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 September 30, 2001
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, 2001, 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 $71,199,000 based on the
closing price for the stock on November 30, 2001.
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, 2001, 27,867,742 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
2002.
Item 1. Business
General
Uniroyal Technology Corporation ("Uniroyal") is engaged in
the development, manufacture and sale of a broad range of materials
employing compound semiconductor technologies, plastic vinyl coated
fabrics and specialty chemicals used in the production of consumer,
commercial and industrial products.
We are organized into two primary business segments: Compound
Semiconductor and Optoelectronics and Coated Fabrics.
o The Compound Semiconductor and Optoelectronics segment
manufactures wafers, epitaxial wafers and package-ready dies used
in high brightness light emitting diodes ("HB-LEDs"), switches
and transformers. 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").
o The Coated Fabrics segment manufactures a wide selection of
plastic vinyl coated fabrics for use in furniture and seating
applications. The Coated Fabrics business is a leading supplier
in its markets because of its ability to provide specialized
materials with performance characteristics customized to the end
user and its ability to provide technical and customer support in
connection with the use of its 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 June 26, 2001, we entered into a letter of intent to sell
certain net assets of our Uniroyal Adhesives and Sealants division
("UAS"), which comprised our Specialty Adhesives segment. Then on
August 24, 2001, we entered into an asset purchase agreement for the
sale of UAS. The transaction closed on November 9, 2001 for a purchase
price of $21.6 million. Proceeds from the sale consisted of $14.6
million in cash, $3.5 million in subordinated promissory notes of the
purchaser, $1.5 million in preferred stock of the purchaser's parent
and $2.0 million of payments contingent on the future earnings
achievements of the UAS business. We expect to record a gain of
approximately $2.5 million on the sale of UAS in the first quarter of
fiscal 2002 after the settlement of certain purchase price adjustments
and the calculation of transaction costs. The consolidated financial
statements at Part II, Item 8, Consolidated Financial Statements and
Supplementary Data, have been restated to reflect the discontinued
operations of the Specialty Adhesives segment. See Note 6 to the
Consolidated Financial Statements for further details.
On August 27, 2001, we reached a settlement with Spartech
Corporation ("Spartech") regarding the final purchase price adjustment
related to the fiscal 2000 sale of certain net assets of the High
Performance Plastics segment (the "Spartech Sale"). The settlement
resulted in the loss of the $5.0 million holdback as well as an
additional $1.0 million payment to Spartech. The $1.0 million payment
is in the form of a promissory note at prime rate. The note is
repayable in four increments of $250,000 plus accrued interest thereon.
The payments are due November 1, 2001, February 1, 2002, May 1, 2002
and August 1, 2002. In connection with the settlement, we recorded a
loss of approximately $522,000 (net of taxes of approximately $306,000)
in the fourth quarter of fiscal 2001. In fiscal 2000, we had estimated
and provided for an ultimate reduction in the purchase price of
approximately $5.1 million.
On August 2, 2001, we purchased Emcore Corporation's
("Emcore") 35.7% minority interest in Uniroyal Optoelectronics, LLC.
The purchase was consummated through the issuance of 1,965,924 shares
of our common stock valued at approximately $15.1 million, net of
approximately $67,000 in stock registration costs. On August 2, 2001,
we received a $5.0 million loan, at prime rate, from Emcore. The
maturity date for this loan was the earlier of the completion of the
sale of UAS and August 2, 2003. Additional interest of 433 shares of
our common stock per day was due Emcore beginning September 28, 2001
until the note was repaid. The loan was evidenced by a convertible
note, the principal and accrued interest of which were convertible into
our common stock after September 20, 2001. The conversion price for
this note was based upon the trading price of our common stock, but
would be no more than $8.39 or less than $6.87 per share subject to
customary antidilution adjustments. The loan was repaid with cash on
November 9, 2001 concurrent with the closing of the sale of UAS. See
Note 8 to the Consolidated Financial Statements.
Coated Fabrics Segment
The Coated Fabrics segment accounted for approximately $27.8
million (85%) of our net sales from continuing operations for the
fiscal year ended September 30, 2001. 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. 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 September 30,
2001 and is expected to be sold in fiscal 2002.
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, quality
and technology 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.
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), NAUGASOFT(TM), NAUGAFORM(R) and DURAN(R). We market our
coated fabrics with a protective top finish 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 contract 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 34%
of the segment's sales in fiscal 2001 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.
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) and DURAN(R). Our trademarks are registered in the United
States and in a number of foreign jurisdictions with terms of
registration expiring generally between 2001 and 2016. No trademark
registration of material importance to us expired during fiscal 2001.
We intend to renew in a timely manner all those trademarks that are
required for the conduct of our business. We also hold 6 patents
(either current or pending) in the United States and Canada.
We use the trade name and trademark "Uniroyal" pursuant to a
license from Uniroyal Goodrich Licensing Services, Inc.
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.
Compound Semiconductor and Optoelectronics Segment
The Compound Semiconductor and Optoelectronics segment is
vertically integrated and engaged in the design, development and
manufacture of compound semiconductor materials and electronic devices
made from silicon carbide (SiC), gallium nitride (GaN) and aluminum
indium gallium phosphide (AllnGaP). The segment's products include
substrate wafers, epitaxial thin film coated wafers and package-ready
devices used in the rapidly expanding solid-state lighting market and
for high frequency wireless communications, high voltage/power and high
temperature applications.
In early 1998, UTC management began repositioning the Company
away from mature, industrial-based activities and into the high-growth
compound semiconductor technology industry. The Company undertook
several transactions to secure its position within the semiconductor
marketplace:
o In February 1998, Uniroyal formed a joint venture with Emcore
(Uniroyal Optoelectronics, LLC; "UOE") to manufacture, sell and
distribute HB-LED wafers and package-ready dies. Uniroyal owned,
through a wholly-owned subsidiary, the majority interest in the
joint venture company. The joint venture was formed to leverage
the relative strengths of Uniroyal and Emcore, expedite the
scaling to commercial production levels and enter the marketplace
rapidly. On August 2, 2001, Uniroyal purchased Emcore's 35.7%
minority interest in the joint venture. See "Item 1. Business -
Recent Developments." UOE emerged from the development stage on
October 1, 2001.
o In May 2000, Uniroyal acquired Sterling Semiconductor, Inc.
("Sterling") for stock and employee stock options valued at
approximately $40.6 million. Sterling is a developer and
manufacturer of silicon carbide (SiC) semiconductor substrates
with silicon carbide epitaxial thin film coatings. Our objective
was to leverage Sterling's strong research and development
capability and SiC expertise in order to capitalize on the
emerging SiC marketplace. See Note 9 to the Consolidated
Financial Statements for further details.
o In May 2000, Uniroyal formed NorLux Corp. ("NorLux") to design
and manufacture custom lighting solutions and applications
utilizing HB-LED technology. NorLux brings our technology one
step closer to the end-user and provides valuable insight into
the needs of the marketplace. NorLux is currently in the
development stage and expects to reach commercial production in
2002.
General
Compound semiconductors have emerged as an enabling technology
to meet the complex requirements of today's highly advanced electronic
devices. Many compound semiconductor materials have unique physical
properties that allow electrons to move at least four times faster
through them than through silicon-based devices. Advantages of compound
semiconductor devices over silicon devices include:
o higher operating speeds;
o lower power consumption;
o higher heat tolerance;
o reduced noise and distortion; and
o light emitting and detecting optoelectronics properties.
Compound semiconductors are composed of two or more elements
and usually consist of a metal, such as gallium, aluminum or indium,
and a non-metal, such as arsenic, phosphorous or nitrogen. The
resulting compounds include gallium arsenide, indium phosphide, gallium
nitride, indium antimonide and indium aluminum phosphide. The
performance characteristics of compound semiconductors are dependent on
the composition of these compounds. Many of the unique properties of
compound semiconductor materials are achieved by layering different
compound semiconductor materials in the same device. This layered
structure creates an optimal configuration to permit the emission or
detection of light and the detection of magnetic fields.
