
Extraordinary loss - - (0.21) - -
----------- ----------- ----------- ----------- -----------
Net income (loss) per share $ 1.87 $ 0.23 $ 0.09 $ 0.01 $ (0.56)
=========== =========== =========== =========== ===========
Average number of shares used in
computation (3) 24,937,364 24,315,992 26,463,084 26,633,930 26,334,932
Income (loss) per common share -
assuming dilution:(2), (3)
(Loss) income from continuing
operations $ (0.43) $ 0.05 $ 0.08 $ (0.09) $ (0.60)
Income from discontinued
operations 2.30 0.16 0.19 0.10 0.04
Extraordinary loss - - (0.19) - -
----------- ----------- ----------- ----------- -----------
Net income (loss) per share $ 1.87 $ 0.21 $ 0.08 $ 0.01 $ (0.56)
=========== =========== =========== =========== ===========
Average number of shares used in
computation (3) 24,937,364 26,572,668 29,262,136 26,633,930 26,334,932
Balance Sheet Data:
Cash and cash equivalents $ 36,627 $ 4,145 $ 4,099 $ 231 $ 2,010
Working capital (deficiency) 36,282 (10,597) (13,612) 74,817 63,996
Total assets 190,032 107,907 91,540 168,589 161,671
Long-term debt (including current
portion) 22,164 29,651 2,592 86,753 72,155
Stockholders' equity 106,849 31,133 32,311 40,032 43,499
---------------------------------------------------------------
(1) Includes amortization of reorganization value in excess of
amounts allocable to identifiable assets of $377,000, $754,000
and $765,000 for the fiscal years ended September 27, 1998,
September 28, 1997 and September 29, 1996, respectively.
(2)Includes effect of preferred stock dividends of $220,000
and $420,000 declared for the fiscal years ended September 28,
1997 and September 29, 1996, respectively.
(3)Includes the retroactive effect of a two-for-one stock
split declared on March 10, 2000 for stockholders of record on
March 20, 2000.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis by the Company's
management should be read in conjunction with "Item 6. Selected
Financial Data" and "Item 8. Consolidated Financial Statements and
Supplementary Data" appearing elsewhere in this Form 10-K.
Results Of Operations
Comparison of Fiscal 2000 with Fiscal 1999
Three non-recurring events materially affected our financial
performance discussed below. On February 28, 2000, we sold
substantially all of the net assets of our High Performance Plastics
segment to Spartech. That segment accounted for approximately 65% of
our Fiscal 1999 revenues and 77% of our Fiscal 1999 net income. On May
31, 2000, we acquired Sterling Semiconductor, Inc. This acquisition
expanded our commitment to the compound semiconductor business.
Finally, in Fiscal 2000 the effects of the 1998 sale of the automotive
portion of the Coated Fabrics segment were fully realized. The runoff
revenues from that operation of $13.1 million in Fiscal 1999 declined
to $631,000 in Fiscal 2000.
Net Sales. The Company's net sales decreased in Fiscal 2000 by
approximately 4% to $68.3 million from $71.2 million in Fiscal 1999,
primarily due to the sale of the automotive operations of the Coated
Fabrics segment in Fiscal 1998 and the gradual phase-out of those
operations. Excluding automotive sales from both periods, sales
increased 16% in Fiscal 2000 compared to Fiscal 1999. The 16% increase,
excluding automotive sales from both periods, was due to an increase in
sales from the Compound Semiconductor and Optoelectronics segment and
the inclusion of fifty-three weeks in Fiscal 2000 versus fifty-two
weeks in Fiscal 1999.
The Coated Fabrics segment's net sales decreased approximately
21% in Fiscal 2000 to $33.7 million from $42.3 million in Fiscal 1999.
The decrease resulted primarily from a decline in automotive sales due
to the gradual phase-out of its automotive operations. Automotive sales
approximated $631,000 during Fiscal 2000 compared to approximately
$13.1 million in Fiscal 1999. Excluding automotive sales from both
periods, sales of Naugahyde(R) vinyl coated fabrics increased
approximately 13% in Fiscal 2000 as compared to Fiscal 1999 as a result
of an increase in unit volume and selling prices and the inclusion of
fifty-three weeks in Fiscal 2000 versus fifty-two weeks in Fiscal 1999.
Net sales by the Specialty Adhesives segment increased in
Fiscal 2000 by approximately 11% to $31.6 million from $28.4 million in
Fiscal 1999, primarily due to increased sales of its branded industrial
adhesives and sealant products and the inclusion of fifty-three weeks
in Fiscal 2000 versus fifty-two weeks in Fiscal 1999.
Net sales by the Compound Semiconductor and Optoelectronics
segment for Fiscal 2000 were $3.0 million compared to $485,000 in
Fiscal 1999. The increase is attributable to the acquisition of
Sterling in Fiscal 2000 and net sales from Sterling of approximately
$1.2 million, as well as an increase in the sales at the joint venture.
The Compound Semiconductor and Optoelectronics segment began limited
commercial sales and production in Fiscal 2000 but is still in the
development stage.
(Loss) Income Before Interest, Income Taxes, Minority Interest
and Discontinued Operations. Loss before interest, income taxes,
minority interest and discontinued operations for Fiscal 2000 was $45.8
million, compared to a loss of $2.7 million for Fiscal 1999. The
greater loss is due to the net effect of a number of non-recurring and
unusual items including:
o the gain realized on the sale of the investment in the
preferred stock of Emcore Corporation ($2.9 million);
o the write-off of a note receivable (and related accrued
interest) related to the sale of the Ensolite closed cell
foam division, due to the deterioration of the financial
condition of the buyer (RBX Group, Inc.) as a result of a
prolonged strike at its major facility and the ultimate
settlement of the note with RBX Group, Inc. ($5.4 million);
o a reduction in the fair value of certain property, plant and
equipment related to the Company's Port Clinton, Ohio
facility which is expected to be disposed of in Fiscal 2001
($1.8 million);
o payments made in connection with the sale of the net assets
of the High Performance Plastics segment, including
incentive payments and benefit costs to and for officers and
directors related to the achievement of certain strategic
initiatives ($5.3 million) and a special contribution of
Company stock to the 401(k) plan for incentives to retain
key personnel ($2.2 million);
o the write-down of a technology license of $4.0 million
related to the future transfer of technology for high
brightness light emitting diodes (HB-LEDs) from Emcore
Corporation; (the Company has added highly qualified
scientists to internally advance and develop certain
technology for HB-LEDs);
o the write-off of acquired in-process research and
development ("IPR&D") of $6.6 million related to the
acquisition of Sterling on May 31, 2000 (see "Item 1.
Business - Recent Developments");
o a reduction of revenues associated with the gradual
phase-out of the automotive operations of the Coated Fabrics
segment; and
o start-up losses for the Compound Semiconductor and
Optoelectronics segment.
Also during Fiscal 2000, there were no corporate allocations to the
discontinued operations of the High Performance Plastics segment. The
corporate allocations for Fiscal 1999 were $4.6 million.
The Coated Fabrics segment's loss before interest, income
taxes, minority interest and discontinued operations in Fiscal 2000 was
$276,000 compared to income of $4.2 million in Fiscal 1999. The
decrease is attributable to the loss of revenues from the gradual
phase-out of its automotive operations, as well as certain incremental
costs related to the closure of the Port Clinton, Ohio facility
previously used to produce automotive products, the write-down to fair
value of certain machinery and equipment to be disposed of at the Port
Clinton, Ohio facility of approximately $657,000, and a special
contribution to the 401(k) plan for eligible participants of the Coated
Fabrics segment of approximately $506,000.
The Specialty Adhesives segment's income before interest,
income taxes, minority interest and discontinued operations in Fiscal
2000 and Fiscal 1999 was $2.7. In Fiscal 2000, a special contribution
to the 401(k) plan for eligible participants of the Specialty Adhesives
segment of $459,000 was substantially offset by the increase in sales
volume of branded industrial products.
The Compound Semiconductor and Optoelectronics segment's loss
before interest, income taxes, minority interest and discontinued
operations in Fiscal 2000 was $25.8 million compared to a loss of $5.1
million in Fiscal 1999. The losses relate to the start-up and training
costs of the Compound Semiconductor and Optoelectronics segment and a
special contribution to the 401(k) plan for eligible participants of
the Compound Semiconductor and Optoelectronics segment of approximately
$638,000. Also contributing to the increase in loss is a charge of $6.6
million related to acquired IPR&D and goodwill and intangible
amortization of $2.3 million during Fiscal 2000 attributable to the
purchase of certain assets of Sterling which were acquired by the
Company on May 31, 2000. The goodwill and intangible assets associated
with the acquisition of approximately $34.5 million are being amortized
over five years.
The identifiable intangible assets and IPR&D of Sterling were
valued on the acquisition date using an income approach and, in the
case of the trained workforce intangible asset, a cost to replicate
approach. In the income approach, a cash flow was developed associated
with the respective asset after charges for the use of existing assets
(as applicable) and consideration of the economic life of the asset
(reflected by the obsolescence factor). The income stream was
discounted to its present value based upon the estimated discount rate.
The discount rate was based upon our required rate of return, useful
life of the technology and risks associated with the timely completion
of the product lines. In the case of IPR&D, the "exclusionary rule" was
applied by which the indicated value was multiplied by the estimate of
the percentage of the total technology that was complete as of the
valuation date. Percentage of completion was determined based upon the
relative number of critical issues solved to the total number of
critical issues identified. Significant appraisal assumptions include
revenue projections, margins and expense levels and the risk adjusted
discount rate applied to the project's expected cash flows.
As of the acquisition date, Sterling had developed a
commercial production capability for 2-inch 4H and 6H (measures of
hardness) SiC wafers. Sterling was also engaged in concurrent efforts
to develop potential product lines for large diameter (3-inch and
4-inch 4H and 6H) wafers, semi-insulating wafers, epitaxial coatings
and device designs that would produce an economical device die for
discrete semiconductor devices.
The purchased IPR&D is summarized as follows (in thousands):
IPR&D Technology Discount Economic Percent Expected Date for Full
Description Rate Life Complete Fair Value Commercial Viability
------------------------ -------- -------- -------- ---------- ----------------------
3" and 4" large diameter
SiC wafers 32.7% 11 years 70% $ 858 2004
Semi-insulating wafers 32.7% 11 years 75% 456 2004
Epitaxy coatings 32.7% 11 years 40% 723 2005
Devices 32.7% 11 years 40% 4,553 2005
--------
Total IPR&D $ 6,590
========
The cost to complete all projects approximates $13.2 million.
The nature of the efforts required to develop the acquired IPR&D into
technologically feasible and commercially viable products principally
relate to the completion of all planning, design and testing activities
necessary to establish a product that can be produced to meet its
design requirements including functions, features and technical
performance requirements. The Company currently expects the acquired
IPR&D will be successfully developed but there can be no assurance the
technological feasibility or commercial viability of these products
will be achieved. If none of these products are successfully developed,
the Company's sales and profitability may be adversely affected in
future periods.
Approximately $22.4 million of net costs, non-recurring and
unusual items recorded in Fiscal 2000 were not allocated to any
business segment compared to $4.5 million of unallocated costs for
Fiscal 1999. Included in the non-allocated items in Fiscal 2000 are the
following:
o gain realized on the sale of the investment in the preferred
stock of Emcore Corporation ($2.9 million);
o the write-off of the RBX Group, Inc. note (and related
accrued interest) ($5.4 million);
o a reduction in the fair value of real property related to
the Company's Port Clinton, Ohio facility which is expected
to be disposed of this year ($1.1 million);
o incentive payments and benefit costs to and for officers and
directors related to the achievement of certain strategic
initiatives ($5.3 million);
o the write-down of a technology license of $4.0 million
related to the future transfer of technology for high
brightness light emitting diodes (HB-LEDs) from Emcore
Corporation (the Company has added highly qualified
scientists to internally develop and advance the technology
for HB-LEDs); and
o a special contribution of Company stock to eligible
participants of the corporate office of approximately
$554,000 for the 401(k) plan.
Also during Fiscal 2000, there were no corporate allocations to the
discontinued operations of the High Performance Plastics segment. Prior
year corporate allocations for Fiscal 1999 were $4.6 million.
Interest Income (Expense). Interest income for Fiscal 2000 was
$3.2 million compared to $225,000 in Fiscal 1999. The increase is
attributable to interest income earned on the investment of the
proceeds received from the sale of the Company's High Performance
Plastics segment on February 28, 2000. Interest expense was $2.1
million in Fiscal 2000 compared to $1.0 million in Fiscal 1999. The
increase in interest expense is due to a lower amount of capitalized
interest in Fiscal 2000 compared to Fiscal 1999. During Fiscal 2000,
approximately $287,000 of interest was capitalized related to the build
out of the Optoelectronics facility in Tampa, Florida, versus
approximately $791,000 in Fiscal 1999.
Income Tax Benefit. Income tax benefit in Fiscal 2000 was
$26.2 million as compared to $2.5 million in Fiscal 1999. The
provisions for income tax benefit were calculated through the use of
the estimated income tax rates based upon annualized income. Fiscal
2000 benefited from the reversal of $13.7 million of deferred tax
valuation allowance related to capital loss carryforwards. The reversal
was due to the use of the capital losses to offset capital gains
resulting from the sale of the preferred stock of Emcore Corporation
and the sale of the High Performance Plastics segment.
Discontinued Operations. Net income from discontinued
operations of the High Performance Plastics segment increased to $57.3
million in Fiscal 2000 compared to $4.3 million in Fiscal 1999. The
increase is attributable to the net effect of the gain recognized on
the February 28, 2000 sale of the High Performance Plastics segment of
approximately $55.8 million (net of taxes of approximately $38.1
million) and operating income for the period September 27, 1999 to
February 28, 2000. The decline in operations is primarily a result of
production inefficiencies at the Stamford, Connecticut facility due to
a major plant modernization and only five months of operations in
Fiscal 2000 versus twelve months of operations in Fiscal 1999. The
decline in operations was partially offset by the suspension of a
corporate allocation to this segment in Fiscal 2000.
Comparison of Fiscal 1999 with Fiscal 1998
Net Sales. The Company's net sales decreased approximately 23%
in Fiscal 1999 to $71.2 million from $92.0 million in Fiscal 1998. The
decrease is primarily attributable to the sale of the automotive
operations of the Coated Fabrics segment in Fiscal 1998 and the gradual
phase-out of those operations. Excluding automotive operations from
both periods, sales increased approximately 13% in Fiscal 1999 compared
to Fiscal 1998.
The Coated Fabrics segment's net sales decreased approximately
38% in Fiscal 1999 to $42.3 million from $67.9 million in Fiscal 1998.
The decrease resulted primarily from a decline in automotive sales due
to the gradual phase-out of its automotive operations. Automotive sales
approximated $13.1 million during Fiscal 1999 compared to approximately
$40.4 million in Fiscal 1998. Excluding automotive sales from both
periods, sales of Naugahyde(R) vinyl coated fabrics increased
approximately 6% in Fiscal 1999 as compared to Fiscal 1998 as a result
of an increase in unit volume and selling prices.
Net sales in the Specialty Adhesives segment increased in
Fiscal 1999 by approximately 18% to $28.4 million from $24.1 million in
Fiscal 1998. This increase in sales is primarily attributable to a
strong demand for roofing adhesives and sealants and increased sales as
a result of a tolling agreement with a major adhesives company.
Net sales in the Compound Semiconductor and Optoelectronics
segment were $485,000 during Fiscal 1999. The segment is in the
developmental stage. Inventory was provided to the segment under a
supply agreement with the segment's joint venture partner. The segment
did not have sales during Fiscal 1998.
(Loss) Income Before Interest, Income Taxes, Minority
Interest, Discontinued Operations and Extraordinary Item. In Fiscal
1999, the Company had loss before interest, income taxes, minority
interest, discontinued operations and extraordinary item of $2.7
million as compared to income before interest, income taxes, minority
interest, discontinued operations and extraordinary item of $6.7
million for Fiscal 1998. The decrease is primarily due to a loss of
revenues associated with the gradual phase-out of the automotive
operations of the Coated Fabrics segment and start-up costs for the
Compound Semiconductor and Optoelectronics segment.
The Coated Fabrics segment's income before interest, income
taxes, minority interest, discontinued operations and extraordinary
item in Fiscal 1999 was approximately $4.2 million compared to income
before interest, income taxes, minority interest, discontinued
operations and extraordinary item of $8.9 million in Fiscal 1998. The
decrease of $4.7 million was principally due to the loss of revenues
from the gradual phase-out of its automotive operations, as well as
certain incremental costs related to the closure of the Port Clinton,
Ohio facility used to produce automotive products.
Income before interest, income taxes, minority interest,
discontinued operations and extraordinary item for the Specialty
Adhesives segment increased approximately 42% to $2.7 million in Fiscal
1999 from $1.9 million in Fiscal 1998. The increase is primarily a
result of increased sales volume.
Loss before interest, income taxes, minority interest,
discontinued operations and extraordinary item for the Compound
Semiconductor and Optoelectronics segment was $5.1 million in Fiscal
1999 compared to a loss of $398,000 in Fiscal 1998. The loss is
attributable to start-up expenses incurred by the Compound
Semiconductor and Optoelectronics segment.
Approximately $4.5 million of miscellaneous expense in Fiscal
1999 was not allocated to any segment of the Company's business
compared to $3.7 million in Fiscal 1998.
Interest Income (Expense). Interest income in Fiscal 1999
approximated $225,000 versus $542,000 in Fiscal 1998. The decrease is
attributable to reduction of cash balances available for investment in
Fiscal 1999 compared to Fiscal 1998. Interest expense in Fiscal 1999
was $1.0 million compared to $2.7 million in Fiscal 1998. The decrease
is due to an increase in capitalized interest in Fiscal 1999 ($791,000)
compared to no capitalized interest in Fiscal 1998 and an overall
reduction in interest cost as a result of a Fiscal 1998 debt
refinancing.
Income Tax Benefit (Expense). Income tax benefit in Fiscal
1999 was approximately $2.5 million compared to income tax expense of
approximately $2.4 million in Fiscal 1998. The provisions for income
tax benefit (expense) were calculated by the Company through use of the
effective income tax rates based upon its actual (loss) income. The
Fiscal 1999 tax benefit included approximately $2.3 million due to a
tax benefit recognized through the carryback effect of a Fiscal 1999
capital loss.