Although compound semiconductors are more expensive to
manufacture than silicon-based devices, electronics manufacturers are
increasingly integrating compound semiconductor devices into their
products in order to achieve higher performance applications targeted
for a wide variety of markets. These include solid-state lighting,
wireless communications and consumer and automotive electronics.
HB-LEDs are solid-state compound semiconductor devices that
emit light when direct current is applied. The advantages of HB-LEDs
over conventional light sources include:
o Efficiency - LEDs efficiently convert electricity to light and
require approximately 90% less energy than conventional light
sources.
o Longevity - LEDs have an expected life span of 50 times longer
than incandescent bulbs. LEDs also operate on low voltage and
qualify for UL low-wattage certification.
o Design Flexibility -LEDs can be arranged in virtually an infinite
number of configurations, making the use of lines, points, fields
and curves possible. LEDs can be easily programmed to create
subtle changes in color and quality of light.
o Range of Colors - LEDs produce high-purity colored light that can
be mixed to create millions of colors.
SiC-based devices offer significant advantages over competing
products made from silicon, gallium, arsenide, sapphire and other
materials for certain electronic applications. SiC is a third
generation compound semiconductor material possessing unique physical
and electrical properties that far exceed those of silicon and GaAs,
the first and second generation materials, respectively. Electronic
devices made from this material can operate more efficiently and at
much higher temperatures than devices made from other common
semiconductor materials. SiC devices operate at much higher voltage
levels and allow power devices to be significantly smaller while
carrying power levels the same as or greater than comparable silicon
and GaAs-based devices. SiC is an excellent thermal conductor compared
to other commercially available semiconductor materials. This feature
enables SiC-based devices to operate at higher power levels and still
dissipate the excess heat generated. SiC has an extremely high melting
point and is one of the hardest known materials in the world. As a
result, SiC can withstand much higher electrical pulses and is much
more radiation-resistant than silicon or GaAs. SiC is also extremely
resistant to chemical breakdown and can operate in harsh environments.
Current product offerings include:
o Gallium nitride (GaN)-based blue, green and ultraviolet LED
products;
o 4H and 6H poly type SiC substrates in diameters of 50.8mm
(2-inch) and a recent introduction of 76.2mm (3-inch) 6H
substrates;
o SiC substrates with epitaxial thin film coatings; and
o custom lighting products.
Future product offerings on a commercial basis include:
o semi-insulating SiC wafers useful in the manufacture of microwave
devices and
o SiC devices.
Competition
The semiconductor industry is intensely competitive and is
characterized by rapid technological change, price erosion and intense
foreign competition. Both SiC bulk crystal growth and SiC epitaxy
technology, however, involve substantial barriers to entry.
In the LED marketplace, our primary competitor is Cree, Inc.,
a leading developer and manufacturer of compound semiconductor
materials and electronic devices, and currently the market leader in
the segment. Other competitors include:
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.
In addition, AXT, Inc., Lucky Goldstar and other Asian-based companies
have announced intentions to begin production of blue and green LEDs.
In the custom lighting arena, traditional light source
manufacturers are the main competition. Solid-state lighting, however,
will probably displace incandescent, fluorescent, neon and other
sources over time. Three multinationals, Philips Lighting, General
Electric and Osram, control 80% to 90% of the worldwide market. Each
has created joint ventures to address solid-state lighting.
In the SiC marketplace, Cree, Inc. is currently the dominant
supplier of SiC wafers, commanding approximately 90% of the market.
SiCrystal, a German-based company that entered the wafer market in 1998
and has limited capacity, produces low commercial volumes and presently
lacks epitaxy capability. Sixon Ltd, a development stage company
affiliated with the Kyota Institute of Technology in Japan, has been
active commercially for two years and has limited production
capability. II-VI, Inc., a U.S.-based company, produces a variety of
compound semiconductor crystals and has announced its intentions to
enter the SiC market.
Marketing
We market our optoelectronics products generally through an
executive sales approach, relying predominantly on the efforts of
senior management and a small direct sales staff for domestic product
sales. We believe that this approach is preferable in view of our
current customer base and product mix, particularly since the
production of lamp and display products incorporating LED chips is
concentrated among a relatively small number of manufacturers. Sales in
Japan, Taiwan, Hong Kong and Europe are made by distributors and
independent sales representatives.
Customers for epitaxy and device dies include distributors
with value-added chip processing and testing capabilities, packagers on
a stand-alone basis and integrated packagers. Customers for packaged
components include original equipment manufacturers and various
suppliers.
Initial efforts have been focused on EPI wafers and die, while
introduction of packaged components has begun only in the first quarter
of fiscal 2002. New representatives and distributors have been signed
on for this effort. In addition, efforts to partner with other LED
producers who lack a die and/or epitaxial capability are ongoing. A
partner would provide the economical solution to package our die into
lamps and provide our customers a high brightness die (blue, green,
yellow and red) at a cost-effective price. It would also be our intent
to market the finished product in that producer's home market through
their distribution channel. This marketing effort would allow us to
obtain greater visibility in the market for our lamps.
In North America, we sell SiC substrates and epitaxy directly
to the customers and track customer needs through a database designed
for this purpose. In Europe, we are represented by a European
distributor based in England, and with offices in Germany and Sweden.
The distributor sells the company's SiC wafers in addition to other
compound semiconductor wafers manufactured in the United Kingdom. The
distributor has been in the semiconductor business since the late
1950s.
In Japan, we established a sales presence in 1997 for our SiC
substrates through a representation agreement with a Japanese
distributor with sales offices in Tokyo and Osaka. The distributor has
a 41-year track record in selling U.S. and European materials to the
Japanese electronics industry on behalf of Fortune-500 firms as well as
small producers of specialty products. We also sell through
representatives in Korea and Taiwan.
Manufacturing Facility
We have recently completed construction of a 77,000 square
foot, state-of-the-art facility in Tampa, Florida, for the development
and manufacture of HB-LEDs. The infrastructure and capital equipment
were completed in two phases with a total investment of approximately
$54 million. The second phase of construction, completed in August
2001, provided the infrastructure and necessary space for future
capacity expansion. Additional reactors for blue, green and UV HB-LEDs
will be staged in as required to further increase the production
capacity. The estimated cost of machinery for this additional capacity
is approximately $25.0 million. This is a leased facility.
Our primary SiC facilities and executive offices are located
in Sterling, Virginia. At this location, the Company conducts research
and development in SiC crystal growth and SiC epitaxy. The Company's
main SiC production facility is in Danbury, Connecticut, where it
manufactures SiC in an ISO-9002 certified facility and performs
research and development. Both facilities are leased.
The Company's NorLux Corp. subsidiary also established a
12,000 square foot facility with a state-of-the-art 2,000 square foot
manufacturing section dedicated to HB-LED assembly. The facility houses
an engineering design and development lab, administrative offices and
warehouse to support the supply of custom and standard products. The
production environment provides for the appropriate atmosphere to
manufacture microelectronic products and LED assemblies. The facility
supports high-quality prototype, pre-production and stocking builds as
well as continuous pilot production in low- to mid-volumes. This is a
leased facility.
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 with the
objective of consolidating our Connecticut and Virginia facilities.
During fiscal 2001, we made a decision to terminate this lease as a
result of construction delays and breach of contract. We are currently
involved in litigation regarding the lease termination. See "Item 3.
Legal Proceedings." As a result of the lease termination, we are no
longer planning to consolidate our Connecticut and Virginia facilities
in the near term. A portion of the Virginia operations has been
relocated to the Tampa, Florida facility.