Discontinued Operations. Net income from discontinued
operations of the High Performance Plastics segment decreased to $4.3
million in Fiscal 1999 from $5.7 million in Fiscal 1998. The decrease
was due to production inefficiencies as a result of a major plant
consolidation at the Polycast acrylic division as well as reduced sales
volume for both Royalite thermoplastic products and Polycast acrylic
products.
Extraordinary Loss on the Extinguishment of Debt. The
extraordinary loss on the extinguishment of debt during Fiscal 1998 was
$5.6 million. This amount represents the loss recognized when the
Company early retired the remaining $72.3 million of its 11.75% Senior
Secured Notes, including a call premium payment of 4.41% and write-off
of applicable debt issuance cost and unamortized debt discount, net of
income tax benefit of approximately $2.8 million. See "Note 10 to
Consolidated Financial Statements."
Liquidity and Capital Resources
For Fiscal 2000, continuing operations provided $14.6 million
of cash as compared to $5.5 million provided by continuing operations
during Fiscal 1999. The increase in cash provided by continuing
operations for Fiscal 2000 resulted primarily from the reversal of a
$13.7 million deferred tax valuation allowance related to capital loss
carryforwards; an increase in depreciation and amortization expense as
a result of the Sterling acquisition and the commencement of
depreciation at the Optoelectronics joint venture; and an increase in
certain accrued and other expenses in connection with a special
contribution to the Company's 401(k) plan and special incentive costs
awarded to officers and other liabilities recorded in connection with
the High Performance Plastics segment sale.
Net cash provided by investing activities for Fiscal 2000 was
$167.8 million as compared to $13.9 million used in investing
activities during Fiscal 1999. Significant cash provided by investing
activities during Fiscal 2000 included net cash proceeds from the sale
of the High Performance Plastics segment of $209.0 million, the sale of
the remaining Emcore Corporation preferred stock for $8.1 million, net
of certain transaction costs, and was offset by the net effect of debt
securities purchased and sold. During Fiscal 2000, the purchase of
machinery and equipment of approximately $25.8 million primarily
related to the new Optoelectronics production facility in Tampa,
Florida and the modernization of the High Performance Plastics Polycast
production facility in Stamford, Connecticut
Net cash used in financing activities during Fiscal 2000 was
$104.6 million as compared to $7.8 million of cash used during Fiscal
1999. The primary use of cash in financing activities during Fiscal
2000 was to repay $99.4 million of outstanding term and revolving
credit borrowings to a syndicate headed by Fleet National Bank as a
result of the sale of the High Performance Plastics segment. Cash of
approximately $13.9 million was also used to purchase the Company's
common stock for treasury.
On October 1, 2000, the Company had approximately $36.6
million in cash and cash equivalents as compared to approximately $4.1
million at September 26, 1999. Working capital at October 1, 2000 was
$36.3 million compared to a working capital deficiency of $10.6 million
at September 26, 1999. On October 1, 2000, the Company had outstanding
borrowings of $1.3 million under its $10,000,000 revolving credit
facility with the CIT Group/Business Credit, Inc. (subject to a
borrowing base limitation of approximately $7.0 million at October 1,
2000). The principal uses of cash during Fiscal 2000 were to repay
debt, repurchase shares in the open market and fund capital
expenditures and operating losses at the new Optoelectronics facility
in Tampa, Florida. The Company plans to spend an additional $75.0 -
$85.0 million on capital expenditures for the Compound Semiconductor
and Optoelectronics segment over the next three years for expansion.
The Company plans to fund these expenditures with the proceeds from the
sale of the High Performance Plastics segment and/or additional
financing as needed. The Company believes that cash from its
operations, its ability to borrow under the revolving credit facility
mentioned above and proceeds from the sale of the High Performance
Plastics segment will provide sufficient liquidity to finance its
existing level of operations and meet its debt service obligations.
However, there can be no assurance that the Company's operations
together with amounts available under the revolving credit facilities
will continue to be sufficient to finance its existing level of
operations and meet its debt service obligations. The Company's ability
to meet its debt service and other obligations depends on its future
performance, which in turn, is subject to general economic conditions
and to financial, business and other factors, including factors beyond
the Company's control. If the Company is unable to generate sufficient
cash flow from operations, it may be required to refinance all or a
portion of its existing debt or obtain additional financing including
equity financing. There can be no assurance that the Company will be
able to obtain such refinancing or additional financing.
Effects of Inflation
The markets in which the Company sells products are
competitive. Thus, in an inflationary environment the Company might not
in all instances be able to pass through to consumers general price
increases, in which event the Company's operations may be materially
impacted if such conditions were to occur. The Company has not in the
past been adversely impacted by general price inflation.
Forward Looking Information
Certain statements contained in or incorporated by reference
into this report are "forward looking statements" within the meaning of
the United States Private Securities Litigation Reform Act of 1995.
Forward looking statements include statements which are predictive in
nature, which depend upon or refer to future events or conditions,
which include words such as "expects," "anticipates," "intends,"
"plans," "believes," "estimates," or similar expressions. In addition,
any statements concerning future financial performance (including
future revenues, earnings or growth rates), ongoing business strategies
or prospects, and possible future actions, which may be provided by
management, are also forward looking statements as defined by the
United States Private Securities Litigation Reform Act of 1995. Forward
looking statements are based on current expectations and projections
about future events and are subject to risks, uncertainties and
assumptions about the Company, economic and market factors and the
industries in which we do business, among other things. These
statements are not guaranties of future performance and we have no
specific intention to update these statements.
These forward looking statements, like any forward looking
statements, involve risks and uncertainties that could cause actual
results to differ materially from those projected or anticipated. Among
the important factors which could cause actual results to differ
materially from those in the forward looking statements are:
o cancellations, rescheduling or delays in product shipments;
o manufacturing capacity constraints;
o lengthy sales and qualification cycles;
o difficulties in the production process;
o the effectiveness of our capital expenditure programs;
o our future financial performance;
o delays in developing and commercializing new products;
o competition;
o changes in the industries in which we compete or plan to
compete, especially the HB-LED and semiconductor industries,
including overall growth of the industries;
o the continued acceptance of our products;
o availability and performance of key personnel;
o relations with employees, customers, suppliers and venture
partners;
o our ability to obtain and protect key intellectual property;
o acquisitions and our success in integrating the acquired
businesses; and
o economic conditions generally and in our industries.
For a discussion of important factors that could cause actual
results to differ materially from the forward looking statements
contained in or incorporated by reference into this Form 10-K, please
read "Item 1. Business - Certain Business Risks and Uncertainties."
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to changes in short-term interest rates
primarily as a result of our cash, investing and borrowing activities
used to maintain liquidity and fund working capital requirements. Our
earnings and cash flows are subject to fluctuations due to changes in
interest rates on our floating rate revolving credit advances and
investment portfolio. Our risk management policy included the use of
derivative financial instruments (interest rate swaps) to manage our
interest rate exposure on long-term variable rate debt. The counter
parties were major financial institutions. We do not enter into
derivatives or other financial instruments for trading or speculative
purposes. During Fiscal 2000, we liquidated all of our interest rate
swap instruments for cash proceeds and a gain of $950,000, which is
included in the income of discontinued operations on the Consolidated
Financial Statements.
At October 1, 2000, we had approximately $47.9 million of
cash, cash equivalents and investments subject to variable short-term
interest rates. On the same date we had a $1.3 million floating rate
revolving credit advance. Because of the short-term nature or floating
rates, interest changes generally do not affect the fair market value
but do impact future earnings and cash flows assuming other factors are
held constant. Based upon the net balance, a change of one percent in
the interest rate would cause a change in net interest income of
approximately $466,000 on an annual basis.
At September 26, 1999, approximately $19.5 million of our
floating rate long-term debt and revolving credit advances were not
covered under an interest rate swap agreement. Based upon this balance,
a change of one percent in the interest rate would have caused a change
in interest expense of approximately $195,000 on an annual basis.
The changes in the composition and balances of items subject
to interest rate risk from Fiscal 1999 to Fiscal 2000 is attributable
to the Spartech Sale. The proceeds from the Spartech Sale were used to
repay outstanding debt with the balance invested primarily in debt
securities.
Item 8. Consolidated Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements on Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the directors and executive
officers of the Company is incorporated herein by reference to the
Company's definitive proxy statement pursuant to Regulation 14A, which
statement will be filed not later than 120 days after the end of the
fiscal year covered by this Report.
Item 11. Executive Compensation
Information with respect to executive compensation is
incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, which statement will be filed not
later than 120 days after the end of the fiscal year covered by this
Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to the security ownership of
directors and executive officers and substantial stockholders of the
Company is incorporated herein by reference to the Company's definitive
proxy statement pursuant to Regulation 14A, which statement will be
filed not later than 120 days after the end of the fiscal year covered
by this Report.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and
transactions between directors, executive officers and substantial
stockholders of the Company with the Company is incorporated herein by
reference to the Company's definitive proxy statement pursuant to
Regulation 14A, which statement will be filed not later than 120 days
after the end of the fiscal year covered by this Report.
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) Consolidated Financial Statements as of October 1, 2000 and
September 26, 1999 and for the Years Ended October 1, 2000,
September 26, 1999 and September 27, 1998:
Independent Auditors' Report F-2
Consolidated Balance Sheets as of October 1, 2000
and September 26, 1999 F-3
Consolidated Statements of Operations for the Years
Ended October 1, 2000, September 26, 1999 and
September 27, 1998 F-5
Consolidated Statements of Comprehensive Income for the
Years Ended October 1, 2000, September 26, 1999 and
September 27, 1998 F-6
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended October 1, 2000, September
26, 1999 and September 27, 1998 F-7
Consolidated Statements of Cash Flows for the Years
Ended October 1, 2000, September 26, 1999 and
September 27, 1998 F-8
Notes to Consolidated Financial Statements F-10
(b) Consolidated Financial Statement Schedule:
Independent Auditors' Report S-1
Schedule II - Valuation and Qualifying Accounts S-2
(c) Exhibits:
2.1 Certificate of Ownership and Merger, dated June 7, 1993, of
Polycast Technology Corporation, Uniroyal Engineered Products,
Inc., Uniroyal Adhesives and Sealants, Inc. and Ensolite, Inc. with
Uniroyal. (2)
3.1 Amended and Restated Certificate of Incorporation of Uniroyal as
corrected by a Certificate of Correction of the Amended and
Restated Certificate of Incorporation of Uniroyal. (1)
3.2 By-Laws of Uniroyal, as amended to March 28, 1997. (7)
4.2 Warrant Agreement, dated as of June 1, 1993, between Uniroyal and
The Bank of New York, as warrant agent. (2)
10.7 Amended and Restated Employment Agreement, dated as of April 25,
1995, between Howard R. Curd and Uniroyal. (3)
10.8 Amended and Restated Employment Agreement, dated as of April 25,
1995, between Oliver J. Janney and Uniroyal. (3)
10.9 Amended and Restated Employment Agreement, dated as of April 25,
1995, between Robert L. Soran and Uniroyal. (3)
10.10 Amended and Restated Employment Agreement, dated as of April 25,
1995, between George J. Zulanas, Jr. and Uniroyal. (3)
10.16 Amended and Restated Uniroyal Technology Corporation 1992 Stock
Option Plan. (10)
10.28 Amended and Restated Uniroyal Technology Corporation 1992
Non-Qualified Stock Option Plan as amended November 30, 2000. (15)
10.39 Financing Agreement dated as of June 5, 1996 by and between The CIT
Group/Business Credit, Inc. and Uniroyal Technology Corporation.
(4)
10.40 Amended and Restated Uniroyal Technology Corporation 1994 Stock
Option Plan as amended May 19, 2000. (15)
10.41 Amended and Restated Uniroyal Technology Corporation 1995
Non-Qualified Stock Option Plan. (15)
10.44 Shareholder Rights Agreement, dated as of December 18, 1996,
between Uniroyal Technology Corporation and The Bank of New York,
as rights agent. (5)
10.45 First Amendment to Financing Agreement dated September 5, 1997 by
and between The CIT Group/Business Credit, Inc. and
Uniroyal Technology Corporation. (8)
10.47 Amendment and Consent Agreement dated April 14, 1998 by and
between the CIT Group/Business Credit, Inc. and Uniroyal Technology
Corporation. (9)
10.48 Consent Agreement dated April 1, 1999 by and between The CIT
Group/Business Credit, Inc. and Uniroyal Technology Corporation.
(10)
10.49 Assumption Agreement dated April 1, 1999 by and between The CIT
Group/Business Credit, Inc., Uniroyal Technology Corporation and
Uniroyal Engineered Products, Inc. (10)
10.50 Guaranty dated April 1, 1999 between The CIT Group/Business
Credit, Inc. and Uniroyal Technology Corporation. (10)
10.51 Asset Purchase Agreement dated as of December 24, 1999, among
Spartech Corporation, High Performance Plastics, Inc. Uniroyal HPP
Holdings, Inc. and Uniroyal Technology Corporation. (11)
10.52 Memorandum of Understanding and Confidentiality Agreement dated
February 23, 1995 between Uniroyal and Firestone Building Products
Division of Bridgestone/Firestone, Inc. and amendments thereto.
(12)
10.53 Amended and Restated Uniroyal Technology Corporation Deferred
Compensation Plan Effective August 1, 1995, as amended April
3, 2000. (12)
10.54 Merger Agreement dated as of April 10, 2000, among Uniroyal
Technology Corporation, BayPlas4, Inc., and Sterling Semiconductor,
Inc. (13)
10.55 Uniroyal Technology Long Term Growth Plan, as amended to August 3,
2000. (14)
10.56 Split Dollar Insurance Agreement dated as of August 15, 1995, as
amended to March 10, 2000, by and between Uniroyal Technology
Corporation and Howard R. Curd. (15)
10.57 Split Dollar Insurance Agreement dated as of August 15, 1995, as
amended to March 10, 2000, by and between Uniroyal Technology
Corporation and Robert L. Soran. (15)
10.58 Split Dollar Insurance Agreement dated as of August 15, 1995, as
amended to March 10, 2000, by and between Uniroyal Technology
Corporation and George J. Zulanas, Jr. (15)
10.59 Split Dollar Insurance Agreement dated as of August 15, 1995, as
amended to March 10, 2000, by and between Uniroyal Technology
Corporation and Oliver J. Janney. (15)
10.60 Split Dollar Insurance Agreement dated as of August 15, 1995, as
amended to March 10, 2000, by and between Uniroyal Technology
Corporation and Martin J. Gutfreund. (15)
10.61 Uniroyal Technology Corporation 2000 Stock Plan, as amended
November 30, 2000. (15)
11.1 Statement Regarding Computation of Per Share Earnings. (15)
21.1 Subsidiaries of Uniroyal Technology Corporation. (15)
23.1 Independent Auditors' Consent. (15)
27.1 Financial Data Schedule (Filed for EDGAR only)
(1) Contained in Amendment No. 2 to Uniroyal's Registration
Statement on Form 10, dated September 25, 1992.
(2) Contained in Uniroyal's Form 8-K, dated June 9, 1993.
(3) Contained in Uniroyal's Quarterly Report on Form 10-Q for the
quarterly period ended April 2, 1995 filed on May 12, 1995.
(4) Contained in Uniroyal's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996 filed August 13, 1996.
(5) Contained in Uniroyal's Registration Statement on Form 8-A,
dated December 20, 1996.
(6) Contained in Uniroyal's Annual Report on Form 10-K for the
year ended September 29, 1996 filed on December 27, 1996.
(7) Contained in Uniroyal's Quarterly Report on Form 10-Q for the
quarterly period ended March 30, 1997 filed May 9, 1997.
(8) Contained in Uniroyal's Annual Report on Form 10-K for the
year ended September 28, 1997 filed on December 22, 1997.
(9) Contained in Uniroyal's Form 8-K/A dated April 22, 1998.
(10) Contained in Uniroyal's Annual Report on Form 10-K for the
year ended September 26, 1999 filed on December 23, 1999.
(11) Contained in Uniroyal's 8-K dated March 14, 2000.
(12) Contained in Uniroyal's Quarterly Report on Form 10-Q for the
quarterly period ended April 2, 2000, filed on May 17, 2000.
Confidential treatment was obtained for portions of the
agreement.
(13) Contained in Uniroyal's 8-K dated June 14, 2000.
(14) Contained in Uniroyal's Quarterly Report on Form 10-Q for the
quarterly period ended July 2, 2000, filed on August 16,
2000.
(15) Filed with this report.
(d) Reports on Form 8-K:
Report on Form 8K/A dated August 14, 2000 related to the merger
with Sterling Semiconductor, Inc.
Item 8. Consolidated Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
Consolidated Financial Statements as of October 1, 2000 and September
26, 1999 and for the Years Ended October 1, 2000, September 26, 1999
and September 27, 1998:
Independent Auditors' Report F-2
Consolidated Balance Sheets as of October 1, 2000 and
September 26, 1999 F-3
Consolidated Statements of Operations for the
Years Ended October 1, 2000, September 26, 1999
and September 27, 1998 F-5
Consolidated Statements of Comprehensive Income for
the Years Ended October 1, 2000, September 26, 1999
and September 27, 1998 F-6
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended October 1, 2000,
September 26, 1999 and September 27, 1998 F-7
Consolidated Statements of Cash Flows for the
Years Ended October 1, 2000, September 26, 1999
and September 27, 1998 F-8
Notes to Consolidated Financial Statements F-10
Consolidated Financial Statement Schedule:
Independent Auditors' Report S-1
Schedule II - Valuation and Qualifying Accounts S-2
Schedules Omitted - Certain other schedules have been omitted
because they are not required or because the information
required therein has been included in Notes to Consolidated
Financial Statements.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Uniroyal Technology Corporation
We have audited the accompanying consolidated balance sheets of Uniroyal
Technology Corporation and subsidiaries (the "Company") as of October 1, 2000
and September 26, 1999, and the related consolidated statements of operations,
comprehensive income, changes in stockholders' equity and cash flows for each of
the three years in the period ended October 1, 2000. 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 of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of October 1, 2000
and September 26, 1999 and the results of its operations and its cash flows for
each of the three years in the period ended October 1, 2000, in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Tampa, Florida
December 5, 2000
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
October 1, September 26,
2000 1999
------------ -------------
Current assets:
Cash and cash equivalents (Note 2) $ 36,627 $ 4,145
Short-term investments (Notes 2 and 3) 12,425 -
Trade accounts receivable (less estimated reserve for
doubtful accounts of $119 and $88, respectively) (Notes 2 5,669 4,808
and 10)
Inventories (Notes 2, 4 and 10) 11,079 9,550
Deferred income taxes (Notes 2 and 13) 5,460 2,779
Prepaid expenses and other current assets 1,408 1,413
----------- -----------
Total current assets 72,668 22,695
Property, plant and equipment - net (Notes 2 and 5) 57,386 43,804
Property, plant and equipment held for sale - net (Note 2) 2,301 4,217
Investments (Note 2 and 3) 8,902 -
Investment in preferred stock (Notes 2 and 6) - 5,383
Note receivable (Note 7) - 5,000
Goodwill - net (Notes 2 and 8) 27,772 1,310
Deferred income taxes - net (Notes 2 and 13) 7,828 15,350
Other assets - net (Notes 2 and 9) 13,175 10,148
----------- -----------
TOTAL ASSETS $ 190,032 $ 107,907
=========== ===========
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
October 1, September 26,
2000 1999
------------ -------------
Current liabilities:
Current portion of long-term debt (Note 10) $ 6,702 $ 5,282
Trade accounts payable 11,563 9,688
Net liabilities of discontinued operations (Note 11) 4,632 8,380
Accrued expenses:
Compensation and benefits 9,180 7,326
Interest 156 222
Taxes, other than income 391 388
Accrued income taxes 623 -
Other 3,139 2,006
----------- -----------
Total current liabilities 36,386 33,292
Long-term debt, net of current portion (Note 10) 15,462 24,369
Other liabilities (Note 12) 23,800 15,288
----------- -----------
Total liabilities 75,648 72,949
----------- -----------
Commitments and contingencies (Note 16)
Minority interest (Notes 1, 2 and 18) 7,535 3,825
Stockholders' equity (Note 14):
Preferred stock:
Series C - 0 shares issued and outstanding; par value
$0.01; 450 shares authorized - -
Common stock:
30,707,976 and 29,362,838 shares issued or to be issued,
respectively; par value $0.01; 35,000,000 shares
authorized 307 294
Additional paid-in capital 94,296 57,524
Retained earnings (deficit) 40,575 (6,112)
Unrealized (loss) gain on securities held for sale - net (44) 100
----------- -----------
135,134 51,806
Less treasury stock at cost - 4,841,059 and 5,343,974
shares, respectively (28,285) (20,673)
----------- -----------
Total stockholders' equity 106,849 31,133
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 190,032 $ 107,907
=========== ===========
See notes to consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Fiscal Years Ended
--------------------------------------------------------
October 1, September 26, September 27,
2000 1999 1998
-------------- -------------- --------------
Net sales $ 68,253 $ 71,214 $ 92,036
Costs, expenses and (other income):
Costs of goods sold 53,346 53,680 69,868
Selling and administrative 37,751 18,276 12,128
Depreciation and other amortization 8,145 3,505 3,618
Gain on sale of preferred stock investment (Note 6) (2,905) (898) -
Provision for uncollectible note receivable (Note 7) 5,387 - -
Purchased in-process research and development (Note 8) 6,590 - -
Write-down of technology license (Note 9) 4,000 - -
Loss on assets to be disposed of (Notes 2 and 17) 1,773 - 226
Gain on sale of division (Note 17) - (667) (512)
----------- ----------- -----------
(Loss) income before interest, income taxes, minority
interest, discontinued operations and extraordinary item (45,834) (2,682) 6,708
Interest income 3,189 225 542
Interest expense (2,114) (1,003) (2,705)
----------- ----------- -----------
(Loss) income before income taxes, minority interest,
discontinued operations and extraordinary item (44,759) (3,460) 4,545
Income tax benefit (expense) (Notes 2 and 13) 26,182 2,520 (2,443)
----------- ----------- -----------
(Loss) income before minority interest, discontinued
operations and extraordinary item (18,577) (940) 2,102
Minority interest in net losses of consolidated joint venture 7,918 2,191 199
----------- ----------- -----------
(Loss) income from continuing operations before discontinued
operations and extraordinary item (10,659) 1,251 2,301
Income from discontinued operations, net of income tax
expense of $1,038, $2,675 and $3,164, respectively
(Note 11) 1,525 4,269 5,726
Gain on disposition of discontinued operations, net of income
taxes of $38,146 (Note 11) 55,821 - -
----------- ----------- -----------
Income before extraordinary item 46,687 5,520 8,027
Extraordinary loss on the extinguishment of debt - net of
income tax of $2,787 (Note 10) - - (5,637)
----------- ----------- -----------
Net income $ 46,687 $ 5,520 $ 2,390
=========== =========== ===========
Net income per common share - basic (Notes 2 and 19)
- ----------------------------------------------------
(Loss) income from continuing operations $ (0.43) $ 0.05 $ 0.09
Income from discontinued operations 2.30 0.18 0.21
Extraordinary loss - - (0.21)
----------- ----------- -----------
Net income $ 1.87 $ 0.23 $ 0.09
=========== =========== ===========
Net income per common share - assuming dilution (Notes 2
and 19)
- --------------------------------------------------------
(Loss) income from continuing operations $ (0.43) $ 0.05 $ 0.08
Income from discontinued operations 2.30 0.16 0.19
Extraordinary loss - - (0.19)
----------- ----------- -----------
Net income $ 1.87 $ 0.21 $ 0.08
=========== =========== ===========
See notes to consolidated financial statements
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Fiscal Years Ended
-----------------------------------------------------
October 1, September 26, September 27,
2000 1999 1998
----------- ------------- ------------
Net income $ 46,687 $ 5,520 $ 2,390
----------- ----------- -----------
Net unrealized (loss) gain on securities
available for sale, net of income taxes:
Unrealized (loss) gain on securities
available for sale (44) 648 -
Less: reclassification adjustment for gains
realized in net income (100) (548) -
----------- ----------- -----------
Net unrealized (loss) gain (144) 100 -
----------- ----------- -----------
Comprehensive income (Note 2) $ 46,543 $ 5,620 $ 2,390
=========== =========== ===========
See notes to consolidated financial statements
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED OCTOBER 1, 2000, SEPTEMBER 26, 1999 AND SEPTEMBER 27, 1998
(In thousands)
Accumulated
Additional Retained Other
Common Paid-In Earnings Comprehensive Treasury Stockholders'
Stock Capital (Deficit) Income Stock Equity
------ --------- --------- ------------ -------- ------------
Balance at September 28, 1997 $ 276 $ 53,899 $(14,022) $ - $ (121) $ 40,032
Common stock issued under stock option plans 8 1,505 - - (894) 619
Common stock issued to employee benefit plan - 191 - - - 191
Amounts received pursuant to Directors' stock option plan - 73 - - - 73
Purchases of treasury stock - - - - (9,797) (9,797)
Tax benefit from exercise of stock options - 117 - - - 117
Purchases of warrants - (1,314) - - - (1,314)
Net income - - 2,390 - - 2,390
------- -------- -------- ----- -------- ---------
Balance at September 27, 1998 284 54,471 (11,632) - (10,812) 32,311
Common stock issued for acquisitions - 775 - - 598 1,373
Common stock issued under stock option plans 10 1,688 - - (1,345) 353
Common stock issued to employee benefit plan - 199 - - - 199
Amounts received pursuant to Directors' stock option plan - 121 - - - 121
Purchases of treasury stock - - - - (9,114) (9,114)
Tax benefit from exercise of stock options - 562 - - - 562
Purchases of warrants - (292) - - - (292)
Net income - - 5,520 - - 5,520
Comprehensive income - - - 100 - 100
------- -------- -------- ----- -------- ---------
Balance at September 26, 1999 294 57,524 (6,112) 100 (20,673) 31,133
Common stock issued for acquisition 15 40,599 - - - 40,614
Common stock issued under stock option plans 13 2,127 - - (1,368) 772
Common stock issued to employee benefit plan - 182 - - 37 219
Amounts received pursuant to Directors' stock option plan - 112 - - - 112
Purchases of treasury stock - - - - (13,850) (13,850)
Cancellation of treasury stock (16) (7,553) - - 7,569 -
Tax benefit from exercise of stock options - 564 - - - 564
Exercise of warrants 1 741 - - - 742
Net income - - 46,687 - - 46,687
Comprehensive loss - - - (144) - (144)
------- -------- -------- ----- -------- ---------
Balance at October 1, 2000 $ 307 $ 94,296 $ 40,575 $ (44) $(28,285) $ 106,849
======= ======== ======== ===== ======== =========
See notes to consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Years Ended
---------------------------------------------
October 1, September 26, September 27,
2000 1999 1998
---------- ------------- -------------
OPERATING ACTIVITIES:
Net income $ 46,687 $ 5,520 $ 2,390
Deduct income from and gain on disposition of discontinued operations (57,346) (4,269) (5,726)
-------- -------- --------
(Loss) income from continuing operations after extraordinary item (10,659) 1,251 (3,336)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and other amortization 8,145 3,505 3,618
Deferred tax expense 7,185 706 2,280
Amortization of debt issuance costs 2 - 235
Amortization of Senior Secured Notes discount - - 63
Gain on sale of preferred stock investment (2,905) (898) -
Provision for uncollectible note receivable 5,387 - -
Purchased in-process research and development 6,590 - -
Write-down of technology license 4,000 - -
Loss on assets to be disposed of 1,773 - 226
Gain on sale of division - (667) (512)
Minority interest in net losses of consolidated joint venture (7,918) (2,191) (199)
Extraordinary loss on the extinguishment of debt - - 5,637
Other 815 290 161
Changes in assets and liabilities:
(Increase) decrease in trade accounts receivable (303) 4,479 1,403
(Increase) decrease in inventories (2,246) 2,405 (613)
Increase in prepaid expenses and other assets (1,535) (1,500) (6,031)
Increase (decrease) in trade accounts payable 805 451 (1,067)
Increase (decrease) in accrued expenses 4,378 (3,440) (672)
Increase in other liabilities 1,108 1,088 305
-------- -------- --------
Net cash provided by continuing operations 14,622 5,479 1,498
Net cash (used in) provided by discontinued operations (45,355) 16,332 9,387
-------- -------- --------
Net cash (used in) provided by operating activities (30,733) 21,811 10,885
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (25,836) (10,445) (7,288)
Investment purchases of available-for-sale securities (50,115) - -
Investment purchases of held-to-maturity securities (17,434) - -
Proceeds from sales of available-for-sale securities 46,150 - -
Purchase of investment (2,640) - -
Purchase of preferred stock - (9,144) -
Proceeds from sale of preferred stock 8,125 4,822 -
Proceeds from sale of division - 1,567 5,306
Business acquisitions, net of cash acquired 613 (732) (1,768)
Proceeds from sale of discontinued operations 208,976 - -
-------- -------- --------
Net cash provided by (used in) investing activities 167,839 (13,932) (3,750)
-------- -------- --------
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
Fiscal Years Ended
---------------------------------------------------
October 1, September 26, September 27,
2000 1999 1998
------------- -------------- -------------
FINANCING ACTIVITIES:
Repayment of term loans (91,704) (10,173) (2,372)
Proceeds from term loans - 2,582 -
Net (decrease) increase in revolving loan balances (13,162) 3,086 (3,827)
Proceeds from termination of interest rate swaps 950 - -
Proceeds from refinancing - - 90,000
Repurchase of Senior Secured Notes - - (72,253)
Redemption costs for Senior Secured Notes - - (3,718)
Refinancing costs - - (3,545)
Minority interest capital contributions 11,628 5,725 490
Stock options exercised 772 353 619
Purchases of warrants - (292) (1,314)
Exercise of warrants 742 - -
Purchases of treasury stock (13,850) (9,114) (7,347)
-------- -------- --------
Net cash used in financing activities (104,624) (7,833) (3,267)
-------- -------- --------
Net increase in cash and cash equivalents 32,482 46 3,868
Cash and cash equivalents at beginning of year 4,145 4,099 231
-------- -------- --------
Cash and cash equivalents at end of year $ 36,627 $ 4,145 $ 4,099
======== ======== ========
Supplemental Disclosures:
Payments for income taxes and interest were as follows (in thousands):
Fiscal Years Ended
--------------------------------------------------
October 1, September 26, September 27,
2000 1999 1998
------------ ------------- -------------
Income tax payments - continuing operations $ 6,344 $ 677 $ 353
Income tax payments - discontinued operations 341 432 39
Interest payments (net of capitalized interest) -
continuing operations 2,142 715 8,825
Interest payments (net of capitalized interest) -
discontinued operations 4,686 6,854 3,833
Non-cash investing activities were as follows (in thousands):
Fiscal Years Ended
------------------------------------------------
October 1, September 26, September 27,
2000 1999 1998
----------- ------------- -------------
Business acquisitions purchased with Company common
stock $ 40,614 $ 1,373 $ -
Business acquisitions purchased with notes payable - 3,033 1,000
The purchases of property, plant and equipment and the proceeds from term loans
for the fiscal years ended October 1, 2000 and September 26, 1999 do not include
$3,211,000 and $20,372,000, respectively, related to property held under
capitalized leases (Note 16). The Company did not enter into any capital lease
agreements during the fiscal year ended September 27, 1998.
The proceeds from term loans and purchases of treasury stock for the fiscal year
ended September 27, 1998 does not include a $2,450,000 note payable issued for
the purchase of 600,000 shares of treasury stock (Notes 10 and 14).
During the fiscal years ended October 1, 2000, September 26, 1999 and September
27, 1998, the Company made matching contributions to its 401(k) Savings Plan of
$219,000, $199,000 and $191,000, respectively, through the re-issuance of
17,206, 39,344 and 60,520 shares of its common stock from treasury,
respectively.
See notes to consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended October 1, 2000, September 26, 1999
and September 27, 1998
1. THE COMPANY
The accompanying consolidated financial statements relate to Uniroyal
Technology Corporation, its wholly-owned subsidiaries, Uniroyal HPP
Holdings, Inc., Uniroyal Engineered Products, Inc., Uniroyal
Optoelectronics, Inc., Sterling Semiconductor, Inc., BayPlas3, Inc.,
UnitechOH, Inc. and UnitechNJ, Inc., and its majority-owned subsidiary,
Uniroyal Liability Management Company (collectively, the "Company").
Uniroyal HPP Holdings, Inc. includes its wholly-owned subsidiary, High
Performance Plastics, Inc. ("HPPI"). Uniroyal Engineered Products, Inc.
includes its operating divisions, Uniroyal Engineered Products ("UEP")
and Uniroyal Adhesives and Sealants ("UAS"). Uniroyal Optoelectronics,
Inc. includes its wholly-owned subsidiary, NorLux Corp., and its
majority-owned joint venture, Uniroyal Optoelectronics, LLC. Uniroyal
Liability Management Company includes its wholly-owned subsidiary
BayPlas2, Inc. See Note 8 for information regarding the acquisition of
Sterling Semiconductor, Inc. See Note 11 for information concerning the
sale of HPPI's business.
Uniroyal Liability Management Company, Inc. ("ULMC") is a special
purpose subsidiary created in the fiscal year ended September 26, 1999
to administer the Company's employee and retiree medical benefit
programs. The Company owns a controlling interest (69%) in the
subsidiary; therefore, the accompanying consolidated financial
statements include the subsidiary's results of operations. BayPlas2,
Inc. is also a special purpose subsidiary created in the fiscal year
ended October 1, 2000 to hold certain assets of ULMC.
NorLux Corp. is a development stage company which will engage in the
development and manufacture of optoelectronic devices. UnitechNJ, Inc.
is a special purpose subsidiary created in the fiscal year ended
September 26, 1999 to hold the Company's plant in Stirling, New Jersey.
UnitechOH, Inc. and BayPlas3, Inc. are special purpose subsidiaries
created in the fiscal year ended October 1, 2000 to hold certain assets
of the Company.
The Company is principally engaged in the development, manufacture and
sale of a broad range of materials employing compound semiconductor
technologies, plastics and specialty chemicals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Uniroyal
Technology Corporation, its subsidiaries, its majority-owned subsidiary
and its majority-owned joint venture. All significant intercompany
transactions and balances have been eliminated. Minority interest
represents the minority shareholders' proportionate share of the equity
of the Company's majority-owned entities.
Fiscal Year End
The Company's fiscal year ends on the Sunday following the last Friday
in September. The dates on which the fiscal year ended for the past
three fiscal years were October 1, 2000 ("Fiscal 2000"), September 26,
1999 ("Fiscal 1999") and September 27, 1998 ("Fiscal 1998"). Fiscal
2000 encompassed a 53-week period as compared to Fiscal 1999 and Fiscal
1998 which encompassed 52-week periods. The additional week in Fiscal
2000 occurred in the first quarter ended January 2, 2000.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments
purchased with an original maturity of three months or less.
Investments and Investment in Preferred Stock
All investments with an original maturity greater than three months are
accounted for under Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities. This statement requires certain securities to be classified
into three categories:
(1)Securities Held-to-Maturity: Debt securities the entity has the
ability and intent to hold to maturity are reported at amortized
cost.
(2)Trading Securities: Debt and equity securities bought and held
principally for the purpose of selling in the near term are reported
at fair value, with unrealized gains and losses included in
earnings.
(3)Securities Available-For-Sale: Debt and equity securities not
classified as either held-to-maturity or trading are reported at
fair value with unrealized gains and losses reported as a separate
component of stockholders' equity.
Management determines the appropriate classification of securities at
the time of purchase and re-evaluates such designation as of each
balance sheet date. The fair value of each equity security is
determined by the most recently traded price of the underlying common
stock at the balance sheet date. The fair value of debt securities is
determined by broker quotes at the balance sheet date.
Financial Instruments
Interest rate swap agreements are used to manage interest rate
exposures. The interest rate differentials to be paid or received under
such swaps are recognized over the life of the agreements as
adjustments to interest expense.
The estimated fair value of amounts reported in the consolidated
financial statements have been determined using available market
information and valuation methodologies, as applicable. The carrying
value of all current assets and liabilities approximates the fair value
because of their short-term nature. The fair values of non-current
assets and liabilities approximate their carrying value unless
otherwise indicated.
Trade Accounts Receivable
The Company grants credit to its customers generally in the form of
short-term trade accounts receivable. The creditworthiness of customers
is evaluated prior to the sale of inventory. There are no significant
concentrations of credit risk to the Company associated with trade
accounts receivable.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using a monthly average basis or standard costs (which
approximates actual average costs) for raw materials and supplies and
the first-in, first-out ("FIFO") basis of accounting or standard costs
(which approximates actual FIFO costs) for work in process and finished
goods.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The cost of property,
plant and equipment held under capital leases is equal to the lower of
the net present value of the minimum lease payments or the fair value
of the leased asset at the inception of the lease. Depreciation is
computed under the straight-line method based on the cost and estimated
useful lives of the related assets including assets held under capital
leases. Interest costs applicable to the construction of major plant
and expansion projects have been capitalized to the cost of the related
assets. Interest capitalized during Fiscal 2000 and Fiscal 1999
approximated $287,000 and $791,000, respectively.