Intellectual Property
Currently, our SiC substrate, epitaxy and device production
and research development processes are not patented. As a general rule,
we believe that disclosing process technology in a patent could
potentially help competitors gain insight into our processes in a way
that could adversely affect the benefits of the patent. Therefore, we
retain our processes as trade secrets and seek to maintain them, along
with other trade secrets, in confidence through appropriate
non-disclosure agreements with employees and others to whom the
information needs to be disclosed. However, we may in the future patent
certain discrete elements of our processes in cases in which the
benefits of doing so outweigh the risk of disclosing process
information. We cannot give assurances that non-disclosure agreements
or any future patents will provide meaningful protection against
unauthorized or use of our proprietary technology know-how, or that it
will not otherwise become known or independently discovered by others.
Our current licenses include a license to Russian silicon
carbide technology through the year 2046. This licensing agreement
covers the manufacture and sale of SiC substrates worldwide based upon
technology developed by Russian scientists who were among the
co-founders of Sterling Semiconductor. In addition, we have a license
from ATMI, Inc., related to SiC substrate manufacture and sale which is
exclusive and worldwide, until a 2% royalty has been paid up to $1.0
million. The ownership of the ATMI technology would then be transferred
to us.
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.
General
Employees
The Company has approximately 405 employees, including
approximately 182 hourly wage employees and 223 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 one collective bargaining agreement.
At our coated fabrics manufacturing facility located in Stoughton,
Wisconsin, approximately 90 hourly employees are covered by an
agreement expiring on September 17, 2003 with Local 7-1207 of P.A.C.E.
International Union (formerly known as the United Paperworkers
International Union).
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.
Recent expansion at the Tampa, Florida facility includes a
state-of-the-art research and development center. We spent
approximately $4.4 million for research and development during fiscal
2001 compared to approximately $1.1 million during fiscal 2000
(excluding expenditures for capital equipment).
We currently employ a staff of 30 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: 21 at Compound Semiconductor
and Optoelectronics and nine at Coated Fabrics.
Backlog
At September 30, 2001, we had backlog orders from continuing
operations aggregating approximately $7.9 million, as compared to
approximately $7.1 million as of October 1, 2000. 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:
September 30, October 1,
2001 2000
------------- ----------
(in thousands)
Coated Fabrics $ 3,430 $ 3,187
Compound Semiconductor
and Optoelectronics 4,477 3,929
--------- ---------
Total $ 7,907 $ 7,116
========= =========
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 and auditing at all of 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 2001, 2000 and 1999, the amount of capital
expenditures for environmental matters related to ongoing operations
was immaterial and the amount of such expenditures is expected to be
immaterial in fiscal 2002. 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.
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 2001, we have
incurred costs of approximately $746,000 in connection with such
remediation. In connection with the sale of UAS, see "Item 1. Business
- Recent Developments," we have placed an additional $300,000 in escrow
pending a Phase II environmental assessment.
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 had
removed approximately 60% of the soil on the property in fiscal 2000 at
a cost of approximately $1,600,000. Fiscal 2001 expenditures
approximated $50,000. The Company has retained environmental
consultants to review its options with regard to the remaining soil on
the premises and expects to complete remediation under a program
approved by the Connecticut Department of Environmental Protection in
December, 2001. The environmental assessment of the Hackensack, New
Jersey facility is still underway. At September 30, 2001, the Company
has estimated the clean-up costs for both facilities to approximate
$1,000,000. At September 30, 2001, 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 September 30, 2001, 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").
In October and November 1991, the predecessor companies 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.
Certain Business Risks and Uncertainties
General
The Market Price of Our Common Stock Has Fluctuated Widely in the Past
and Might Fluctuate Widely in the Future.
The market price of Uniroyal's 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 those of our competitors
from quarter to quarter;
o changes in earnings estimates by securities analysts;
o market conditions in the compound semiconductor and coated
fabrics industries;
o cash flow constraints;
o our ability to obtain orders for products in our Compound
Semiconductor and Optoelectronics segment; and
o general economic conditions.
Uniroyal's stock price has fluctuated widely. For example,
between January 1, 2000 and September 30, 2001, the high and low sale
prices of our common stock fluctuated between approximately a high of
$36.44 and a low of $2.54 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.
We May Soon Face a Liquidity Crisis If Our Plans to Reduce Operating
Costs and to Sell Certain Assets are Unsuccessful
We have experienced losses from continuing operations in each
of the three years ended September 30, 2001 and have an accumulated
deficit of $11.3 million as of September 30, 2001. Cash used in
operations for the years ended September 30, 2001 and October 1, 2000
was $25.0 million and $30.7 million, respectively, and it is likely
that cash flow from operations will be negative throughout Fiscal 2002.
We had a working capital deficiency at September 30, 2001 of $2.8
million compared to working capital of $49.0 million as of October 1,
2000. At September 30, 2001, our principal source of liquidity is $2.0
million of cash and cash equivalents and $1.1 million of availability
under a revolving credit facility. Such conditions raise substantial
doubt that we will be able to continue as a going concern for a
reasonable period of time without receiving additional funding.
The operating results for Fiscal 2001 and Fiscal 2000 have
occurred while we have been repositioning our operations away from the
mature, industrial-based activities and into the high-growth compound
semiconductor technology industry. The transition to this business
segment has required significant investment spending related to
start-up costs and capital expenditures. Many of the markets in this
business segment are characterized by long lead times for new products
requiring significant working capital investments and extensive
testing, qualification and approval by our customers and end users.
This business segment is marked by intense competition requiring us to
introduce new products in a timely and cost-effective manner. This
business segment started operations in the second quarter of Fiscal
2000 and has a limited operating history. The segment faces risks and
difficulties as an early stage business in a high-growth and rapidly
evolving industry. These factors have placed a significant strain on
our financial resources. We have sought to generate additional
financial resources by reducing operating costs and selling certain
assets and by seeking additional sources of financing, including bank
and other lender financing as well as private placements. Our ultimate
success depends on our ability to obtain additional financing, to
continue reducing operating costs and, ultimately to generate higher
sales levels to attain profitability.
On August 24, 2001, we agreed to sell certain net assets of
UAS and closed this transaction on November 9, 2001. Net cash proceeds
from the sale approximated $8.0 million after repayment of
approximately $6.5 million of debt and preliminary purchase price
adjustments. The cash proceeds are exclusive of $1.5 million of
preferred stock of the purchaser's parent and $3.5 million of
subordinated notes of the purchaser.
Our future results of operations involve a number of
significant risks and uncertainties. Factors that could affect our
future operating results and cause actual results to vary materially
from expectations include, but are not limited to, dependence on key
personnel, product obsolescence, ability to generate consistent sales,
ability to finance research and development, government regulation,
technological innovations and acceptance, competition, reliance on
certain vendors and credit risks. Our historical sales results and our
current backlog cannot ensure that we will be able to achieve the
higher sales levels required for profitability. We currently believe
that sales will increase from the fourth quarter of fiscal 2001 levels
and increase at higher growth rates quarterly thereafter; however,
there can be no assurance thereof. If such quarterly sales increases do
not materialize, we will have to reduce our expenses and capital
expenditures to maintain cash levels necessary to sustain our
operations. Our future success will depend on increasing our revenues
and reducing our expenses to enable us to reach profitability.
The Markets in Which We Compete are Highly Competitive. An Increase in
Competition Would Limit Our Ability to Maintain and Increase Our Market
Share.
The coated fabrics, 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
industry.
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.
We have devoted and will be required to continue to devote
significant funds and technologies to the Compound Semiconductor and
Optoelectronics segment to develop and enhance its products. In
addition, we require some of our employees to devote much of their time
to the segment's projects. This could place a strain on our management
and financial employees. If the Compound Semiconductor and
Optoelectronics segment is unsuccessful in developing and marketing its
products, our business, financial condition and results of operations
may be materially and adversely affected.
Our Continued Success Depends in Part on Our Ability to Attract and
Retain Certain 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-LED 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-LED 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.