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of, establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used
and for long-lived assets and certain identifiable intangibles to be
disposed of. SFAS No. 121 requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate
that the book value of the asset may not be recoverable. The Company
evaluates at each balance sheet date whether events and circumstances
have occurred that indicate possible impairment. In accordance with
SFAS No. 121, the Company uses an estimate of the future undiscounted
net cash flows of the related assets over the remaining life in
measuring whether the assets are recoverable.
Property, Plant and Equipment Held for Sale
The Company has classified certain property, plant and equipment
related to its Port Clinton, Ohio ("Port Clinton") facility and its
Stirling, New Jersey ("Stirling") facility as held for sale.
In November of 1998, the Company ceased operations at its Port Clinton
facility in connection with its sale of the automotive operations of
the Coated Fabrics segment (Note 17). The Company expects to dispose of
the remaining Port Clinton assets, including real property, during the
first quarter of the fiscal year ending September 30, 2001 ("Fiscal
2001") and is carrying the property at fair value less cost to sell
based upon an executed asset purchase agreement for the property. The
fair value less cost to sell of the property approximates $1,300,000 at
October 1, 2000. The Company had previously recorded an impairment loss
for the Port Clinton assets in Fiscal 1996 based upon a decision to
sell the plant. The Company recorded an additional impairment loss in
Fiscal 2000 of $1,773,000 related to machinery and equipment and real
property at Port Clinton. The Port Clinton facility incurred operating
(loss) income of ($74,000) and $3,263,000 in Fiscal 1999 and Fiscal
1998, respectively.
During Fiscal 1998, in conjunction with plant consolidations at HPPI
and in order to address concerns of the Federal Trade Commission
("FTC") (Note 16), the Company decided to sell its Stirling facility.
In accordance with SFAS No. 121, the Company recorded a write-down of
the facility totaling approximately $226,000 in Fiscal 1998 related to
this decision. The Company expects the disposition of the Stirling
facility to be completed in Fiscal 2001. The Company is carrying the
facility at fair value less cost to sell based upon an appraisal. The
fair value less cost to sell approximates $1,000,000 at October 1,
2000. The Stirling operations incurred an operating loss of $261,000 in
Fiscal 1998. Separate operating results were not maintained in Fiscal
1999. The Stirling operations (excluding the facility) were sold to
Spartech Corporation in Fiscal 2000. See Note 11.
Amortization
Debt issuance costs are included in other assets and are amortized
using the interest method over the life of the related debt. Debt
discount for the Senior Secured Notes was amortized using the interest
method over the life of the related debt until the debt was repaid in
Fiscal 1998 (Note 10). Patents and trademarks are included in other
assets and are amortized using the straight-line method over periods
ranging from 7 to 20 years. Reorganization value in excess of amounts
allocable to identifiable assets was amortized on a straight-line basis
over 15 years until Fiscal 1998 when the remaining reorganization value
was reduced to zero in connection with the reduction of the deferred
tax valuation allowance related to acquired tax loss carryforward
benefits, and with respect to which $377,000 reported in Fiscal 1998
was reclassified to depreciation and amortization. Goodwill is
amortized on a straight-line basis over five years for the high
technology business and 25 years for all others. Goodwill is reported
net of accumulated amortization of $2,098,000 and $146,000 at October
1, 2000 and September 26, 1999, respectively.
Research and Development Expenses
Research and development expenditures are expensed as incurred.
Research and development expenditures were $1,613,000, $1,075,000 and
$1,454,000 in Fiscal 2000, Fiscal 1999 and Fiscal 1998, respectively.
The increase in research and development expenditures is due to
start-up operations of the Compound Semiconductor and Optoelectronics
segment.
Employee Compensation
The cost of post-retirement benefits is recognized in the consolidated
financial statements over an employee's term of service with the
Company.
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred income
taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying
amounts and the tax basis of existing assets and liabilities. The
effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Company has recorded a deferred tax asset of approximately
$13,288,000. Realization of the asset is dependent on generating
sufficient taxable income prior to expiration of loss carryforwards
available to the Company. Although realization is not assured,
management believes it is more likely than not that all of the
remaining deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in
the near term if estimates of future taxable income during the
carryforward period are reduced.
Stock-Based Compensation
In Fiscal 1997, the Company adopted only the disclosure provisions of
SFAS No. 123, Accounting for Stock-Based Compensation. As permitted
under this standard, the Company has elected to follow Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, in accounting for its stock options. Pro forma information
regarding net income and earnings per share, as calculated under the
provisions of SFAS No. 123, are disclosed in Note 14.
Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income,
during Fiscal 1999. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components.
Comprehensive income is defined as the change in equity of a business
during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and
distributions to owners. SFAS No. 130 requires that the Company's
change in unrealized gains and losses on equity securities available
for sale be included in comprehensive income. The net unrealized gain
on securities available for sale is shown net of tax expense of $28,000
and $63,000 for the years ended October 1, 2000 and September 26, 1999,
respectively. The adoption of SFAS No. 130 had no impact on the
Company's net income or stockholders' equity in Fiscal 1998.
Income Per Common Share
Earnings per share are computed in accordance with SFAS No. 128,
Earnings Per Share. Basic earnings per share is based on weighted
average number of common shares outstanding for the period. Diluted
earnings per share is based on the sum of weighted average number of
shares outstanding for the period and the weighted average number of
potential common shares outstanding. Potential common shares consist of
outstanding options under the Company's stock option plans and
outstanding warrants to purchase the Company's common stock.
Stock Split
On March 10, 2000, the Company declared a two-for-one stock split in
the form of a 100% stock dividend to its common stockholders of record
on March 20, 2000. The consolidated financial statements and
accompanying notes have been retroactively adjusted to reflect the
effect of the split.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative
(that is, gains and losses) depends upon the intended use of the
derivative and resulting designation. In July 1999, FASB issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133, which postponed the
effective date of SFAS No. 133 for one year. SFAS No. 133 will now be
effective for the Company beginning in Fiscal 2001. In June 2000, FASB
issued SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an amendment to SFAS No. 133. The Company
currently does not anticipate there will be a material impact on the
results of operations or financial position upon adoption of SFAS No.
133 as amended by SFAS No. 138.
Reclassifications
Certain prior years' amounts have been reclassified to conform with the
current year's presentation.
3. INVESTMENTS
At October 1, 2000, the Company's investment portfolio consisted of
marketable debt securities classified as held-to-maturity and
available-for-sale as well as marketable equity securities classified
as available-for-sale. The carrying amount of the investment portfolio
by investment type and classification as of October 1, 2000 is as
follows (in thousands):
Held-to-Maturity Available-for-Sale Total
---------------- ------------------ ------------
Short-term:
Corporate debt securities $ 12,425 $ - $ 12,425
----------- ---------- -----------
Long-term:
Corporate debt security 5,009 - 5,009
State debt security - 2,750 2,750
Corporate debt security - 1,000 1,000
Common stock - 143 143
----------- ---------- -----------
Total long-term securities 5,009 3,893 8,902
----------- ---------- -----------
Total investments $ 17,434 $ 3,893 $ 21,327
=========== ========== ===========
Held-to-maturity debt securities are carried at amortized cost. The
fair value of the held-to-maturity debt securities approximates
$17,372,000 at October 1, 2000, based upon broker quotes. The gross
unrecognized holding loss approximates $62,000 at October 1, 2000.
Available-for-sale debt securities are carried at fair market value
with the unrealized gains and losses, net of tax, reported in
stockholders' equity until realized. Gains and losses on securities
sold are based upon the specific identification method. At October 1,
2000, the cost of available-for-sale debt securities was equal to fair
value (based upon broker quotes); accordingly, there were no unrealized
gains or losses. There have been no realized gains or losses for the
year ended October 1, 2000.
Available-for-sale equity securities are carried at fair market value
with the unrealized gains and losses, net of tax, reported in
stockholders' equity until realized. Gains and losses on equity
securities sold are based upon the specific identification method. At
October 1, 2000, the fair value of the equity securities (based upon
broker quotes) was less than the cost. The net unrealized loss included
in stockholders' equity was $44,000 (net of tax of $28,000). There were
no realized gains or losses on the sale of available-for-sale equity
securities other than those discussed in Note 6.
Scheduled maturities of investments in debt securities is as follows
(in thousands):
Held-to-Maturity Available-for-Sale
----------------- ------------------
Less than one year $ 12,425 $ -
Due in 1-2 years 5,009 -
Due after 5 years - 3,750
----------- ---------
Total $ 17,434 $ 3,750
=========== =========
There were no investments at September 26, 1999 other than the
investment in Emcore Corporation ("Emcore") preferred stock discussed
in Note 6.
4. INVENTORIES
Inventories consisted of the following (in thousands):
October 1, September 26,
2000 1999
----------- -------------
Raw materials, work in process and supplies $ 6,187 $ 5,226
Finished goods 4,892 4,324
---------- --------
Total $ 11,079 $ 9,550
========== ========
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in
thousands):
Estimated October 1, September 26,
Useful Lives 2000 1999
------------ ---------- -------------
Land and improvements - $ 691 $ 740
Buildings and improvements 5-40 years 15,663 14,804
Machinery, equipment and office
furnishings 3-20 years 54,385 32,481
Construction in progress - 7,057 11,816
--------- -----------
77,796 59,841
Accumulated depreciation (20,410) (16,037)
--------- -----------
Total $ 57,386 $ 43,804
========= ===========
Depreciation expense was $5,524,000, $3,185,000 and $2,921,000 for
Fiscal 2000, Fiscal 1999 and Fiscal 1998, respectively.
6. INVESTMENT IN PREFERRED STOCK
On November 30, 1998, the Company purchased 642,857 shares of the
Series I Redeemable Convertible Preferred Stock ("Preferred Stock") of
Emcore for approximately $9,000,000 ($14.00 per share). The shares were
offered pursuant to a private placement by Emcore.
Dividends on the Preferred Stock were cumulative and were payable at
Emcore's option, in cash or additional shares of Preferred Stock on
March 31, June 30, September 30 and December 31, commencing December
31, 1998 at the annual rate of 2% per share of Preferred Stock on the
liquidation preference thereof (equivalent to $0.28 per annum per share
of Preferred Stock).
Shares of the Preferred Stock were convertible at any time, at the
option of the holders thereof, into shares of common stock of Emcore on
a one-for-one basis, subject to adjustment for certain events.
The Preferred Stock was redeemable, in whole or in part, at the option
of Emcore at any time Emcore's common stock traded at or above $28.00
per share for 30 consecutive trading days, at a price of $14.00 per
share plus accrued and unpaid dividends, if any, to the redemption
date. Emcore was required to provide not less than 30 days and not more
than 60 days notice of the redemption. The shares of Preferred Stock
were subject to mandatory redemption by Emcore on November 17, 2003 at
a price of $14.00 per share plus accrued and unpaid dividends.
In June of 1999, the Company converted 270,000 shares of the Preferred
Stock into 270,000 shares of Emcore common stock. The Company then sold
its 270,000 shares of Emcore common stock for $4,822,200 in conjunction
with a public stock offering by Emcore. The Company recognized a gain
on the sale of approximately $898,000, net of certain transaction
costs.
On September 26, 1999, the closing sales price of Emcore's common stock
on the Nasdaq National Market was $14.4375. This resulted in an
unrealized gain of $100,000 (net of taxes of $63,000) as of September
26, 1999.
During the first quarter of Fiscal 2000, the Company converted the
remaining 372,857 shares of its Emcore preferred stock into 372,857
shares of Emcore common stock. The common stock was then sold in the
open market for approximately $8,125,000. This resulted in a gain of
approximately $2,905,000, net of certain transaction costs.
7. NOTE RECEIVABLE
On June 10, 1996, the Company sold substantially all the assets net of
certain liabilities of its Ensolite closed cell foam division to
Rubatex Corporation ("Rubatex") for $25,000,000. Proceeds consisted of
cash of $20,000,000 and an unsecured promissory note receivable (the
"Note") in the amount of $5,000,000 of RBX Group, Inc. ("RBX"), the
parent of Rubatex. Interest on the Note was payable semi-annually at
11.75% per annum. The Note was to mature on May 1, 2006.
In January 1998, the Company brought suit to compel RBX to honor a
mandatory early redemption obligation under the terms of the $5,000,000
Note. In March 1998, Rubatex filed a counterclaim asserting that the
Ensolite machinery purchased was in breach of the Company's warranties
when Rubatex purchased it in June 1996. RBX did not make the
semi-annual interest payment on the Note of $293,750 on May 1, 1998.
The Company stopped accruing interest on the Note as of June 29, 1998.
As of September 26, 1999, the Company had accrued interest receivable
related to the Note of approximately $387,000. In March of 2000, the
Company fully reserved its note receivable and related accrued interest
from RBX in the amount of $5,387,000. This was a result of a
determination that based on recent events at RBX, which included the
effects of a prolonged strike at its major facility, the financial
condition of RBX had deteriorated such that collectibility of the note
receivable and related accrued interest was in doubt. On June 22, 2000,
the Company settled all outstanding claims and counterclaims with RBX
for a cash payment from RBX of $250,000. The settlement is included in
selling and administrative costs for the year ended October 1, 2000 and
is substantially offset by legal costs incurred.
8. ACQUISITION OF STERLING SEMICONDUCTOR, INC.
On May 31, 2000, the Company completed a merger with Sterling
Semiconductor, Inc. ("Sterling") whereby Sterling became a wholly-owned
subsidiary of the Company. Sterling is a developer and manufacturer of
silicon carbide ("SiC") semiconductor wafer substrates and substrates
with epitaxial thin film coatings.
Under the terms of the merger agreement, the Company exchanged 1.1965
shares of its common stock for each share of Sterling's issued and
outstanding preferred and common stocks and exchanged Company employee
stock options for 1.1965 shares of the Company's common stock for each
share of Sterling common stock covered by an outstanding Sterling
employee stock option (the majority of which were vested). This
resulted in an issuance of 1,531,656 shares of the Company's common
stock valued at approximately $31,655,000, the issuance of 508,219 of
Company employee stock options valued at approximately $8,959,000, and
the payment of approximately $2,000 for fractional shares. The total
purchase price, including acquisition costs, approximated $41,333,000.
The Company common stock issued was valued based upon the average
market value of such shares on the dates surrounding the final purchase
price adjustment, which occurred on April 30, 2000. The Company
employee stock options issued were recorded at fair value calculated
using the Black-Scholes option-pricing model.
The Sterling merger was accounted for by the purchase method in
accordance with the APB Opinion No. 16, Business Combinations. The
results of operations of Sterling are included in the consolidated
financial statements for the period June 1, 2000 through October 1,
2000. The purchase price was allocated to the estimated fair value of
assets purchased, liabilities assumed and in-process research and
development ("IPR&D") based on an independent appraisal and management
estimates at the date of acquisition as follows (in thousands):
Working capital (excluding cash) $ (521)
Cash 613
Property, plant and equipment 1,840
Deferred tax asset 2,656
Intangible assets 6,102
Other assets 81
Goodwill 28,415
Notes payable (1,051)
Other liabilities (3,392)
-------------
Net value of purchased assets 34,743
Purchased in-process research and development 6,590
Value of common stock and employee
stock options issued (40,614)
Cash paid for fractional shares (2)
Accrued acquisition costs (717)
-------------
Cash due at closing $ -
=============
Included in other liabilities as of the acquisition date is
approximately $2,640,000 related to the Company's investment in
Sterling prior to the merger. Subsequent to the merger, this amount was
converted to a capital contribution.
The excess of the purchase price over the fair value of the net
identifiable assets, totaling $28,415,000 was allocated to goodwill and
is being amortized on a straight-line basis over 5 years.
Approximately $6,102,000 of the purchase price was allocated to
identifiable intangible assets including existing product line, core
technology and trained workforce. These intangible assets are being
amortized over a 5-year period.
Approximately $6,590,000 of the purchase price was allocated to IPR&D
for research and development projects of Sterling that were in various
stages of development, had not reached technological feasibility and
for which there was no alternative future use. In accordance with SFAS
No. 2, Accounting for Research and Development Costs, as clarified by
FASB Interpretation No. 4, amounts assigned to IPR&D that have not
reached technological feasibility and for which there is no alternative
use must be charged to expense as part of the allocation of the
purchase price. The IPR&D was charged to expense in the fourth quarter
of Fiscal 2000 and had no tax benefit.
The identifiable intangible assets and IPR&D were valued on the
acquisition date using an income approach and, in the case of the
trained workforce intangible asset, a cost to replicate approach. In
the income approach, a cash flow was developed associated with the
respective asset after charges for the use of existing assets (as
applicable) and consideration of the economic life of the asset
(reflected by the obsolescence factor). The income stream was
discounted to its present value based upon the estimated discount rate.
The discount rate was based upon our required rate of return, useful
life of the technology and risks associated with the timely completion
of the product lines. In the case of IPR&D, the "exclusionary rule" was
applied by which the indicated value was multiplied by the estimate of
the percentage of the total technology that was complete as of the
valuation date. Percentage of completion was determined based upon the
relative number of critical issues solved to the total number of
critical issues identified. Significant appraisal assumptions include
revenue projections, margins and expense levels and the risk adjusted
discount rate applied to the project's expected cash flows.
As of the acquisition date, Sterling had developed a commercial
production capability for 2-inch 4H and 6H (measures of hardness) SiC
wafers. Sterling was also engaged in concurrent efforts to develop
potential product lines for large diameter (3-inch and 4-inch 4H and
6H) wafers, semi-insulating wafers, epitaxial coatings and device
designs that would produce an economical device die for discrete
semiconductor devices.
The purchased IPR&D is summarized as follows (in thousands):
IPR&D Technology Discount Economic Percent Expected Date for
Description Rate Life Complete Fair Value Full Commercial
Viability
--------------------------- -------- --------- -------- ---------- -----------------
3" and 4" large diameter
SiC wafers 32.7% 11 years 70% $ 858 2004
Semi-insulating wafers 32.7% 11 years 75% 456 2004
Epitaxy coatings 32.7% 11 years 40% 723 2005
Devices 32.7% 11 years 40% 4,553 2005
--------
Total IPR&D $ 6,590
========
The cost to complete all projects approximates $13,200,000. The nature
of the efforts required to develop the acquired IPR&D into
technologically feasible and commercially viable products principally
relate to the completion of all planning, design and testing activities
necessary to establish a product that can be produced to meet its
design requirements including functions, features and technical
performance requirements. The Company currently expects the acquired
IPR&D will be successfully developed but there can be no assurance the
technological feasibility or commercial viability of these products
will be achieved. If none of these products are successfully developed,
the Company's sales and profitability may be adversely affected in
future periods.