Protecting Our Trade Secrets and Securing Patent Protections is
Critical to Our Ability Effectively to Compete for Business
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 our strategy is to rely more on trade
secrets than patents to protect our manufacturing and sales processes
and products. 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,
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 Uniroyal's business, financial condition and results
of operations.
Patent Protection. Although we currently hold six U.S. patents
and patents pending, 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.
Enforcement of Intellectual Property Rights By or Against Us Could be
Costly and Could Impair Our Business
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 be sure 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.
Due to Protracted Product Qualification Periods, We May Incur
Significant Costs to Develop Products that May Ultimately be
Unsuccessful
Many of the markets in which we compete are characterized by
long lead times for new products requiring significant working capital
investment by Uniroyal 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.
Unsuccessful Control of Hazardous Materials Used in Our Manufacturing
Processes Could Result in Costly Remediation Fees, Penalties or Damages
Under Environmental and Safety Regulations.
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.
Certain Provisions of Our Charter and Our Stockholder Rights Plan May
Adversely Effect the Stock Price and Make it More Difficult for a Third
Party to Acquire Uniroyal Even if Such Acquisition Could be Beneficial
to Some of Our Shareholders
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.
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 Coated Fabrics Business Segment
If Labor Relations at our Coated Fabrics Business Segment were
Materially Impaired, Our Business Would be Adversely Affected.
We are a party to a collective bargaining agreement at our
coated fabrics manufacturing facility located in Stoughton, Wisconsin.
Approximately 90 hourly employees are covered by an agreement expiring
on September 17, 2003 with Local 1207 of P.A.C.E. (formerly known as
the United Paperworkers International Union).
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 our coated fabrics manufacturing
facility when the applicable collective bargaining agreement expires.
Moreover, the wages and/or benefits we may agree upon might adversely
affect the Coated Fabrics segment's profitability. Furthermore, if we
were the subject of a strike, we could incur significant costs.
Growth is Difficult in Our Coated Fabrics Segment Due to the Maturity
of the Business Sector in Which it Operates
Our Coated Fabrics segment competes in a mature business
sector. We believe the key to generating growth in this sector (besides
acquiring other businesses) is to introduce new products or product
innovations that address unsatisfied market needs. We believe we will
need to significantly increase revenues from product sales and increase
profitability in this sector. We can give no assurance that we will
have resources available for, or otherwise be successful in, any
efforts to achieve such growth.
Our Coated Fabrics Segment is Particularly Sensitive to Changes in
General Economic Conditions
The recreational vehicle and upholstery markets, among others
in which the Coated Fabrics segment competes, are sensitive to changes
in general economic conditions which affect demand for the commercial
and consumer items that the Coated Fabrics segment manufactures.
Risk Factors Associated with Uniroyal's Compound Semiconductor and
Optoelectronics Business Segment
The Future Success of Our Compound Semiconductor and Optoelectronics
Segment Depends 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 involves highly complex processes. 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 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 by the market of the products of the Compound
Semiconductor and Optoelectronics segment's customers;
o consistent cost-effective manufacturing processes; and
o cash flow constraints.
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.
Our Compound Semiconductor and Optoelectronics Segment Has a Limited
Operating History and We Expect Operating Losses to Continue
The Compound Semiconductor and Optoelectronics business
segment started operations in the second quarter of fiscal 2000 and has
a limited operating history. The segment faces 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 securing sales of our products;
o responding to technological development or product offerings by
competitors;
o attracting and retaining qualified personnel; and
o cash flow constraints.
As of September 30, 2001, the Compound Semiconductor and
Optoelectronics segment had an accumulated deficit of approximately
$60.4 million. It incurred net losses of approximately $46.5 million in
fiscal 2001 and $27.0 million in fiscal 2000. See "Item 1. Business -
Recent Developments." We expect it to continue to incur losses in 2002.
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 product
offerings are not successful, our business, financial condition and
results of operations could be materially and adversely affected.
The Rapid Expansion of Our Compound Semiconductor and Optoelectronics
Segment Places a Strain on Our Resources
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. Various
startup issues, including equipment and process issues, have delayed
commercial production at this facility. We have not yet reached high
volume commercial production levels. 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;
o delays in bringing production equipment on-line; and
o cash flow constraints.
This expansion 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 expansion of the Compound Semiconductor
and Optoelectronics segment, our business, financial condition and
results of operations could be materially and adversely affected.
The Industries in Which Our Compound Semiconductor and Optoelectronics
Segment Operates are Rapidly Changing
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
and refine production processes to meet ever higher customer
requirements.
Because we generally are unable to predict the amount of time
required and the costs involved to achieve 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;
o our new products experience reliability or quality problems; or
o we experience cash flow constraints that interfere with any of
the foregoing.
Our Operating Results Could be Harmed if We Lose Access to Certain
Limited Sources of Materials, Components or Equipment Used in Our
Compound Semiconductor and Optoelectronics Segment
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.
The Manufacture of the Compound Semiconductor and Optoelectronics
Segment's Products is a Highly Complex and Precise Process and
Production Could be Impaired or Disrupted if We Experience
Manufacturing Difficulties
The manufacture of the Compound Semiconductor and
Optoelectronics segment's products is a highly complex and precise
process. We now manufacture nearly 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.
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
Compound Semiconductor and
Optoelectronics Segment
Danbury, Connecticut 11,070 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 14,000 Research and development, SiC technology Leased
Item 3. Legal Proceedings
On February 23, 2001, the Company and its wholly owned
subsidiary, Sterling Semiconductor, Inc., were served with a complaint
by AFG-NVC, LLC in the Loudoun County, Virginia Circuit Court. The
complaint seeks approximately $8,106,000 for alleged default under a
lease and benefits that the landlord believes it would have received
under such lease. The Company has filed an answer seeking not less than
$7,000,000 for breach of contract, fraud and constructive fraud on the
part of the plaintiff. The case is currently in discovery. At the
present time, the amount of liability, if any, cannot be reasonably
estimated.
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.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of fiscal
2001 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 a plan of reorganization on
September 27, 1992, 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, 2001, the price per share of Common Stock was $4.40.
As of November 30, 2001, there were 1,203 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
September 30, 2001 October 1, 2000
--------------------------- ----------------------------
Quarter High Low High Low
------- ---- --- ---- ---
First $ 15.13 $ 5.25 $ 13.18 $ 4.41
Second $ 8.75 $ 5.88 $ 36.44 $ 10.28
Third $ 10.11 $ 6.94 $ 26.88 $ 10.25
Fourth $ 8.50 $ 2.54 $ 18.88 $ 11.00
We have never paid cash dividends on our 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 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 September 30,
2001 ("Fiscal 2001) and October 1, 2000 ("Fiscal 2000") and for each of
the three years in the period ended September 30, 2001 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 26,
1999 ("Fiscal 1999") September 27, 1998 and September 28, 1997 and for
the fiscal years ended September 27, 1998 and September 28, 1997 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
------------------------------------------------------------------------------------------
September 30, October 1, September 26, September 27, September 28,
2001 2000(1) 1999 1998 1997
------------- ------------ -------------- ------------- --------------
Operating Data:
Net sales $ 32,862 $ 36,674 $ 42,826 $ 67,907 $ 68,773
Depreciation and other amortization (2) 15,737 7,201 2,632 2,776 2,498
(Loss) income before interest, income
taxes, minority interest, discontinued
operations and extraordinary item (54,281) (48,496) (5,368) 4,797 393
Interest (expense) income - net (156) 1,052 (796) (1,709) (2,679)
Income tax (expense) benefit (6,692) 26,876 3,214 (1,847) 599
(Loss) income before minority interest,
discontinued operations and
extraordinary item (61,129) (20,568) (2,950) 1,241 (1,687)
Minority interest 8,246 7,918 2,191 199 -
(Loss) income from continuing operations
before discontinued operations and
extraordinary item (52,883) (12,650) (759) 1,440 (1,687)
Income from discontinued operations and
disposition of discontinued operations,
net of income tax expense 1,048 59,337 6,279 6,587 2,066
Extraordinary loss - - - (5,637) -
Net (loss) income $ (51,835) $ 46,687 $ 5,520 $ 2,390 $ 379
(Loss) income per common share -
basic:(3,4)
(Loss) income from continuing
operations $ (2.01) $ (0.51) $ (0.03) $ 0.05 $ (0.07)
Income from discontinued operations 0.04 2.38 0.26 0.25 0.08
Extraordinary loss - - - (0.21) -
----------- ----------- ----------- ----------- -----------
Net (loss) income per share $ (1.97) $ 1.87 $ 0.23 $ 0.09 $ 0.01
=========== =========== =========== =========== ===========
Average number of shares used in
computation (4) 26,286,148 24,937,364 24,315,992 26,463,084 26,633,930
=========== =========== =========== =========== ===========
(Loss) income per common share -
assuming dilution:(3,4)
(Loss) income from continuing
operations $ (2.01) $ (0.51) $ (0.03) $ 0.05 $ (0.07)
Income from discontinued operations 0.04 2.38 0.26 0.22 0.08
Extraordinary loss - - - (0.19) -
----------- ----------- ----------- ----------- -----------
Net (loss) income per share $ (1.97) $ 1.87 $ 0.23 $ 0.08 $ 0.01
=========== =========== =========== =========== ===========
Average number of shares used in
computation (4) 26,286,148 24,937,364 24,315,992 29,262,136 26,633,930
=========== =========== =========== =========== ===========
Balance Sheet Data:
Cash and cash equivalents $ 2,037 $ 36,625 $ 4,143 $ 4,097 $ 229
Working capital (deficiency) (2,765) 48,988 2,054 (1,032) 87,858
Total assets 144,262 184,518 102,112 84,834 163,082
Long-term debt (including current portion) 30,605 22,163 29,629 2,592 86,753
Stockholders' equity 63,446 106,849 31,133 32,311 40,032
- ------------------------------------------------------------------------------------------------------------------------------------
1 Our fiscal year ends on the Sunday following the last Friday in September. As
a result, Fiscal 2000 encompassed a 53-week period compared to 52-week periods
for all other fiscal years presented.
2 Includes amortization of reorganization value in excess of amounts allocable
to identifiable assets of $377,000 and $754,000 for the fiscal years ended
September 27, 1998 and September 28, 1997, respectively.
3 Includes effect of preferred stock dividends of $220,000 declared for the
fiscal year ended September 28, 1997.
4 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 2001 with Fiscal 2000
Net Sales. The Company's net sales from continuing operations
decreased in Fiscal 2001 by approximately 10% to $32.9 million from
$36.7 million in Fiscal 2000. The decrease is due to economic
conditions at the Coated Fabrics segment and is partially offset by an
increase in sales at the Compound Semiconductor and Optoelectronics
segment.
Net sales by the Coated Fabrics segment decreased approximately
17% in Fiscal 2001 to $27.8 million from $33.7 million in Fiscal 2000.
The decrease is due to a lower sales volume as a result of the
softening in the transportation, industrial equipment and recreational
vehicle markets. The comparison of net sales to the prior year is also
affected by the inclusion of $836,000 of net sales from its
discontinued automotive operation in Fiscal 2000 and the inclusion of
53 weeks in Fiscal 2000 versus 52 weeks in Fiscal 2001.
Net sales by the Compound Semiconductor and Optoelectronics
segment were $5.1 million in Fiscal 2001 versus $3.0 million in Fiscal
2000. The increase in sales is primarily due to the acquisition of
Sterling Semiconductor, Inc. in May of Fiscal 2000 and the effect of
including a full year of sales in Fiscal 2001 versus four months of
sales in Fiscal 2000. Also, in the fourth quarter of Fiscal 2001, sales
of optoelectronic wafers became more consistent as the segment begins
to ramp-up its commercial production levels.
Loss Before Interest, Income Taxes, Minority Interest and
Discontinued Operations. Loss before interest, income taxes, minority
interest and discontinued operations for Fiscal 2001 was $54.3 million
compared to a loss of $48.5 million in Fiscal 2000. The increase in the
loss is attributable to start-up costs for the Compound Semiconductor
and Optoelectronics segment and a decline in sales associated with the
Coated Fabrics segment. There were also a number of unusual items in
both fiscal years that are explained below.
The Coated Fabrics segment had a loss before interest, income
taxes, minority interest and discontinued operations in Fiscal 2000 of
$216,000 versus income of $227,000 in Fiscal 2000. The decrease was
primarily a result of the decline in sales revenues for Fiscal 2001
versus Fiscal 2000. Fiscal 2000 was also negatively impacted by a
$657,000 write-down to fair value of certain machinery and equipment to
be disposed of at the Port Clinton, Ohio facility and a $506,000 charge
related to a special contribution to the 401(k) plan for eligible
participants of the Coated Fabrics segment.
The Compound Semiconductor and Optoelectronics segment's loss
before interest, income taxes, minority interest and discontinued
operations in Fiscal 2001 was $45.5 million versus $25.8 million in
Fiscal 2001. The increase in the loss relates to the following factors:
o start-up costs of the segment which have increased as the segment
moves closer to commencement of commercial operations for the
optoelectronics products;
o the inclusion of the operations of Sterling Semiconductor, Inc.
for a full year in Fiscal 2001 versus four months in Fiscal 2000
after its acquisition in May 2000;
o the impairment and related write-down of Sterling goodwill in
Fiscal 2001 of $9.8 million;
o the amortization of approximately $6.9 million of intangible
assets associated with the prior year acquisition of Sterling;
Fiscal 2000 amortization of Sterling intangibles approximated
$2.3 million;
o the Fiscal 2001 acquisition of Emcore's minority interest in
Uniroyal Optoelectronics, LLC and the related amortization of
intangible assets of approximately $100,000;
o the impairment and related write-down of assets in Fiscal 2001 at
a facility for which the lease was terminated of approximately
$686,000; and
o the recognition of $250,000 of acquired in-process research and
development expense ("IPR&D") in Fiscal 2001 versus $6.6 million
in Fiscal 2000.
In addition to items identified above, Fiscal 2000 loss at the Compound
Semiconductor and Optoelectronics segment was also negatively impacted
by a special contribution to the 401(k) plan of Company common stock of
approximately $638,000.
Approximately $8.6 million of net costs and unusual items
recorded in Fiscal 2001 were not allocated to any business segment
compared to $22.9 million of unallocated costs for Fiscal 2000.
Included in the non-allocated items in Fiscal 2001 is the following
unusual item:
o a reduction in the fair value of real property related to the
Company's Port Clinton, Ohio and Stirling, New Jersey facilities
of approximately $703,000.
Fiscal 2000 non-allocated costs were negatively impacted by
the net effect of the following unusual items:
o gain realized on the sale of the investment in the preferred
stock of Emcore ($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 ($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 HB-LEDs from Emcore; and
o a special contribution to the 401(k) of Company stock to eligible
participants of the corporate office ($554,000).
After the elimination of unusual items from both fiscal periods,
unallocated costs decreased approximately $1.6 million primarily due to
a reduction in the amount of management incentive payments in Fiscal
2001 versus Fiscal 2000.
Interest Income (Expense). Interest income in Fiscal 2001 was
$1.6 million compared to $3.2 million in Fiscal 2000. The decrease is
attributable to the overall decline in the average balance of cash,
cash equivalents and investments from Fiscal 2000 to Fiscal 2001 due to
the start-up cash requirements of the Compound Semiconductor and
Optoelectronics segment. Interest expense was $1.7 million in Fiscal
2001 compared to $2.1 million in Fiscal 2000. The decrease in interest
expense is primarily due to a higher level of interest capitalization
in Fiscal 2001 ($810,000) versus Fiscal 2000 ($287,000). Interest
capitalization relates to the build-out of facilities in the Compound
Semiconductor and Optoelectronics segment. After consideration of the
effect of capitalized interest, interest expense increased slightly due
to an overall increase in outstanding debt balances.