The following pro forma data summarize the results of operations for
the periods indicated as if the Sterling acquisition had been completed
as of the beginning of the periods presented. The pro forma data gives
effect to actual operating results prior to the acquisition, adjusted
to include the pro forma effect of interest expense, amortization of
intangibles and income taxes. The pro forma results do not include an
adjustment for IPR&D. These pro forma results are not necessarily
indicative of the results that would have actually been obtained if the
acquisition occurred as of the beginning of the periods presented or
that may be obtained in the future (in thousands):
Fiscal Year Ended
---------------------------------
October 1, September 26,
2000 1999
-------------- ------------------
Pro forma net sales $ 70,417 $ 73,162
Pro forma net income (loss) $ 39,447 $ (3,669)
Pro forma earnings (loss) per share:
Basic $ 1.58 $ (0.15)
Diluted $ 1.58 $ (0.15)
The acquisition costs for Sterling primarily include approximately
$428,000 paid to an investment banking firm that employs relatives of
one of the Company's executive officers and approximately $137,000 paid
to a law firm of which one of the Company's directors is a senior
partner.
9. OTHER ASSETS
Other assets consisted of the following (in thousands):
October 1, September 26,
2000 1999
----------- -------------
Intangible assets $ 5,695 $ -
Patents and trademarks 3,109 3,371
Technology license 1,000 5,000
Deposits 518 472
Other 2,853 1,305
--------- ---------
Total $ 13,175 $ 10,148
========= =========
Intangible assets were acquired in connection with the Sterling
acquisition (Note 8) and are reported net of accumulated amortization
of $407,000 at October 1, 2000. Patents and trademarks are reported net
of accumulated amortization of $2,562,000 and $2,300,000 at October 1,
2000 and September 26, 1999, respectively.
During Fiscal 1999 and Fiscal 1998, the Company paid a total of
$5,000,000 to Emcore in connection with a technology license dated
September 29, 1997, for certain technology relating to the manufacture
of epitaxial wafers used in high brightness light emitting diodes
("LEDs") for lamps and display devices (Note 18). During the fourth
quarter of Fiscal 2000, the Company wrote down the value of its
technology license in the amount of $4,000,000 based on its decision to
pursue its own research and development efforts. The remaining value of
the technology license will be amortized over the estimated life of the
technology once sales from internal production have commenced.
10. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
October 1, September 26,
2000 1999
----------- -------------
Revolving credit agreement $ 1,266 $ 6,878
Unsecured promissory notes 3,069 4,524
Capital lease obligations 17,829 18,249
---------- ----------
22,164 29,651
Less current portion (6,702) (5,282)
---------- ----------
Long-term debt, net of current portion $ 15,462 $ 24,369
========== ==========
Debt amounts become due during subsequent fiscal years ending in
September as follows (in thousands):
2001 $ 6,702
2002 5,372
2003 5,881
2004 3,993
2005 216
----------
Total debt $ 22,164
==========
CIT Revolving Credit Agreement
On April 14, 1998, the Company entered into an Amendment and Consent
Agreement with CIT whereby the Company's existing revolving credit
arrangement was amended to permit the Company to borrow the lesser of
$10,000,000 or the sum of 85% of Eligible Receivables plus 55% of
Eligible Inventories as defined in the agreement. On April 1, 1999, in
connection with the creation of Uniroyal Engineered Products, Inc., the
CIT revolving credit agreement was assumed by Uniroyal Engineered
Products, Inc. The collateral securing the credit line includes only
the assets of Uniroyal Engineered Products, Inc. Interest on the CIT
revolving credit agreement is payable monthly at Prime plus .5% per
annum or at the LIBOR rate plus 2.75% per annum if the Company elects
to borrow funds under a LIBOR loan as defined in the agreement. The
loan matures on June 5, 2001 and is subject to automatic one year
renewals unless the agreement is terminated by either party with a 90
day notice and is therefore included as a short-term obligation at
October 1, 2000. All of Uniroyal Engineered Products, Inc.'s trade
accounts receivables and inventories are pledged as collateral for this
loan. The agreement restricts the creation of certain additional
indebtedness. The Company was in compliance with the covenants under
this agreement at October 1, 2000. At October 1, 2000, the Company had
approximately $1,266,000 of outstanding borrowings under the revolving
credit agreement and $7,005,000 of availability. The Company had
$6,878,000 of outstanding borrowings under this agreement at September
26, 1999. The weighted average interest rate on the CIT revolving
credit agreement was 9.1% during Fiscal 2000 and 8.28% during Fiscal
1999.
Unsecured Promissory Notes
On May 31, 2000, in connection with the acquisition of Sterling, the
Company assumed an unsecured promissory note payable with a balance of
approximately $833,000. The note was payable in two equal installments
of approximately $416,500 on September 1, 2000 and September 1, 2001,
plus accrued interest at the stated rate of 10.50%. At October 1, 2000,
the balance of this note payable approximates $416,500.
On June 14, 1999, in connection with the purchase of Happel Marine,
Inc., the Company issued unsecured promissory notes for $2,400,000 and
$511,007. The $2,400,000 note is payable in four equal annual
installments beginning January 15, 2000, plus accrued interest at the
stated rate of 7.75% per annum. The $511,007 note is payable in two
equal annual installments beginning January 15, 2000, plus accrued
interest at the stated rate of 7.75%. The notes were adjusted to
$2,500,030 and $533,114, respectively, in connection with a subsequent
purchase price adjustment in September, 1999. At October 1, 2000, the
balances of these notes approximate $1,875,000 and $267,000,
respectively.
The Company entered into an unsecured promissory note the balance of
which was $817,000 at September 26, 1999, in connection with a prior
year treasury stock purchase at a stated rate of 8.0%. To the extent
the stated rate was below the current market rate, the Company imputed
interest at the market rate in effect on the date of the respective
transaction. The note was repaid during Fiscal 2000.
Capital Lease Obligations
The Company leases certain machinery and equipment under non-cancelable
capital leases which extend for varying periods up to 5 years. Capital
lease obligations entered into during Fiscal 2000 were primarily
related to the Company's majority owned joint venture, Uniroyal
Optoelectronics, LLC. The Company is a guarantor of the Uniroyal
Optoelectronics capital lease obligations. The weighted average
interest rate on these obligations was 8.9% in Fiscal 2000 and 8.8% in
Fiscal 1999.
The approximate minimum future lease obligations on long-term
non-cancelable capital lease obligations included in long-term debt
during subsequent fiscal years ending in September are as follows (in
thousands):
Fiscal Year
2001 $ 5,427
2002 5,710
2003 5,759
2004 4,141
2005 220
---------
21,257
Less imputed interest (3,428)
---------
Total $ 17,829
=========
Interest is imputed using the rate that would equate the present value
of the minimum lease payments to the fair value of the leased
equipment.
Senior Secured Notes
On April 14, 1998, HPPI paid $94,944,000 to the Company which in turn
used such amount to defease the outstanding 11.75% Senior Secured Notes
due June 1, 2003 ("Senior Secured Notes") including the call premium
and interest accrued through the call date and to pay down its
revolving line of credit and secured term loan with the CIT
Group/Business Credit, Inc. ("CIT"). The redemption of the Senior
Secured Notes was completed on June 1, 1998 at a call premium of 4.41%
($3,264,000). In connection with the June 1, 1998 redemption, the
Company incurred an extraordinary loss on the extinguishment of debt of
approximately $5,637,000 (net of applicable income taxes of
approximately $2,787,000).
11. DISCONTINUED OPERATIONS
On December 24, 1999, the Company entered into a definitive agreement
to sell certain net assets of its High Performance Plastics segment for
$217,500,000 in cash to Spartech Corporation ("Spartech"). The
transaction closed on February 28, 2000, and resulted in cash proceeds
of $208,976,000 net of certain transaction costs and preliminary
purchase price adjustments (the "Spartech Sale"). The ultimate purchase
price adjustments have not been agreed to by both parties. The Company
estimates, and has provided for, an ultimate reduction in purchase
price of approximately $5,100,000, which would result in a loss of the
$5,000,000 holdback as well as an additional payment from the Company
to Spartech of approximately $100,000. In addition to what the Company
has provided for, Spartech is seeking an additional purchase price
reduction up to approximately $4,237,000. Management believes the
ultimate resolution of the purchase price adjustment should not have a
material adverse effect on the results of operations, cash flows or
financial position. After consideration of the estimated purchase price
adjustments of $5,100,000, the Company recorded a gain on the sale of
approximately $55,821,000 (net of taxes of approximately $38,146,000).
The accompanying consolidated financial statements reflect the High
Performance Plastics segment as discontinued operations in accordance
with APB Opinion No. 30, Reporting Results of Operations.
Net liabilities of the discontinued operations of the High Performance
Plastics segment have been segregated on the October 1, 2000 and
September 26, 1999 balance sheets, the components of which are as
follows (in thousands):
Net Liabilities of Discontinued Operations
October 1, September 26,
2000 1999
------------ -------------
Assets:
Cash $ 100 $ 37
Trade receivables 21 18,261
Inventories - 30,028
Deferred income taxes 186 2,030
Prepaids and other assets 466 1,712
Property, plant and equipment - net - 45,099
Goodwill - net - 11,142
Other assets - net - 4,258
----------- -----------
Total assets 773 112,567
----------- -----------
Liabilities:
Current portion of long-term debt 158 8,805
Trade payables 432 13,323
Other accrued expenses 4,815 7,429
Long-term debt, net of current portion - 84,552
Deferred income taxes - 6,322
Other liabilities - 516
----------- -----------
Total liabilities 5,405 120,947
----------- -----------
Net liabilities of discontinued operations $ 4,632 $ 8,380
=========== ===========
The results of operations for all periods presented have been restated
for discontinued operations. The operating results of discontinued
operations are as follows (in thousands):
Fiscal Years Ended
--------------------------------------------------
October 1, September 26, September 27,
2000 1999 1998
------------- ------------- -------------
Net sales $ 55,001 $ 130,219 $ 128,580
Cost of goods sold 44,434 93,367 90,638
Selling and administrative 3,933 15,538 15,947
Depreciation and other amortization 2,511 5,652 5,479
Loss on assets to be disposed of - 144 407
Gain on sale of segment (96,027) - -
----------- ----------- -----------
Income before interest expense and income taxes 100,150 15,518 16,109
Interest expense - net (3,620) (8,574) (7,219)
----------- ----------- -----------
Income before taxes 96,530 6,944 8,890
Tax expense (39,184) (2,675) (3,164)
----------- ----------- -----------
Net income from discontinued operations $ 57,346 $ 4,269 $ 5,726
=========== =========== ===========
The following note relates to the business of the High Performance
Plastics segment.
HPPI Credit Agreement
On April 14, 1998, the Company transferred all of the assets of its
High Performance Plastics segment to a newly created wholly-owned
subsidiary, HPPI. On that same day HPPI, as borrower, entered into a
credit agreement with Uniroyal HPP Holdings, Inc. (the parent of HPPI
and a wholly-owned subsidiary of the Company), the Company, the banks,
financial institutions and other institutional lenders named therein,
Fleet National Bank (as Initial Issuing Bank, Swing Line Bank and
Administrative Agent) ("Fleet") and DLJ Capital Funding, Inc. as
Documentation Agent (the "Credit Agreement"), providing among other
things, for the borrowing by HPPI of an aggregate principal amount of
up to $110,000,000 (the "Fleet Financing"). The $110,000,000 line under
the Credit Agreement was composed of a $30,000,000 Term A Advance, for
which the weighted average interest rate was 8.0% in Fiscal 2000 and
7.36% in Fiscal 1999, a $60,000,000 Term B Advance for which the
weighted average interest rate was 8.3% in Fiscal 2000 and 7.57% in
Fiscal 1999, and a $20,000,000 Revolving Credit Advance for which the
weighted average interest rate was 8.8% in Fiscal 2000 and 8.31% in
Fiscal 1999. The Fleet Financing was repaid on February 28, 2000, in
connection with the Spartech Sale.
The advances under the Credit Agreement were collateralized by a lien
on substantially all of the non-cash assets of HPPI. The Credit
Agreement contained certain covenants which limited, among other
things, HPPI's ability to incur additional debt, sell its assets, pay
cash dividends, make certain other payments and redeem its capital
stock. The Credit Agreement also contained covenants which required the
maintenance of certain ratios. HPPI was in compliance with those
covenants at September 26, 1999. The Credit Agreement also contained
annual mandatory pre-payments of principal equal to 50% of HPPI's
annual Excess Cash Flow (as defined in the Credit Agreement) beginning
September 26, 1999. No such prepayment was due on September 26, 1999.
Under the terms of the Credit Agreement, HPPI was required to obtain
and keep in effect one or more interest rate Bank Hedge Agreements (as
defined in the Credit Agreement) covering at least 50% of the Term A
and Term B Advances, for an aggregate period of not less than three
years. On May 14, 1998, HPPI entered into three interest rate swap
agreements with two banks. The first agreement was a fixed rate swap on
$30,000,000 notional amount with an expiration date of May 14, 2003.
HPPI's fixed LIBOR rate of interest on this swap was 5.985%. HPPI paid
or received interest based upon the differential between HPPI's fixed
LIBOR rate and the bank's floating LIBOR rate. The bank's floating
LIBOR rate was adjusted monthly. The second agreement was a cancelable
interest rate swap on $30,000,000 notional amount with an expiration
date of May 14, 2003. HPPI's fixed LIBOR rate of interest on this swap
was 5.7375%. HPPI paid or received interest based upon the differential
between HPPI's fixed LIBOR rate and the bank's floating LIBOR rate. The
bank's floating LIBOR rate was adjusted quarterly. The bank had the
option to cancel this swap on May 14, 2001. The third agreement was a
cancelable interest rate swap on $20,000,000 notional amount with an
expiration date of May 14, 2000. HPPI's fixed LIBOR rate of interest on
this swap was 5.6725%. HPPI paid or received interest based upon the
rate differential between HPPI's fixed LIBOR rate and the bank's
floating LIBOR rate. The bank's floating LIBOR rate was adjusted
quarterly. The bank had the option to cancel this swap on May 14, 1999
which it did not exercise. The differential on interest rate swaps was
accrued as interest rates changed and was recognized as an adjustment
to interest expense over the life of the agreements. The fair value of
these interest rate swap agreements represented the estimated receipts
or payments that would be made to terminate the agreements. The
interest rate swap agreements were terminated on February 28, 2000 in
connection with the repayment of the Fleet Financing. HPPI received
$950,000 upon termination and recorded this amount as a gain on
interest rate swap termination. The gain on interest rate swap
termination is included in selling and administrative expenses of
discontinued operations.
In connection with the Fleet Financing, the Company incurred
approximately $3,545,000 in debt issuance costs. The costs were
capitalized and were amortized using the interest method over the lives
of the agreements. The remaining unamortized amount at February 28,
2000 was written-off in connection with the Spartech Sale and the
repayment of the Fleet Financing.
12. OTHER LIABILITIES
Other liabilities consisted of the following (in thousands):
October 1, September 26,
2000 1999
---------- -------------
Accrued retirement benefits $ 22,545 $ 14,653
Taxes, other than income 74 71
Other 1,181 564
----------- -----------
Total $ 23,800 $ 15,288
=========== ===========
13. INCOME TAXES
The effective tax rate differs from the statutory federal income tax
rate for the following reasons (in thousands):
Fiscal Years Ended
---------------------------------------------------------
October 1, September 26, September 27,
2000 1999 1998
---------- ------------- -------------
Income tax (benefit) expense calculated at
the statutory rate applied to
(loss) income before income tax,
discontinued operations and
extraordinary item $ (12,895) $ (435) $ 1,925
Increase (decrease) resulting from:
Capital loss from medical benefits
subsidiary - (15,980) -
Valuation allowance (13,702) 13,702 -
Goodwill 3,061 - -
State income tax (1,797) 103 (31)
Research and development credit (894) - -
Other 45 90 448
Exclusion of extraordinary loss on
the extinguishment of debt - - (2,787)
Amortization of reorganization
value in excess of amounts
allocable to identifiable assets - - 101
----------- ----------- -----------
Income tax benefit $ (26,182) $ (2,520) $ (344)
=========== =========== ===========
Allocation of income tax benefit is as follows (in thousands):
Fiscal Years Ended
-------------------------------------------------------------
October 1, September 26, September 27,
2000 1999 1998
------------ ------------- -------------
(Loss) income before extraordinary
item $ (26,182) $ (2,520) $ 2,443
Extraordinary item - - (2,787)
----------- ----------- -----------
Income tax benefit $ (26,182) $ (2,520) $ (344)
=========== =========== ===========
Income tax (benefit) expense consisted of the following components (in
thousands):
Fiscal Years Ended
-------------------------------------------------------
October 1, September 26, September 27,
2000 1999 1998
----------- ------------- -------------
Current:
Federal $ (30,786) $ (2,948) $ (2,593)
State (2,581) (278) (31)
------------ ----------- -----------
Total $ (33,367) $ (3,226) $ (2,624)
============ =========== ===========
Net deferred tax expense:
Federal $ 6,401 $ 325 $ 2,280
State 784 381 -
------------- ----------- -----------
Total $ 7,185 $ 706 $ 2,280
============ =========== ===========
Total:
Federal $ (24,385) $ (2,623) $ (313)
State (1,797) 103 (31)
------------- ----------- -----------
Total $ (26,182) $ (2,520) $ (344)
============ =========== ===========
The components of the deferred tax assets and liabilities were as
follows (in thousands):
October 1, 2000
---------------------------------------------------
Assets Liabilities Total
----------- ------------ -----------
Current
-------
Accrued expenses deductible in future
periods $ 5,460 $ - $ 5,460
=========== ========= ==========
Non-Current
-----------
Acquired tax loss carryforward
benefits $ 4,976 $ - $ 4,976
Book basis in excess of tax basis of
assets - (4,214) (4,214)
Long-term accrual of expenses
deductible in future periods 7,066 - 7,066
---------- --------- ----------
Total $ 12,042 $ (4,214) $ 7,828
========== ========= ==========
September 26, 1999
--------------------------------------------------
Assets Liabilities Total
---------- ----------- ---------
Current
-------
Accrued expenses deductible in future
periods $ 2,779 $ - $ 2,779
========== ========= ==========
Non-Current
-----------
Acquired tax loss carryforward
benefits $ 4,951 $ - $ 4,951
Net operating loss carryforward 5,496 - 5,496
Capital loss 13,702 - 13,702
Valuation allowance (13,702) - (13,702)
Book basis in excess of tax basis of
assets - (1,577) (1,577)
Long-term accrual of expenses
deductible in future periods 6,141 - 6,141
AMT credit carryforward 339 - 339
---------- --------- ----------
Total $ 16,927 $ (1,577) $ 15,350
========== ========= ==========
The acquired tax loss carryforward benefits expire in various years
starting in the year 2007 through 2020. These acquired tax loss
benefits consist of tax net operating loss carryforwards from
acquisitions of subsidiaries and are subject to an annual limitation.