Income Tax (Expense) Benefit. Income tax expense in Fiscal
2001 was $6.7 million compared to an income tax benefit of $26.9
million in Fiscal 2000. The provisions for income tax were calculated
through the use of the estimated income tax rates based upon annualized
income. Fiscal 2001 was impacted by the establishment of a $17.9
deferred tax valuation allowance recognized due to the uncertainty
regarding the ability to realize the benefit of the deferred tax
assets. 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 and the
sale of substantially all of the net assets of the High Performance
Plastics segment.
Discontinued Operations. Net income from discontinued
operations and the disposition of discontinued operations of the High
Performance Plastics segment and the Specialty Adhesives segment
decreased to $1.0 million in Fiscal 2001 compared to $59.3 million in
Fiscal 2000. Fiscal 2001 net income from discontinued operations
includes approximately $2.3 million of net income from the discontinued
operations of the Specialty Adhesives segment as well as a $1.3 net
loss related to the disposition of the High Performance Plastics
segment. Fiscal 2000 net income from discontinued operations includes
approximately $2.0 million of net income from the discontinued
operations of the Specialty Adhesives segment and $57.3 million of net
income related to the operations and sale of the High Performance
Plastics segment.
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 $836,000 in Fiscal 2000.
Net Sales. The Company's net sales decreased in Fiscal 2000 by
approximately 14% to $36.7 million from $42.8 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 21% in Fiscal 2000 compared to Fiscal 1999. The 21% 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 $836,000 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 12% 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 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 Fiscal 2000 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 $48.5
million, compared to a loss of $5.4 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 was 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 ($1.7 million
related to continuing operations);
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 IPR&D of $6.6 million related to the acquisition
of Sterling on May 31, 2000;
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 income before interest, income
taxes, minority interest and discontinued operations in Fiscal 2000 was
$227,000 compared to $4.8 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 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 poly type 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):
Expected Date for
Discount Economic Percent Full Commercial
IPR&D Technology Description Rate Life Complete Fair Value 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 approximated $13.2 million
in May of 2000 and $10.9 million at September 30, 2001. Progress has
been made on purchased IPR&D projects during Fiscal 2001. The expected
dates for full commercial viability remain the same. 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. We currently expect 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, our sales and
profitability may be adversely affected in future periods.
Approximately $22.9 million of net costs, non-recurring and
unusual items recorded in Fiscal 2000 were not allocated to any
business segment compared to $5.1 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 $206,000 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
$26.9 million as compared to $3.2 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 and disposition of 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.
Net income from the discontinued operations of the Specialty
Adhesives segment in Fiscal 2000 and fiscal 1999 was $2.0 million. 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.
Liquidity and Capital Resources
For Fiscal 2001, continuing operations used $23.6 million of
cash compared to $11.4 million of cash provided by continuing
operations for Fiscal 2000. Cash used in continuing operations during
Fiscal 2001 was primarily a result of the increase in start-up costs
related to the Compound Semiconductor and Optoelectronics segment.
Net cash used in investing activities during Fiscal 2001 was
$7.4 million compared to $167.8 million of net cash provided by
investing activities during Fiscal 2000. During Fiscal 2001, the
purchases of property, plant and equipment of $26.1 million and a $2.8
million acquisition related to the discontinued operations of the
Specialty Adhesives segment exceeded the cash proceeds from the
sale/maturity of investments. Fiscal 2000 net cash provided from
investing activities included the net cash proceeds from the sale of
the High Performance Plastics segment of $209.0 million and net cash
proceeds of $8.1 million relating to the sale of the remaining Emcore
preferred stock and were offset by the net effect of debt securities
purchased/sold and the purchase of $25.8 million of machinery and
equipment. For both fiscal years, the purchase of machinery and
equipment related primarily to the start-up of the Compound
Semiconductor and Optoelectronics segment.
Net cash used in financing activities was $2.2 million in
Fiscal 2001 versus $104.6 million in Fiscal 2000. The primary use of
cash in financing activities during Fiscal 2001 was the $9.6 million
purchase of treasury stock and the repayment of approximately $6.3
million in debt. These amounts were partially offset by increases in
term loans and the revolving credit advance of $11.0 million and $2.4
million of capital contributions from the former minority interest
holder of Uniroyal Optoelectronics LLC. Primary uses of cash during
Fiscal 2000 included the repayment of $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
and the purchase of $13.9 million of the Company's common stock for
treasury. In Fiscal 2000, we also received $11.6 million in capital
contributions from the minority interest holder of Uniroyal
Optoelectronics LLC.
On September 30, 2001, we had approximately $2.0 million in
cash and cash equivalents as compared to approximately $36.6 million at
October 1, 2000. Working capital deficiency at September 30, 2001 was
$2.8 million compared to a working capital of $49.0 million at October
1, 2000. On September 30, 2001, we had outstanding borrowings of $7.2
million under our $10.0 million revolving credit facility with Tyco
Capital (subject to a borrowing base limitation of approximately $8.3
million at September 30, 2001). The principal uses of cash during
Fiscal 2001 were to fund capital expenditures, working capital,
operating losses at the Compound Semiconductor and Optoelectronics
segment and to repurchase shares in the open market. We plan to spend
an additional $20.0 - $25.0 million on capital expenditures for the
Compound Semiconductor and Optoelectronics segment over the next three
years for expansion.
We have experienced losses from continuing operations in each
of the three years ended September 30, 2001 and have an accumulated
deficit of $11.3 million as of September 30, 2001. Cash used in
operations for the years ended September 30, 2001 and October 1, 2000
was $25.0 million and $30.7 million, respectively, and it is likely
that cash flow from operations will be negative throughout Fiscal 2002.
We had a working capital deficiency at September 30, 2001 of $2.8
million compared to working capital of $49.0 million as of October 1,
2000. At September 30, 2001, our principal source of liquidity is $2.0
million of cash and cash equivalents and $1.1 million of availability
under a revolving credit facility. Such conditions raise substantial
doubt that we will be able to continue as a going concern for a
reasonable period of time without receiving additional funding.
The operating results for Fiscal 2001 and Fiscal 2000 have
occurred while we have been repositioning our operations away from the
mature, industrial-based activities and into the high-growth compound
semiconductor technology industry. The transition to this business
segment has required significant investment spending related to
start-up costs and capital expenditures. Many of the markets in this
business segment are characterized by long lead times for new products
requiring significant working capital investments and extensive
testing, qualification and approval by our customers and end users.
This business segment is marked by intense competition requiring us to
introduce new products in a timely and cost-effective manner. This
business segment started operations in the second quarter of Fiscal
2000 and has a limited operating history. The segment faces risks and
difficulties as an early stage business in a high-growth and rapidly
evolving industry. These factors have placed a significant strain on
our financial resources. We have sought to generate additional
financial resources by reducing operating costs and selling certain
assets and by seeking additional sources of financing, including bank
and other lender financing as well as private placements. Our ultimate
success depends on our ability to obtain additional financing, to
continue reducing operating costs and, ultimately to generate higher
sales levels to attain profitability.
On November 9, 2001, we sold certain net assets of UAS, which
comprised our Specialty Adhesives segment (See "Item 1. Business -
Recent Developments"). Net cash proceeds at closing approximated
$8.0 million after the repayment of certain debt.
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 September 30, 2001, we had approximately $2.0 million of
cash and cash equivalents subject to variable short-term interest
rates. On the same date we had a $7.2 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 $52,000 on an annual basis.
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. Based upon net balance, a change of one
percent in the interest rate would have caused a change in interest
expense of approximately $466,000 on an annual basis.
The changes in the composition and balances of items subject
to interest rate risk from Fiscal 2000 to Fiscal 2001 is attributable
to investment spending at our Compound Semiconductor and
Optoelectronics segment in Fiscal 2001.
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 September 30, 2001 and
October 1, 2000 and for the Years Ended September 30, 2001,
October 1, 2000 and September 26, 1999:
Independent Auditors' Report F-2
Consolidated Balance Sheets as of September
30, 2001 and October 1, 2000 F-3
Consolidated Statements of Operations for the
Years Ended September 30, 2001, October 1,
2000 and September 26, 1999 F-5
Consolidated Statements of Comprehensive
(Loss) Income for the Years Ended September
30, 2001, October 1, 2000 and September 26,
1999 F-6
Consolidated Statements of Changes in
Stockholders' Equity for the Years Ended
September 30, 2001, October 1, 2000 and
September 26, 1999 F-7
Consolidated Statements of Cash Flows for the
Years Ended September 30, 2001, October 1,
2000 and September 26, 1999 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. (1)
3.1 Amended and Restated Certificate of Incorporation of Uniroyal. (13)
3.2 By-Laws of Uniroyal, as amended to March 16, 2001. (13)
4.2 Amended and Restated Warrant Agreement dated January 1, 2001 between
Uniroyal and Mellon Investor Services, LLC. (12)
10.7 Amended and Restated Employment Agreement, dated as of April 25, 1995,
between Howard R. Curd and Uniroyal. (2)
10.8 Amended and Restated Employment Agreement, dated as of April 25, 1995,
between Oliver J. Janney and Uniroyal. (2)
10.9 Amended and Restated Employment Agreement, dated as of April 25, 1995,
between Robert L. Soran and Uniroyal. (2)
10.10 Amended and Restated Employment Agreement, dated as of April 25, 1995,
between George J. Zulanas, Jr. and Uniroyal. (2)
10.16 Amended and Restated Uniroyal Technology Corporation 1992 Stock Option
Plan as amended and restated to March 20, 2001. (13)
10.28 Amended and Restated Uniroyal Technology Corporation 1992 Non-Qualified
Stock Option Plan as amended November 30, 2000. (11)
10.39 Financing Agreement dated as of June 5, 1996 by and between Tyco
Capital (formerly The CIT Group/Business Credit, Inc.) and Uniroyal
Technology Corporation. (3)
10.40 Amended and Restated Uniroyal Technology Corporation 1994 Stock Option
Plan as amended and restated to March 16, 2001. (13)
10.41 Amended and Restated Uniroyal Technology Corporation 1995 Non-Qualified
Stock Option Plan. (11)
10.44 Amended and Restated Shareholder Rights Agreement, dated as of August
2, 2001, between Uniroyal Technology Corporation and Mellon Investor
Services, LLC, as rights agent. (14)
10.45 First Amendment to Financing Agreement dated September 5, 1997 by and
between Tyco Capital (formerly The CIT Group/Business Credit, Inc.) and
Uniroyal Technology Corporation. (4)
10.47 Amendment and Consent Agreement dated April 14, 1998 by and between
Tyco Capital (formerly The CIT Group/Business Credit, Inc.) and
Uniroyal Technology Corporation. (5)
10.48 Consent Agreement dated April 1, 1999 by and between Tyco Capital
(formerly The CIT Group/Business Credit, Inc.) and Uniroyal Technology
Corporation. (6)
10.49 Assumption Agreement dated April 1, 1999 by and between Tyco Capital
(formerly The CIT Group/Business Credit, Inc.), Uniroyal Technology
Corporation and Uniroyal Engineered Products, Inc. (6)
10.50 Guaranty dated April 1, 1999 between Tyco Capital (formerly The CIT
Group/Business Credit, Inc.) and Uniroyal Technology Corporation. (6)
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. (7)
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.
Confidential treatment was obtained for portions of the agreement. (8)
10.53 Amended and Restated Uniroyal Technology Corporation Deferred
Compensation Plan Effective August 1, 1995, as amended April 3, 2000.
(8)
10.54 Merger Agreement dated as of April 10, 2000, among Uniroyal Technology
Corporation, BayPlas4, Inc., and Sterling Semiconductor, Inc. (9)
10.55 Uniroyal Technology Long Term Growth Plan, as amended to August 3,
2000. (10)
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. (11)
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. (11)
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. (11)
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. (11)
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. (11)
10.61 Uniroyal Technology Corporation 2000 Stock Plan, as amended November
30, 2000. (11)
10.62 Uniroyal Technology Corporation 2001 Stock Option Plan. (13)
10.63 Membership Purchase Agreement, dated August 2, 2001 among Uniroyal,
Uniroyal Optoelectronics, LLC, Uniroyal Compound Semiconductors, Inc.
and Emcore Corporation. (14)
10.64 Credit Agreement dated as of August 2, 2001 between Uniroyal and Emcore
Corporation. (14)
10.65 Registration Rights Agreement between Uniroyal and Emcore Corporation
pursuant to the Membership Interest Purchase Agreement. (16)
10.66 Asset Purchase Agreement dated as of August 24, 2001 between Uniroyal
Engineered Products, LLC and SAS Acquisition Corp. (15)
11.1 Statement Regarding Computation of Per Share Earnings. (17)
21.1 Subsidiaries of Uniroyal Technology Corporation. (17)
23.1 Independent Auditors' Consent. (17)
Footnotes to Exhibits:
(1) Contained in Uniroyal's Form 8-K, dated June 9, 1993.
(2) Contained in Uniroyal's Quarterly Report on Form 10-Q for the
quarterly period ended April 2, 1995 filed on May 12, 1995.
(3) Contained in Uniroyal's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996 filed August 13, 1996.
(4) Contained in Uniroyal's Annual Report on Form 10-K for the year
ended September 28, 1997 filed on December 22, 1997.
(5) Contained in Uniroyal's Form 8-K/A dated April 22, 1998.
(6) Contained in Uniroyal's Annual Report on Form 10-K for the year
ended September 26, 1999 filed on December 23, 1999.
(7) Contained in Uniroyal's 8-K dated March 14, 2000.
(8) Contained in Uniroyal's Quarterly Report on Form 10-Q for the
quarterly period ended April 2, 2000, filed on May 17, 2000.
(9) Contained in Uniroyal's 8-K dated June 14, 2000.
(10) Contained in Uniroyal's Quarterly Report on Form 10-Q for the
quarterly period ended July 2, 2000, filed on August 16, 2000.
(11) Filed with Uniroyal's Annual Report on Form 10-K for the year
ended October 1, 2000 filed on December 13, 2000.
(12) Contained in Uniroyal's Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 2000 filed on February 5,
2001.
(13) Contained in Uniroyal's Quarterly Report on Form 10-Q for the
quarterly period ended April 1, 2001 filed on May 9, 2001.
(14) Contained in Uniroyal's 8-K dated August 6, 2001.
(15) Contained in Uniroyal's 8-K dated November 20, 2001.
(16) Contained in Uniroyal's Quarterly Report on Form 10-Q for the
quarterly period ended July 1, 2001 filed on August 15, 2001.
(17) Filed with this report.
(d) Reports on Form 8-K:
Report on Form 8-K dated August 6, 2001, related to the
completion of the acquisition of Emcore Corporation's minority interest
in Uniroyal Optoelectronics, LLC.