The annual limitation on utilization of the acquired net operating
losses is approximately $4,000,000 per year.
In Fiscal 1999, the Company established a subsidiary to administer the
Company's employee medical benefits program. The Company realized a
one-time federal capital loss tax benefit of approximately $15,980,000
arising from the sale of a portion of the stock of this subsidiary.
However, due to the uncertainty regarding the Company's ability to
utilize this capital loss in the future, only $2,278,000 of this
benefit was recognized in Fiscal 1999 as an offset against current and
previous capital gains. In Fiscal 2000, the Company realized an
additional state tax benefit of $936,000 and the $13,702,000 previous
federal balance of this benefit was recognized as an offset to a
portion of the capital gain realized upon the sale of the High
Performance Plastics segment.
14. STOCKHOLDERS' EQUITY
The Company's certificate of incorporation provides that the authorized
capital stock of the Company consists of 35,000,000 shares of common
stock and 1,000 shares of preferred stock, each having a par value of
$0.01 per share. At October 1, 2000, 30,707,976 shares of common stock
were issued or to be issued.
On December 18, 1996, the Board designated a new series of preferred
stock of the Company termed Series C Junior Participating Preferred
Stock, $.01 par value ("Series C Preferred") and reserved 450 shares of
the Series C Preferred for issuance. At the same time, the Board
declared a dividend of a right to acquire 1/100,000 of a share of
Series C Preferred to the holder of each share of common stock (the
"Rights") under a Shareholder Rights Plan. The Rights will trade with
the common stock and be detachable from the common stock and
exercisable only in the event of an acquisition of or grant of the
right to acquire 15% or more of the common stock by one party or common
group or a tender offer to acquire 15% or more of the common stock.
Common Stock
The holders of record of shares of common stock are entitled to receive
dividends when and as declared by the Board of Directors of the
Company, provided that the Company has funds legally available for the
payment of dividends and is not otherwise contractually restricted from
the payment of dividends. The Company declared no such dividends during
Fiscal 2000, Fiscal 1999 and Fiscal 1998.
Treasury Stock Transactions
During Fiscal 2000 and Fiscal 1999, the Company received 109,149 and
260,764 shares of its common stock, respectively, in lieu of cash for
the exercise of stock options from officers and employees of the
Company. These shares were valued at approximately $1,368,000 in Fiscal
2000 and $1,345,000 in Fiscal 1999 (which were calculated based on the
closing market value of the stock on the day prior to the exercise
dates) and are included as treasury shares as of October 1, 2000 and
September 26, 1999.
During Fiscal 2000 and Fiscal 1999, the Company repurchased 1,008,496
and 1,810,970 shares, respectively, of its common stock in the open
market for approximately $13,547,000 and $8,451,000, respectively.
During Fiscal 1999, the Company received 506,580 shares of its common
stock in connection with the final distributions of the bankruptcy
proceedings, 36,542 of which were purchased at a cost of approximately
$181,000. No such shares were received or purchased during Fiscal 2000.
During Fiscal 2000 and Fiscal 1999, the Company repurchased 47,984 and
95,424 shares of its common stock from its benefit plans for
approximately $303,000 and $482,000, respectively.
During Fiscal 1998, the Company repurchased 1,000,000 shares of its
common stock for $2,187,500 in connection with the sale by the Pension
Benefit Guaranty Corporation ("PBGC") of all of its holdings of the
Company's common stock. Also during Fiscal 1998, the Company
repurchased 600,000 shares of its common stock, previously issued in
connection with the Fiscal 1997 purchase of Townsend Plastics, for
$250,000 cash and an unsecured promissory note for $2,450,000 (Note 10)
and repurchased 100,000 shares of its common stock, previously issued
in connection with the Fiscal 1997 acquisition of C. Gunther Company,
for $431,250.
Subsequent to the fiscal year ended October 1, 2000, and as of November
30, 2000, the Company repurchased approximately 459,200 shares of its
common stock in the open market for approximately $3,640,900.
Warrants
The Company has 367,885 warrants outstanding to purchase an aggregate
of 735,770 shares of its common stock at a price equal to $4.375 per
warrant, subject to adjustments under certain circumstances. All
outstanding warrants are exercisable at any time on or prior to June 1,
2003, at which time they will terminate and become void. The Company
originally issued 800,000 warrants to purchase an aggregate of
1,600,000 shares of its common stock in connection with the issuance of
its Senior Secured Notes in Fiscal 1993. The warrants were detachable
from the Senior Secured Notes and, therefore, were allocated a portion
of the proceeds in the amount of approximately $1,566,000, which was
their market value at the time they were issued. This amount was added
to additional paid-in capital. During Fiscal 2000, 169,650 warrants
were exercised resulting in cash proceeds of approximately $742,000. No
warrants were exercised in Fiscal 1999. During Fiscal 1999, the Company
repurchased 45,615 of its outstanding warrants for approximately
$292,000. No warrants were repurchased during Fiscal 2000. As of
September 26, 1999, no warrants had been exercised.
Stock Compensation Plans
At October 1, 2000, the Company has four stock-based compensation
plans, which are described below. The Company applies APB Opinion No.
25 and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for these plans
except as indicated below. Had compensation cost been determined based
on the fair value at the grant dates for awards under those plans
consistent with the method of SFAS No. 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands, except earnings per share information):
Fiscal Years Ended
----------------------------------------------------
October 1, September 26, September 27,
2000 1999 1998
----------- ------------- -------------
Net income:
As reported $ 46,687 $ 5,520 $ 2,390
Pro forma $ 43,090 $ 4,778 $ 2,175
Earnings per share - basic:
As reported $ 1.87 $ 0.23 $ 0.09
Pro forma $ 1.73 $ 0.20 $ 0.08
Earnings per share - assuming dilution:
As reported $ 1.87 $ 0.21 $ 0.08
Pro forma $ 1.73 $ 0.18 $ 0.07
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants for the fiscal years ended
October 1, 2000, September 26, 1999 and September 27, 1998,
respectively: expected volatility of 58.65%, 44.16% and 45.46%,
dividend yield of 0% for all years, risk-free interest rates of 6.23%,
6.014% and 4.523% and expected lives of 3 to 10 years.
The Company has reserved 2,727,272 shares of common stock to be issued
and sold pursuant to the 1992 Stock Option Plan that was adopted by the
Company on September 27, 1992. Generally, of the options granted under
this plan, 60% vested on May 1, 1994 and the remainder vested on
November 1, 1995. Vesting provisions for any additional options will be
determined by the Board of Directors of the Company at the time of the
grant of such options. The stock options are exercisable over a period
determined by the Board of Directors or its Compensation Committee, but
no longer than ten years after the date granted.
During the fiscal year ended September 26, 1993, the Company adopted
the 1992 Non-Qualified Stock Option Plan available for non-officer
directors. This plan provides that directors who are not officers of
the Company are entitled to forego up to 100% of their annual retainer
in exchange for options to purchase the Company's common stock at an
option price of 50% of the market price of the underlying common stock
at the date of grant. The options are exercisable for a period of 10
years from the date of the grant of each option. Compensation expense
related to these options was approximately $118,000, $109,000 and
$64,000 during Fiscal 2000, Fiscal 1999 and Fiscal 1998, respectively.
During the fiscal year ended October 2, 1994, the Company adopted the
1994 Stock Option Plan available for certain key employees of the
Company. The Company has reserved approximately 1,624,000 shares of
common stock to be issued under this plan, provided that the aggregate
number of options that may be granted under the 1994 Stock Option Plan
and all other stock option plans of the Company for employees may not
at any time exceed in the aggregate 15% of the then currently
authorized common stock outstanding, on a fully diluted basis. Stock
options granted under this plan are exercisable until not later than
January 1, 2004.
During the fiscal year ended September 29, 1996, the Company adopted
the 1995 Non-Qualified Stock Option Plan available for directors. Each
director is granted an option to purchase 20,000 shares of the
Company's common stock in the case of the initial grant and 10,000
shares for any subsequent grant. The initial grant occurred upon the
adoption of this plan or, in the case of new directors, 30 days after
becoming an eligible director of the Company. Options granted under
this plan have a term of three years and may be exercised nine months
after the date of the grant. This plan terminates on February 14, 2006.
No director who is not an officer of the Company may receive options to
purchase more than an aggregate of 60,000 shares of Common Stock in any
calendar year under all of the Company's Stock Option Plans. The plan
was amended by the Stockholders in 1999 to increase the annual amount
from 20,000 to 35,000 shares of the Company's common stock.
The following table summarizes all stock option transactions for the
fiscal years ended October 1, 2000 and September 26, 1999:
Fiscal Years Ended
--------------------------------------------------------------------
October 1, 2000 September 26, 1999
------------------------------- -------------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
------------ ------------------ ------------ ------------------
Outstanding at Beginning of Year 3,695,060 $ 2.87 4,352,786 $ 2.53
Grants 3,382,079 $ 11.37 374,200 $ 3.88
Exercised (1,125,520) $ 1.91 (996,926) $ 1.71
Forfeited (15,000) $ 13.59 (35,000) $ 3.92
---------- ----------
Outstanding at End of Year 5,936,619 $ 7.87 3,695,060 $ 2.87
========== ==========
Exercisable at End of Year 2,676,093 2,059,210
========== ==========
Weighted-average fair value of
options granted during the year $ 10.84 $ 1.85
The following table summarizes information about stock options at
October 1, 2000:
Options Outstanding Options Exercisable
---------------------------------------------------------------------------- ----------------------------
Number Weighted-Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 10/1/00 Contractual Life Exercise Price At 10/1/00 Exercise Price
--------------- ----------- ----------------- -------------- ------------ --------------
$ 0.00 - $ 2.99 1,331,616 3.97 Years $ 1.59 1,331,616 $ 1.59
$ 3.00 - $ 5.99 2,640,624 7.49 Years $ 4.56 1,020,992 $ 4.50
$ 6.00 - $ 8.99 78,343 7.33 Years $ 7.15 66,743 $ 6.93
$ 9.00 - $11.99 225,138 7.04 Years $ 10.57 211,094 $ 10.53
$12.00 - $14.99 156,148 8.50 Years $ 13.00 45,648 $ 12.54
$15.00 - $17.99 1,212,500 9.52 Years $ 17.18 - $ -
$18.00 - $20.99 2,750 9.65 Years $ 19.45 - $ -
$21.00 - $23.99 285,000 2.65 Years $ 23.03 - $ -
$29.25 4,500 9.47 Years $ 29.25 - $ -
--------- ---------
5,936,619 6.89 Years $ 7.87 2,676,093 $ 3.73
========= =========
Employee Stock Ownership Plan
The Company established the Uniroyal Technology Corporation Employee
Stock Ownership Plan (the "ESOP") in 1992. The ESOP was a stock bonus
plan intended to encourage eligible employees to save for their
retirement and to increase their proprietary interest in the Company by
accumulating the Company's common stock. Employees eligible for the
initial distribution generally were all employees employed by the
Company on or after January 1, 1993, excluding executive officers of
the Company.
The Company made an initial contribution to the ESOP of 850,000 shares
of common stock. Future contributions by the Company were
discretionary. The initial contribution was allocated to eligible
employees of the Company ratably based upon the respective compensation
levels of the eligible employees. Shares allocated to each participant
account under the ESOP became vested upon the participant's completion
of three years of cumulative service with the Company. The Company did
not make any contributions to the ESOP nor did they have any ESOP
expense during Fiscal 2000 and Fiscal 1998. During Fiscal 1999, the
Company contributed approximately $40,000 to the ESOP. During Fiscal
1999, the Company merged the ESOP into the three existing employee
savings plans effective October 1, 1998. No further contributions are
to be made to the Plan, no further benefits will accrue to any
participants in the Plan and the accounts of all participants in the
Plan as of February 6, 1998 are vested.
15. EMPLOYEE COMPENSATION
Post-retirement Healthcare and Life Insurance Benefits
Certain retired employees are currently provided with specified
healthcare and life insurance benefits. Generally, the plan provides
for reimbursement of approved medical and prescription drug costs not
fully covered by Medicare. The plan also provides for certain
deductibles and co-payments. The life insurance benefits provide for
amounts based upon the retirees' compensation at the time of their
retirement. Eligibility requirements for such benefits vary by
division, but generally provide that benefits are available to
employees who retire after a certain age with specified years of
service or a combined total of age and years of service. The Company
has the right to modify or terminate certain of these benefits. The
Company's policy is to pay the actual expenses incurred by the
retirees; the Company does not intend to fund any amounts in excess of
those obligations. The Company is also obligated to provide benefits to
certain salaried retirees of Uniroyal Plastics Company, Inc. ("UPC"),
which is currently in liquidation proceedings under Chapter 7 of the
U.S. Bankruptcy Code and is an affiliate of the Predecessor Companies
(Note 16), and Uniroyal, Inc. ("Uniroyal") (not affiliated with the
Company) who are class members under a federal district court order.
The Company and Uniroyal, through Uniroyal Holdings, Inc., agreed to
share on a 35%-65% basis, respectively, the costs of providing medical,
prescription drug and life insurance benefits to these retirees. The
Company is further obligated to make payments to a Voluntary Employee
Benefits Association ("VEBA") established to provide benefits to
certain retirees of the Predecessor Companies and UPC. The Company's
post-retirement benefit plans are not funded.
The Company adopted SFAS No. 106, Employer's Accounting for
Post-retirement Benefits Other than Pensions, as of September 27, 1992,
which requires that the cost of the foregoing benefits be recognized in
the Company's consolidated financial statements over an employee's
service period with the Company. The Company determined that the
accumulated post-retirement benefit obligation ("Transition
Obligation") of these plans upon adoption of SFAS No. 106 was
$28,085,000. The Company elected to defer the recognition of the
Transition Obligation and amortize it over the greater of the average
remaining service period or life expectancy period of the participants,
which were both expected to be approximately 16 years. In connection
with the Spartech Sale, the Company recognized approximately $6,341,000
of the transition obligation as a reduction of the gain on sale.
The components of net periodic benefit costs are as follows (in
thousands):
October 1, September 26, September 27,
2000 1999 1998
----------- ------------- -------------
Service cost $ 132 $ 61 $ 52
Interest cost 2,184 1,864 2,212
Amortization of prior service credit (14) (14) (14)
Amortization of transition obligation 683 1,114 1,114
Recognized actuarial loss 310 151 289
--------- --------- ---------
Net periodic benefit cost $ 3,295 $ 3,176 $ 3,653
========= ========= =========
A reconciliation of the beginning and ending balances of benefit
obligations and the funded status of the plans are as follows (in
thousands):
October 1, September 26,
2000 1999
----------- -------------
Change in benefit obligations:
Benefit obligation at beginning of year $ 28,651 $ 34,163
Service cost before expenses 132 61
Interest cost 2,184 1,864
Benefit payments (2,827) (2,649)
Actuarial (gain)/loss 3,529 (4,788)
----------- -----------
Benefit obligation at end of year $ 31,669 $ 28,651
=========== ===========
Reconciliation of funded status:
Benefit obligation at end of year $ 31,669 $ 28,651
Unrecognized actuarial loss (5,980) (2,762)
Unrecognized prior service credit 232 247
Unrecognized transition obligation (2,999) (10,022)
----------- -----------
Net amount recognized at year-end $ 22,922 $ 16,114
=========== ===========
The weighted average discount rate assumptions were 7.5% at October 1,
2000, 6.75% at September 26, 1999 and 6.25% at September 27, 1998.
The assumed healthcare cost trend rate used in measuring the healthcare
benefits for Fiscal 2000 was a 8.0% average annual rate of increase in
the per capita cost healthcare benefits. This rate is assumed to change
over the years as follows: 7.5% for the fiscal years beginning 2001,
7.0% for the fiscal years beginning 2006, 6.5% for the fiscal years
beginning 2011, 6.0% for the fiscal years beginning 2016, and 5.5% for
the fiscal years beginning 2020 and later.
Assumed healthcare cost trend rates have a significant effect on the
amounts reported for the healthcare plan. A one-percentage-point change
in assumed cost trend would have the following effects for Fiscal 2000
(in thousands):
1% Point Increase 1% Point Decrease
----------------- -----------------
Effect on total of service and interest cost components for 2000 $ 275 $ (234)
Effect on year-end 2000 post-retirement benefit obligation 3,389 (2,850)
Post-retirement Benefit Plan
Effective October 1, 1998, the Company established an unfunded
post-retirement defined benefit plan for officers and certain key
employees of the Company.
The components of net periodic benefit costs are as follows (in
thousands):
October 1, September 26,
2000 1999
----------- -------------
Service cost $ 487 $ 525
Interest cost 35 -
---------- ----------
Net periodic benefit cost $ 522 $ 525
========== ==========
The following table provides a reconciliation of the changes in the
plan's benefit obligations and a reconciliation of the funded status
for Fiscal 2000 and Fiscal 1999 (in thousands):
October 1, September 26,
2000 1999
----------- -------------
Accrued benefit obligation at beginning of year $ 525 $ -
Service cost 487 525
Interest cost 35 -
Benefits paid or transferred (85) -
---------- ----------
Accrued benefit obligation at end of year $ 962 $ 525
========== ==========
Projected benefit obligation $ 903 $ 484
Unrecognized loss 59 41
---------- ----------
Accrued benefit obligation at end of year $ 962 $ 525
========== ==========
The discount rate used as of October 1, 2000 and September 26, 1999 was
8.0% and 7.75%, respectively.
In connection with the post-retirement defined benefit plan, the
Company purchased life insurance contracts on the lives of officers and
certain key employees of the Company during Fiscal 1999. Life insurance
premiums of approximately $482,000 and $383,000 were paid by the
Company in Fiscal 2000 and Fiscal 1999, respectively, with respect to
these policies. As of October 1, 2000 and September 26, 1999,
approximately $660,000 and $303,000, respectively, have been
capitalized to reflect the cash surrender value of the contracts.
During Fiscal 2000, the post-retirement defined benefit plan was
amended for the officers of the Company. The amendment provided for
extended plan benefits. The extended benefits were immediately vested
and fully funded through life insurance products. The Company funded
and recognized an expense of approximately $2,300,000 in Fiscal 2000 in
connection with the plan amendment. This amount is included in selling
and administrative costs in Fiscal 2000.
Other Benefit Plans
The Company provides additional retirement benefits to the union wage
employees of the UEP and UAS divisions through two defined contribution
savings plans. The plans provide for employee contributions and
employer matching contributions to employee savings. Employer
contributions are at rates per hour ranging generally from $.05 to $.66
based on years of service. The expenses pertaining to these plans
amounted to approximately $92,000, $98,000 and $280,000 for the fiscal
years ended in 2000, 1999 and 1998, respectively.
In addition, the Company provides a savings plan under Section 401(k)
of the Internal Revenue Code. The savings plan covers all eligible
salaried and non-union wage employees of the Company. The savings plan
allows all eligible employees to defer up to 15% of their income on a
pre-tax basis through contributions to the savings plan. For every
dollar an employee contributes, the Company may contribute an amount
equal to 25% of each participant's before-tax obligation up to 6% of
the participant's compensation. Such employer contribution may be made
in cash or in Company common stock. The expenses pertaining to this
savings plan for continuing operations were approximately $137,000,
$85,000 and $88,000 for the fiscal years ended 2000, 1999 and 1998.
During Fiscal 2000, Fiscal 1999 and Fiscal 1998, the Company
contributed 17,206, 39,344 and 60,520 shares of its common stock with a
market value of approximately $219,000, $199,000 and $191,000,
respectively, to the savings plan. These contributions included
contributions to employees of discontinued operations.
On August 4, 2000, the Board of Directors of the Company approved a
special contribution of Company common stock to the Company's 401(k)
savings plan for the plan years ended December 31, 2000 and December
31, 1999. The contribution will be made to eligible plan participants
employed by the Company and certain of the Company's subsidiaries. The
amount of the contribution will approximate $2,157,000 and will be made
through an undetermined number of shares of Company common stock. As of
October 1, 2000, approximately $2,157,000 has been accrued and charged
to selling and administrative expenses.
16. COMMITMENTS AND CONTINGENCIES
Bankruptcy Proceedings
On September 27, 1992 the Company acquired the businesses of certain
direct and indirect subsidiaries of The Jesup Group, Inc. ("Jesup") for
$54,400,000 of the Company's common and preferred stocks. These
subsidiaries (collectively, the "Predecessor Companies") are the
current operating divisions of the Company. The Predecessor Companies
previously filed petitions with the United States Bankruptcy Court for
the Northern District of Indiana, South Bend Division (the "Bankruptcy
Court") seeking protection from their creditors under Chapter 11 of the
United States Bankruptcy Code. On August 20, 1992 the Bankruptcy Court
approved the Third Amended Plan of Reorganization under Chapter 11 of
the Bankruptcy Code for Polycast Technology Corporation and its
Affiliated Debtors (the "Plan"). The Plan was substantially consummated
at the close of business on September 27, 1992 (the "Effective Date").
As a result of the bankruptcy and the consummation of the Plan at
September 27, 1992, the Company recorded certain adjustments to present
its consolidated financial statements at September 27, 1992 in
conformity with Statement of Position 90-7 "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), of
the American Institute of Certified Public Accountants. Under the
provisions of SOP 90-7, the Company was required to adopt fresh start
reporting as of September 27, 1992 because (i) the reorganization value
of the Company (approximate fair value on the Effective Date) was less
than the total of all post-petition liabilities and pre-petition
allowed claims and (ii) holders of the voting shares of the Predecessor
Companies before the Effective Date received less than 50 percent (50%)
of the voting shares of the Company.
As of September 26, 1999, all 20,000,000 shares of the Company's common
stock allocated for the disposition of bankruptcy claims have been
issued for full settlement to the holders of unsecured claims against
the estates of the Predecessor Companies and to the Company's ESOP. The
Bankruptcy Court issued its final decree closing the bankruptcy of the
Predecessor Companies on September 27, 1999.
Townsend Acquisition
By letter dated January 30, 1998, the Denver Regional Office of the FTC
notified the Company that it was conducting a non-public investigation
into the Company's acquisition of the Townsend Plastics Division of
Townsend Industries, Inc. (the "Townsend business") in September 1997.
The purpose of the investigation was to determine whether the
transaction violated Section 7 of the Clayton Act, 15 USC Section 18,
Section 5 of the Federal Trade Commission Act, 15 USC Section 45, or
any other law enforced by the FTC. While no formal termination of the
preceding has been issued, the Company was unofficially informed in
April, 2000 that the investigation was discontinued. The Townsend
business, included in the High Performance Plastics segment, was sold
to Spartech in February, 2000.
Litigation
The Company is also engaged in litigation arising from the ordinary
course of business. Management believes the ultimate outcome of such
litigation will not have a material adverse effect upon the Company's
results of operations, cash flows or financial position.
Environmental Factors
The Company is subject to a wide range of federal, state and local laws
and regulations designed to protect the environment and worker health
and safety. The Company's management emphasizes compliance with these
laws and regulations. The Company has instituted programs to provide
guidance and training and to audit compliance with environmental laws
and regulations at Company owned or leased facilities. The Company's
policy is to accrue environmental and clean-up related costs of a
non-capital nature when it is probable both that a liability has been
incurred and that the amount can be reasonably estimated.
The Company may become subject to claims relating to certain
environmental matters. The operations of the Predecessor Companies and
certain of their affiliates produced waste materials that, prior to
1980, were disposed of at some 36 known unregulated sites throughout
the United States. After 1980, waste disposal was limited to sites
permitted under federal and state environmental laws and regulations.
If any of the disposal sites (unregulated or regulated) are found to be
releasing hazardous substances into the environment, under current
federal and state environmental laws, the appropriate company might be
subject to liability for clean-up and containment costs.
Prior to the Effective Date of the Predecessor Companies' Plan, several
sites were identified where there were potential liabilities for the
cost of environmental clean-up. In most instances, this potential
liability resulted from the alleged arrangement for the off-site
disposal of hazardous substances by Uniroyal, Inc.
Pursuant to a settlement agreement with the United States Environmental
Protection Agency ("EPA"), the United States Department of the Interior
and the States of Wisconsin and Indiana (the "EPA Settlement
Agreement"), entered into in connection with the Plan, the Predecessor
Companies compromised and settled (in exchange for common stock of the
Company) substantially all of the pre-petition liabilities of the
Predecessor Companies and the Company relating to disposal activities
under Sections 106 and 107 of the Comprehensive Environmental Response
Compensation and Liability Act ("CERCLA"), Section 3008 of the Resource
Conservation and Recovery Act ("RCRA") and similar state laws for
clean-up of the remaining unsettled 20 designated sites not owned by
any of the Predecessor Companies (the "Known Sites") and for natural
resource damages at 15 of the 20 Known Sites. Pursuant to the EPA
Settlement Agreement, the Predecessor Companies and the Company
received from the United States and the States of Indiana and Wisconsin
a covenant not to sue for response costs and, with the exception of
five Known Sites, natural resource damages at each of the Known Sites.
In addition, pursuant to Section 113(f)(2) of CERCLA, and as provided
under the EPA Settlement Agreement, the Predecessor Companies and the
Company will be protected against contribution claims filed by private
parties for any Known Site for matters covered by the EPA Settlement
Agreement. The EPA Settlement Agreement established a mechanism for the
Company to resolve its liability for any other sites, except for those
owned by the Company (the "Additional Sites"), arising from
pre-petition disposal activity. The Company also agreed to share with
such parties the proceeds of claims relating to the known sites made
against certain insurers of the Predecessor Companies and their
affiliates.
In the event that the United States, or the State of Wisconsin or the
State of Indiana asserts a claim against any of the Predecessor
Companies or the Company for response costs associated with
pre-petition disposal activities at any Additional Site, the
governmental party will be entitled to pursue its claim in the ordinary
course, and the Company and the Predecessor Companies will be entitled
to assert all of their defenses. However, if and when the Company or
any of the Predecessor Companies is held liable, and if the liability
is determined to arise from pre-petition disposal activities, the
Company or such Predecessor Company may pay the claims in discounted
"plan dollars" (i.e., the value of the consideration that the party
asserting such claim would have received if the liability were treated
as a general unsecured claim under the Plan). Such payment may be made
in cash or securities, or a combination thereof, at the Company's or
such Predecessor Company's option.
The Company received a letter dated October 30, 1997, from the EPA,
Region 5, informing the Company that it might be financially
responsible for a pollution incident at the facility formally leased by
the Company at 312 North Hill Street, Mishawaka, Indiana. The EPA
notified the Company that it expected the Company to pay for part or
all of the approximately $1,700,000 of costs associated with the
clean-up of a portion of such plant. The Company and the EPA negotiated
a settlement whereby the EPA was given an allowed unsecured claim of
$1,700,000 under the Plan, and the Company made a payment of $525,000
to the EPA in March of 1999. The liability had been fully accrued for
in a prior fiscal year.
In October 1996, the EPA sent the Company a General Notice and Special
Notice of Liability concerning the Refuse Hideaway landfill Superfund
Site at Middleton, Wisconsin. While a unit of Uniroyal, Inc. is
believed to have sent non-hazardous waste to the site between 1978 and
1984, the Company is not aware that the Uniroyal, Inc. unit sent any
hazardous materials to the site. The Company has entered into an
Administrative Order on Consent with the EPA and a Potentially
Responsible Parties Agreement with certain other potentially
responsible parties. The Company does not presently anticipate any
material liability in connection with the site, and in any event, if
the Company is found to have liability in connection with the site,
such liability will be subject to the terms of the EPA Settlement
Agreement. In August, 2000, the Department of Justice of the State of
Wisconsin approved in principle a resolution of the liabilities of the
Company and other potentially responsible parties that would require
future payment by the Company of less than $10,000. Such settlement is
subject to successful completion of the negotiation of a consent decree
between the State of Wisconsin and the EPA.
Claims arising from real property owned by the Company are not affected
by the EPA Settlement Agreement. In connection with the July 1996
acquisition of a manufacturing facility in South Bend, Indiana, the
Company assumed costs of remediation of soil and ground water
contamination which the Company estimates will cost not more than
$1,000,000 over a five-to-seven year period. The Company had placed
$1,000,000 in an escrow account to be used for such clean-up in
accordance with the terms of the agreement for the purchase of the
facility. As of October 1, 2000, the Company had incurred approximately
$688,000 of related remediation costs.
The Company's acquisition of assets of the Townsend business in
September 1997, included the building in which the business operates in
Pleasant Hill, Iowa. The seller retained the underlying real property,
which was leased to the Company for a term of ten years. The Company
also had an option to acquire such real property until September 30,
2007. The real property is subject to a RCRA Facility
Investigation/Corrective Measures Study with Interim Measures ordered
by the EPA pursuant to RCRA. Two former lessees of the property are
performing corrective measures on the real property to remediate soil
and ground water contamination. The Company does not anticipate that
such corrective measures will interfere with the use of the property.
The Company does not anticipate any liability to the Company in
connection with such contamination or corrective measures. The lease
was transferred to Spartech in connection with the Spartech Sale.
In connection with the Spartech Sale, the Company conducted
environmental assessments on two of the plants of HPPI in compliance
with the laws of the states of Connecticut and New Jersey relating to
transfers of industrial real property. The asset purchase agreement
provided that Spartech could defer taking title to certain parcels of
real property until the Company provides evidence that environmental
contamination had been remediated to the satisfaction of Spartech. The
environmental assessment of the Connecticut property indicated that a
separate parcel purchased by the Company in 1995 was contaminated with
total petroleum hydrocarbons, DDT and other pesticide chemicals. The
Company has removed approximately 60% of the soil on the property at a
cost of approximately $1,600,000. The Company has retained
environmental consultants to review its options with regard to the
remaining soil on the premises. At October 1, 2000, the Company has
estimated the cost to clean up the remaining contamination at the
Connecticut site to approximate $1,000,000. The environmental
assessment of the Hackensack, New Jersey facility is still underway. At
October 1, 2000, the Company has estimated the clean-up cost to
approximate $60,000. At October 1, 2000, the estimates for
environmental clean-up costs are included in the net liabilities of
discontinued operations. Spartech has agreed to lease the parcels for a
nominal amount until after remediation is complete.
Based on information available as of September 26, 1999, the Company
believes that the costs of known environmental matters either have been
adequately provided for or are unlikely to have a material adverse
effect on the Company's operations, cash flows or financial position.
Leases
The Company is a party to non-cancelable lease agreements involving
equipment. The leases extend for varying periods up to 5 years and
generally provide for the payment of taxes, insurance and maintenance
by the lessee. Generally these leases have options to purchase at
varying dates.
The Company's property held under capital leases, included in property,
plant and equipment (Note 5) consists of the following (in thousands):
October 1, September 26,
2000 1999
---------- -------------
Buildings and improvements $ 5,429 $ 5,426
Machinery, equipment and office furnishings 18,202 5,380
Construction in progress - 9,755
---------- ----------
23,631 20,561
Less accumulated amortization (2,117) (311)
---------- ----------
Total $ 21,514 $ 20,250
========== ==========
Amortization of assets recorded under capital leases is included with
depreciation expense.
The Company leases equipment, vehicles and warehouse and office space
under various lease agreements, certain of which are subject to
escalations based upon increases in specified operating expenses or
increases in the Consumer Price Index. The approximate future minimum
rentals under non-cancelable operating leases during subsequent fiscal
years ending in September are as follows (in thousands):
Fiscal Year
2001 $ 1,450
2002 1,525
2003 1,320
2004 1,148
2005 1,148
Subsequent 5,064
--------
Total $ 11,655
========
Rent expense was approximately $1,015,000, $617,000 and $516,000 for
Fiscal 2000, Fiscal 1999 and Fiscal 1998, respectively.
Officers' Compensation
On August 1, 1995, the Company implemented a Deferred Compensation Plan
providing certain key employees the opportunity to participate in an
unfunded deferred compensation program. Under the program, participants
may defer a portion of their base compensation and bonuses earned each
year. Amounts deferred earned interest at 12% per annum until March 10,
2000, at which time the plan was amended to reduce the interest rate to
7.84%. The program is not qualified under Section 401 of the Internal
Revenue Code. At October 1, 2000 and September 26, 1999, participant
deferrals, which are included in other liabilities, were $938,000 and
$726,000, respectively. The expense during the Fiscal 2000, Fiscal 1999
and Fiscal 1998 was $212,000, $208,000 and $184,000, respectively.
Also during the fiscal year ended October 1, 1995, split dollar life
insurance contracts were purchased on the lives of the five executive
officers. Annual insurance premiums of $186,000 are paid by the Company
with respect to these policies. During Fiscal 2000, the Company
deposited approximately $1,190,000 into a Premium Deposit Fund which
will be used to fund the remaining annual insurance premiums under the
split dollar life insurance contracts. As of October 1, 2000 and
September 26, 1999, $2,135,000 and $929,000, respectively, has been
capitalized to reflect the cash surrender value of these contracts due
the Company, net of loan balances.
As of October 1, 2000, the Company had employment contracts with four
officers of the Company, providing for total annual payments of
approximately $1,588,000 plus bonuses through September 1, 2001.
17. SALE OF THE AUTOMOTIVE DIVISION OF THE COATED FABRICS SEGMENT
During the fourth quarter of Fiscal 1996, management of the Company
concluded that, based not only on its decision to sell, but also on
discussions with interested buyers, a sale of the automotive operations
of the Coated Fabrics segment was probable. The automotive operations
were comprised of 100% of the operations at the Port Clinton, Ohio
("Port Clinton") facility and a portion of overall operations at the
Stoughton, Wisconsin facility ("Stoughton"). Further, on December 11,
1996, the Board of Directors approved the closure of the Port Clinton
operation of the Coated Fabrics segment during the fiscal year ending
September 28, 1997 in the event a sale did not occur. Port Clinton had
incurred operating losses of approximately $7,640,000 and $5,540,000
during the fiscal years ended September 29, 1996 and October 1, 1995.
In accordance with SFAS No. 121, the Company recorded a write-down of
long-lived assets related to the automotive operations totaling
approximately $8,900,000 during the fiscal year ended September 29,
1996. The related assets were classified as held for sale and
depreciation ceased on September 29, 1996. The Company recorded an
additional impairment loss of $1,773,000 in Fiscal 2000. The carrying
value of the remaining long-lived assets to be disposed of was
$1,300,000 as of October 1, 2000 and $3,217,000 as of September 26,
1999. The Company expects to dispose of the remaining automotive
assets, the majority of which represent the real property at Port
Clinton, in Fiscal 2001.
On May 15, 1997, the Company agreed to sell certain assets of the
automotive division of the Coated Fabrics segment located at the
Company's Stoughton, Wisconsin, facility ("Stoughton") to Textileather
Corporation, a subsidiary of Canadian General-Tower, Limited ("CGT")
for $6,657,500. The Company received $4,657,500 in cash and
Textileather retained $2,000,000 which was to be paid pursuant to the
terms of a supply agreement and to bear interest at the rate of 9% per
annum. Under the terms of the supply agreement, the Company agreed to
continue to manufacture and supply Stoughton automotive products to its
customers until Textileather Corporation could transfer production of
the Stoughton automotive products to its own facility. The $2,000,000
plus accrued interest was payable in stages and contingent upon the
successful transfer of certain automotive programs to Textileather
Corporation. The first installment was due September 30, 1997. The
Company requested payment and was denied payment by CGT. On October 10,
1997, the Company filed suit against CGT and Textileather Corporation
in the Dane County, Wisconsin Circuit Court. The Company sought damages
for non-payment of the holdback and declaratory and injunctive relief.
On October 30, 1997, the defendants filed their answer, basically
denying the claims. Textileather Corporation later commenced an
arbitration in Madison, Wisconsin in connection with claims by
Textileather Corporation under the asset purchase agreement. The two
cases were settled on July 17, 1998. As part of the settlement the
Company retained in perpetuity certain automotive programs it had
previously sold, and two programs were retained until February 28,
1999. In addition, Textileather made a cash payment to the Company of
approximately $379,000 which was recorded by the Company as a gain, and
also transferred ownership back to the Company of an asset located at
the Company's Port Clinton, Ohio facility.
On October 17, 1997 the Company further agreed to sell certain assets
at Port Clinton to CGT for $5,325,000 plus the value of purchased
inventories and plus or minus adjustments contingent upon the transfer
of certain automotive programs to CGT as defined in the agreement. On
July 10, 1998, the Company received $4,930,000 from CGT under this
agreement relative to assets related to the Company's door panel
program. Under the terms of a supply agreement, the Company agreed to
continue to manufacture and supply customers of the door panel programs
until CGT could transfer the production of the door panels to its own
facility. The Company stopped producing door panels at its Port
Clinton, Ohio facility in November, 1998. The Company received an
additional $800,000 when CGT secured purchase orders for the twelve
months following the door panel closing from certain customers as
identified in the agreement. The Company also received an additional
$900,000 on July 19, 1999 for certain customer approvals and resulting
transfer to CGT of purchased assets that relate to the Company's
instrument panel programs. During Fiscal 1999 and Fiscal 1998, the
Company recognized a gain of $667,000 and $133,000, respectively, in
connection with this transaction.
Management believes that the Company will not have any further
significant gain or loss upon the disposal of the remaining Port
Clinton assets.
18. JOINT VENTURE
As of September 29, 1997, the Company entered into a technology
agreement with Emcore to acquire certain technology for the manufacture
of epitaxial wafers used in high brightness LEDs for lamps and display
devices for $5,000,000. See Note 9 regarding the Fiscal 2000 write-down
of the technology license. On September 29, 1997, Thomas J. Russell,
the Chairman of the Board of Directors of Emcore, was a director and
major stockholder of the Company and Howard R. Curd, the Chairman of
the Board of Directors and Chief Executive Officer of the Company, was
a director and stockholder of Emcore. Subsequent to the transaction,
Thomas J. Russell resigned from the Board of Directors of the Company
and Howard R. Curd resigned from the Board of Directors of Emcore.
Uniroyal Optoelectronics, Inc., a wholly-owned subsidiary of the
Company, entered into a joint venture (Uniroyal Optoelectronics, LLC)
with Emcore which Uniroyal Optoelectronics, Inc. manages and owns a 51%
interest. Emcore is the 49% owner. In July 1998, both owners
capitalized the joint venture through cash contributions of $510,000 by
the Company and $490,000 by Emcore. During Fiscal 2000 and Fiscal 1999,
Emcore made additional capital contributions to the joint venture of
$11,628,000 and $5,500,000, respectively. During Fiscal 2000, the
Company made additional capital contributions to the joint venture of
$17,827,000. The Company did not make any capital contributions to the
joint venture in Fiscal 1999.
Included in selling and general administrative expenses of the Company
for Fiscal 2000, Fiscal 1999 and Fiscal 1998 are $12,667,000,
$4,345,000 and $302,000, respectively, of joint venture start-up costs.
In July 1998, the joint venture entered into a supply agreement with
Emcore whereby Emcore agreed to supply epitaxial wafers, dies and
package-ready devices to the joint venture until the joint venture was
ready to produce its own products. During Fiscal 2000 and Fiscal 1999,
Uniroyal Optoelectronics, LLC sales of approximately $1,643,000 and
$479,000, respectively, were attributable to product supplied by
Emcore.
In July 1998, the joint venture entered into a lease agreement for a
facility in Tampa, Florida and completed construction of leasehold
improvements in Fiscal 1999. Significant start-up costs have been
incurred during Fiscal 2000 for training and research and development.
It is anticipated that the joint venture will reach commercial
production levels in the first half of Fiscal 2001.
19. INCOME (LOSS) PER COMMON SHARE
For the year ended October 1, 2000, the weighted average number of
common shares outstanding for the calculation of basic and diluted
earnings per share was 24,937,364. Inclusion of stock options to
purchase 5,936,619 shares of common stock at various prices and
warrants to purchase 735,770 shares of common stock at $2.1875 per
share in the calculation of diluted earnings per share would have been
antidilutive.
The reconciliation of the numerators and denominators of the basic and
diluted earnings per share computation for the fiscal years ended
September 26, 1999 and September 27, 1998 are as follows:
For the Fiscal Year Ended September 26, 1999
----------------------------------------------------------------------
Income (Numerator) Shares (Denominator) Per Share Amount
-------------------- -------------------- ----------------
Income from continuing opera-
tions before discontinued
operations and extraordinary
item $ 1,251,000
Basic EPS
---------
Income available to common
stockholders 1,251,000 24,315,992 $ 0. 05
========
Effect of Dilutive Securities
-----------------------------
Stock options 1,656,920
Warrants 599,756
----------
Diluted EPS
-----------
Income available to common
stockholders $ 1,251,000 26,572,668 $ 0.05
============== ========== ========
For the Fiscal Year Ended September 27, 1998
--------------------------------------------------------------------
Income (Numerator) Shares (Denominator) Per Share Amount
------------------ -------------------- ----------------
Income from continuing opera-
tions before discontinued
operations and extraordinary
item $ 2,301,000
Basic EPS
---------
Income available to common
stockholders 2,301,000 26,463,084 $ 0. 09
========
Effect of Dilutive Securities
-----------------------------
Stock options 2,140,244
Warrants 658,808
----------
Diluted EPS
-----------
Income available to common
stockholders $ 2,301,000 29,262,136 $ 0.08
============= ========== ========
Additional stock options to purchase 1,157,696 and 1,155,696 shares of
common stock at various prices were outstanding at September 26, 1999
and September 27, 1998, respectively. These shares were not included in
the computation of diluted earnings per share because the exercise
price was greater than the average market price of the common shares.
20. RELATED PARTY TRANSACTIONS
The Company has an agreement with an investment banking firm that
employs relatives of one of the Company's executive officers. The
investment banking firm has provided financial advisory services to the
Company for fees of approximately $2,452,000, $157,000 and $732,000
during Fiscal 2000, Fiscal 1999 and Fiscal 1998, respectively. Of the
$2,452,000 incurred in Fiscal 2000, approximately $1,959,000 was paid
in connection with the Spartech Sale and $428,000 was paid in
connection with the acquisition of Sterling. Of the $732,000 incurred
during Fiscal 1998, $650,000 was incurred in connection with the Fleet
Financing.
During the fiscal years ended October 1, 2000, September 26, 1999 and
September 27, 1998, the Company incurred legal fees of approximately
$448,000, $299,000 and $326,000, respectively, with a law firm of which
one of the Company's directors is a senior partner. Approximately
$164,000 of legal fees incurred in Fiscal 2000 were paid in connection
with the acquisition of Sterling and the related common stock
registration. Approximately $231,000 of the legal fees incurred in
Fiscal 1998, were incurred in connection with the Fleet Financing.
During Fiscal 2000, the Company incurred legal fees of approximately
$117,000 to another law firm of which another of the Company's
directors is a senior partner. No legal fees were paid to this firm
during Fiscal 1999 or Fiscal 1998.
During Fiscal 2000, the Company paid approximately $17,000 to a
relative of one of the Company's executive officers for consulting
services.
21. SEGMENT INFORMATION
The Company adopted SFAS No. 131, Disclosures About Segments of
Enterprise and Related Information, which establishes standards for
reporting information about a Company's operating segments, in the
fourth quarter of Fiscal 1999. Operating segments are defined as
components of an enterprise for which separate financial information is
available that is evaluated on a regular basis by the chief operating
decision maker, or decision making group, in deciding how to allocate
resources to an individual segment and in assessing performance of the
segment.
The Company's operations are classified into three reportable segments:
Coated Fabrics, Specialty Adhesives and Compound Semiconductor and
Optoelectronics. The Coated Fabrics segment manufactures vinyl coated
fabric products. The Specialty Adhesives segment manufactures
industrial adhesives and sealants. The Compound Semiconductor and
Optoelectronics segment manufactures wafers, epitaxial wafers, dies and
package-ready dies used in high brightness light-emitting diodes
(LEDs), power amplification and radio frequency applications.
The Company's reportable segments are strategic business units that
offer different products and are managed separately based on
fundamental differences in their operations.
The Coated Fabrics segment comprises Uniroyal Engineered Products,
Inc.'s operating division, Uniroyal Engineered Products. The Specialty
Adhesives segment comprises Uniroyal Engineered Products, Inc.'s
operating division, Uniroyal Adhesives and Sealants. The Compound
Semiconductor and Optoelectronics segment includes Uniroyal
Optoelectronics, Inc. and its majority-owned subsidiary, Uniroyal
Optoelectronics, LLC, Sterling Semiconductor, Inc. and NorLux Corp. All
other subsidiaries are considered part of the corporate office.
The Company's assets and operations are located in the United States.
The principal markets for the Company's products are in the United
States. Export sales to foreign countries, based upon where the
products are shipped, were approximately $3,966,000, $2,544,000 and
$5,980,000 in Fiscal 2000, Fiscal 1999 and Fiscal 1998, respectively.
Sales to one customer of the Coated Fabrics segment represented
approximately 14.5% of consolidated net sales in Fiscal 1998. Sales to
another customer of the Specialty Adhesives segment represented
approximately 30%, 27% and 17.5% of consolidated net sales in Fiscal
2000, Fiscal 1999 and Fiscal 1998, respectively.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. Management evaluates
a segment's performance based upon profit or loss from operations
before interest and income taxes. Intersegment sales are not
significant.
Segment data for Fiscal 2000, Fiscal 1999 and Fiscal 1998 is as follows
(in thousands):
October 1, September 26, September 27,
2000 1999 1998
---------- ------------- -------------
Net Sales:
Coated Fabrics $ 33,651 $ 42,341 $ 67,906
Specialty Adhesives 31,579 28,388 24,130
Compound Semiconductor and Optoelectronics 3,023 485 -
---------- ---------- ----------
Total $ 68,253 $ 71,214 $ 92,036
========== ========== ==========
Operating (loss) income:
Coated Fabrics $ (276) $ 4,202 $ 8,868
Specialty Adhesives 2,662 2,686 1,911
Compound Semiconductor and Optoelectronics (25,841) (5,080) (398)
Corporate (22,379) (4,490) (3,673)
---------- ----------- ----------
Total $ (45,834) $ (2,682) $ 6,708
========== ========== ==========
Identifiable assets:
Coated Fabrics $ 20,915 $ 23,547 $ 35,959
Specialty Adhesives 16,346 16,923 16,826
Compound Semiconductor and Optoelectronics 74,823 22,474 2,677
Corporate 77,948 44,963 35,456
---------- ---------- ----------
Total $ 190,032 $ 107,907 $ 90,918
========== ========== ==========
Depreciation and amortization:
Coated Fabrics $ 1,719 $ 1,702 $ 1,704
Specialty Adhesives 944 873 842
Compound Semiconductor and Optoelectronics 4,906 210 1
Corporate 576 720 1,071
---------- ---------- ----------
Total $ 8,145 $ 3,505 $ 3,618
========== ========== ==========
Capital Expenditures:
Coated Fabrics $ 587 $ 535 $ 448
Specialty Adhesives 1,076 578 911
Compound Semiconductor and Optoelectronics 16,613 21,353 292
Corporate 147 787 238
Discontinued operations 10,624 7,564 5,399
---------- ---------- ----------
Total $ 29,047 $ 30,817 $ 7,288
========== ========== ==========
Included in each segment's operating income in Fiscal 2000 and Fiscal
1999 is an allocation of corporate overhead based upon 3.5% of segment
sales with the exception of the Compound Semiconductor and
Optoelectronics segment for which the corporate overhead allocation was
$1,207,000 in Fiscal 2000 and $876,000 in Fiscal 1999.
During Fiscal 1998, the Company changed its methodology for the
allocation of corporate overhead from an allocation of 100% of certain
corporate costs to an allocation of costs based upon 3.0 - 3.5% of
segment sales. Prior fiscal year allocations were not restated. Had
prior year allocations been restated for consistency with current year
allocations, it would have resulted in additional corporate overhead
allocation to the Coated Fabrics and Specialty Adhesives segments' in
Fiscal 1998 of $177,000 and $48,000, respectively.
In Fiscal 2000, the gain on the sale of the preferred stock investment,
the provision for uncollectible note receivable, the write-down of the
technology license and $1,116,000 of the loss on assets to be disposed
of (related to the real property) are included in Corporate. The
acquired in-process-research and development is included in the
Compound Semiconductor and Optoelectronics segment and $657,000 of the
loss on assets to be disposed of (relating to machinery and equipment)
is included in the Coated Fabrics segment.
In Fiscal 1999, the gain on the sale of preferred stock is included in
Corporate, and the gain on the sale of division is included in the
Coated Fabrics segment.
In Fiscal 1998, the loss on assets to be disposed of is included in
Corporate, and the gain on the sale of division is included in the
Coated Fabrics segment.
22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (in thousands):
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Fiscal 2000
-----------
Net sales $ 15,195 $ 16,103 $ 18,276 $ 18,679
Gross profit 3,781 3,075 4,399 3,652
Net income (loss) 2,420 60,225 (1) (1,827) (14,131) (2)
Basic earnings per share $ 0.10 $ 2.44 $ (0.07) $ (0.54)
Diluted earnings per share $ 0.09 $ 2.08 $ (0.07) $ (0.54)
(1)Includes the following unusual adjustments:
o gain of approximately $57,118,000 (net of tax) related to the sale
of the High Performance Plastics segment;
o incentive payments and benefit costs to and for officers and
directors related to the achievement of certain strategic
initiatives of approximately $3,324,000 (net of tax);
o provision for an uncollectible note receivable of approximately
$3,286,000 (net of tax);
o loss on assets to be disposed of of approximately $1,356,000 (net
of tax); and
o tax benefit of approximately $13,702,000 related to the utilization
of a capital loss carryforward.
(2)Includes the following unusual adjustments:
o reduction in the selling price of the High Performance Plastics
segment of approximately $1,297,000 (net of tax);
o write-off of purchased in-process research and development of
$6,590,000 for which there is no tax effect;
o write-off of approximately $2,440,000 (net of tax) related to the
technology license; and
o accrual of approximately $1,316,000 (net of tax) related to a
special contribution to the Company's 401(k) plan.
Fiscal 1999 First Quarter Second Quarter Third Quarter Fourth Quarter
----------- ------------- -------------- ------------- --------------
Net sales $ 18,126 $ 16,965 $ 18,522 $ 17,601
Gross profit 3,281 3,812 4,931 5,510
Net Income 19 1,059 1,931 2,511
Basic earnings per share $ - $ 0.04 $ 0.08 $ 0.10
Diluted earnings per share $ - $ 0.04 $ 0.07 $ 0.10
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Uniroyal Technology Corporation
We have audited the consolidated balance sheets of Uniroyal Technology
Corporation and subsidiaries (the "Company") as of October 1, 2000 and September
26, 1999, and the related consolidated statements of operations, comprehensive
income, changes in stockholders' equity and cash flows for the years ended
October 1, 2000, September 26, 1999 and September 27, 1998, and have issued our
report thereon dated December 5, 2000. Our audits also included the accompanying
consolidated financial statement schedule shown in this Form 10-K. This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Tampa, Florida
December 5, 2000
SCHEDULE II
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
CHARGED ADDITIONS
BALANCE AT (CREDITED)TO CHARGED
BEGINNING COSTS AND TO OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCTS. DEDUCTION END OF PERIOD
----------- ---------- ----------- --------- --------- -------------
(a) (b)
Year ended October 1, 2000
Estimated reserve for doubtful
accounts $ 88 $ 101 $ 5 $ (75) $ 119
======== ======== ======= ========= =========
Year ended September 26, 1999
Estimated reserve for doubtful
accounts $ 87 $ - $ 2 $ (1) $ 88
======== ======== ======= ========= =========
Year ended September 27, 1998
Estimated reserve for doubtful
accounts $ 100 $ - $ - $ (13) $ 87
======== ======== ======= ========= =========
(a) Represents recovery of amounts previously written-off and reserve
established for receivables of an acquired business.
(b) Includes write-off of uncollectible accounts.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: December 12, 2000
By:/S/ Howard R. Curd
--------------------------------------
Howard R. Curd, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Robert L. Soran /s/ Richard D. Kimbel
- ------------------------------- ------------------------------
Robert L. Soran, Director, President Richard D. Kimbel, Director
and Chief Operating Officer Date: December 12, 2000
Date: December 12, 2000
/s/ George J. Zulanas, Jr. /s/ Curtis L. Mack
- -------------------------------- ------------------------------
George J. Zulanas, Jr., Executive Curtis L. Mack, Director
Vice President, Treasurer and Chief Date: December 12, 2000
Financial Officer
Date: December 12, 2000
/s/ Howard R. Curd /s/ Roland H. Meyer
- -------------------------------- ------------------------------
Howard R. Curd, Director, Chairman of Roland H. Meyer, Director
the Board and Chief Executive Officer Date: December 12, 2000
Date: December 12, 2000
/s/ Peter C. B. Bynoe /s/ John A. Porter
- -------------------------------- ------------------------------
Peter C. B. Bynoe, Director John A. Porter, Director
Date: December 12, 2000 Date: December 12, 2000
/s/ Thomas E. Constance
- --------------------------------
Thomas E. Constance, Director
Date: December 12, 2000
POWER OF ATTORNEY
Each person whose signature to this report appears below hereby appoints Howard
R. Curd, Robert L. Soran and Oliver J. Janney, and each individually, any one of
whom may act without the joinder of the others, as his agent and
attorney-in-fact to sign on his behalf individually and in the capacity stated
below and to file all amendments to this report, which amendments make such
changes and additions to this report as such agent and attorney-in-fact may deem
necessary and appropriate.
/s/ Howard R. Curd /s/ Peter C. B. Bynoe
- ---------------------------------- -------------------------------
Howard R. Curd, Director, Chairman of Peter C.B. Bynoe, Director
the Board and Chief Executive Officer Date: December 12, 2000
Date: December 12, 2000
/s/ Robert L. Soran /s/ Thomas E. Constance
- ---------------------------------- -------------------------------
Robert L. Soran, Director, President Thomas E. Constance, Director
and Chief Operating Officer Date: December 12, 2000
Date: December 12, 2000
/s/ Richard D. Kimbel
-------------------------------
Richard D. Kimbel, Director
Date: December 12, 2000
/s/ Curtis L. Mack
-------------------------------
Curtis L. Mack, Director
Date: December 12, 2000
/s/ Roland H. Meyer
-------------------------------
Roland H. Meyer, Director
Date: December 12, 2000
/s/ John A. Porter
-------------------------------
John A. Porter, Director
Date: December 12, 2000