Appendix A. Consolidated Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
Consolidated Financial Statements as of September 30, 2001 and October
1, 2000 and for the Years Ended September 30, 2001, October 1, 2000 and
September 26, 1999:
Independent Auditors' Report F-2
Consolidated Balance Sheets as of September
30, 2001 and October 1, 2000 F-3
Consolidated Statements of Operations for the
Years Ended September 30, 2001, October 1,
2000 and September 26, 1999 F-5
Consolidated Statements of Comprehensive
(Loss) Income for the Years Ended September
30, 2001, October 1, 2000 and September 26,
1999 F-6
Consolidated Statements of Changes in
Stockholders' Equity for the Years Ended
September 30, 2001, October 1, 2000 and
September 26, 1999 F-7
Consolidated Statements of Cash Flows for the
Years Ended September 30, 2001, October 1,
2000 and September 26, 1999 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 September 30, 2001
and October 1, 2000, and the related consolidated statements of operations,
comprehensive (loss) income, changes in stockholders' equity and cash flows for
each of the three years in the period ended September 30, 2001. 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 September 30,
2001 and October 1, 2000 and the results of its operations and its cash flows
for each of the three years in the period ended September 30, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 2 and 3
to the consolidated financial statements, the Company's recurring losses from
operations, working capital deficiency and negative cash flow from operating
activities raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans concerning these matters are also described in
Note 3. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Tampa, Florida
December 21, 2001
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
September 30, October 1,
2001 2000
------------- -----------
Current assets:
Cash and cash equivalents (Notes 2 and 3) $ 2,037 $ 36,625
Short-term investments (Notes 2 and 4) - 12,425
Trade accounts receivable (less estimated reserve for
doubtful accounts of $161 and $75, respectively) (Notes 2 and 11) 4,177 4,392
Inventories (Notes 2, 5 and 11) 13,110 8,935
Accrued income taxes receivable 5,334 -
Deferred income taxes - net (Notes 2 and 14) - 5,460
Net assets of discontinued operations of UAS (Note 6) 14,103 10,832
Prepaid expenses and other current assets 1,912 1,326
----------- -----------
Total current assets 40,673 79,995
Property, plant and equipment - net (Notes 2 and 7) 66,888 46,822
Property, plant and equipment held for sale - net (Note 2) 1,597 2,301
Investments (Note 2 and 4) - 8,902
Goodwill - net (Notes 2, 8 and 9) 23,430 26,519
Deferred income taxes - net (Notes 2 and 14) - 7,828
Other assets - net (Notes 2 and 10) 11,674 12,151
----------- -----------
TOTAL ASSETS $ 144,262 $ 184,518
=========== ===========
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, October 1,
2001 2000
------------- -----------
Current liabilities:
Current portion of long-term debt (Note 11) $ 18,140 $ 6,701
Trade accounts payable 15,258 8,261
Net liabilities of discontinued operations of HPPI (Note 12) 1,910 4,632
Accrued expenses:
Compensation and benefits 5,135 8,589
Interest 151 156
Taxes, other than income 292 155
Accrued income taxes - 623
Other 2,552 1,890
----------- -----------
Total current liabilities 43,438 31,007
Long-term debt, net of current portion (Note 11) 12,465 15,462
Other liabilities (Note 13) 24,688 23,665
----------- -----------
Total liabilities 80,591 70,134
----------- -----------
Commitments and contingencies (Note 15)
Minority interest (Notes 1, 2 and 8) 225 7,535
Stockholders' equity (Note 16):
Preferred stock:
Series C - 0 shares issued and outstanding; par value
$0.01; 450 shares authorized - -
Common stock:
32,662,611 and 30,707,976 shares issued or to be issued,
respectively; par value $0.01; 100,000,000 shares
authorized 327 307
Additional paid-in capital 113,904 94,296
Retained (deficit) earnings (11,260) 40,575
Accumulated other comprehensive loss - net - (44)
----------- -----------
102,971 135,134
Less treasury stock at cost - 4,794,869 and 4,841,059 shares,
respectively (39,525) (28,285)
----------- -----------
Total stockholders' equity 63,446 106,849
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 144,262 $ 184,518
=========== ===========
See notes to consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Fiscal Years Ended
------------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ---------- --------------
Net sales $ 32,862 $ 36,674 $ 42,826
Costs, expenses and (other income):
Costs of goods sold 29,209 28,983 31,693
Selling and administrative (Note 8) 30,742 34,141 15,434
Depreciation and other amortization 15,737 7,201 2,632
Write-down of goodwill (Note 9) 9,816 - -
Loss on assets to be disposed of (Note 2) 1,389 1,773 -
Purchased in-process research and development (Notes 8 and 9) 250 6,590 -
Provision for uncollectible note receivable (Note 17) - 5,387 -
Write-down of technology license (Note 10) - 4,000 -
Gain on sale of preferred stock investment (Note 18) - (2,905) (898)
Gain on sale of division (Note 20) - - (667)
----------- ----------- -----------
Loss before interest, income taxes, minority interest and
discontinued operations (54,281) (48,496) (5,368)
Interest income 1,590 3,164 206
Interest expense (1,746) (2,112) (1,002)
----------- ----------- -----------
Loss before income taxes, minority interest and discontinued
operations (54,437) (47,444) (6,164)
Income tax (expense) benefit (Notes 2 and 14) (6,692) 26,876 3,214
----------- ----------- -----------
Loss before minority interest and discontinued operations (61,129) (20,568) (2,950)
Minority interest in net losses of consolidated joint venture 8,246 7,918 2,191
----------- ----------- -----------
Loss from continuing operations before discontinued operations (52,883) (12,650) (759)
Income from discontinued operations, net of income tax expense of
$593, $1,732 and $3,369, respectively (Notes 6 and 12) 1,270 3,516 6,279
(Loss) gain on disposition of discontinued operations, net of income
tax expense of $529 and $38,146, respectively (Notes 6 and 12) (222) 55,821 -
----------- ----------- -----------
Net (loss) income $ (51,835) $ 46,687 $ 5,520
=========== =========== ===========
Net (loss) income per common share - basic (Notes 2 and 21)
- -----------------------------------------------------------
Loss from continuing operations $ (2.01) $ (0.51) $ (0.03)
Income from discontinued operations 0.04 2.38 0.26
----------- ----------- ----------
Net (loss) income $ (1.97) $ 1.87 $ 0.23
=========== =========== ===========
Net (loss) income per common share - assuming dilution (Notes 2
- ---------------------------------------------------------------
and 21)
- ---------
Loss from continuing operations $ (2.01) $ (0.51) $ (0.03)
Income from discontinued operations 0.04 2.38 0.26
----------- ----------- -----------
Net (loss) income $ (1.97) $ 1.87 $ 0.23
=========== =========== ===========
See notes to consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
Fiscal Years Ended
------------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ---------- -------------
Net (loss) income $ (51,835) $ 46,687 $ 5,520
----------- ----------- -----------
Net unrealized gain (loss) on securities available for sale,
net of taxes:
Unrealized gain (loss) on securities
available for sale 53 (44) 648
Less: reclassification adjustment for gains
realized in net income (9) (100) (548)
----------- ----------- -----------
Net unrealized gain (loss) 44 (144) 100
----------- ----------- -----------
Comprehensive (loss) income (Note 2) $ (51,791) $ 46,543 $ 5,620
=========== =========== ===========
See notes to consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2001, OCTOBER 1, 2000 AND SEPTEMBER 26, 1999
(In thousands)
Accumulated
Additional Retained Other
Common Paid-In Earnings Comprehensive Treasury Stockholders'
Stock Capital (Deficit) Income (Loss) Stock Equity
------ ---------- ---------- ------------- ---------- -------------
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 shares (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
Common stock issued for acquisition of joint venture - 8,583 - - 6,484 15,067
Common stock issued under stock option plans 20 9,042 - - (8,779) 283
Common stock issued to employee benefit plan - 1,663 - - 696 2,359
Common stock issued under stock purchase plan - 54 - - - 54
Amounts received pursuant to Directors' stock option plan - 90 - - - 90
Purchases of treasury stock - - - - (9,641) (9,641)
Tax benefit from exercise of stock options - 170 - - - 170
Exercises of warrants - 6 - - - 6
Net loss - - (51,835) - - (51,835)
Comprehensive income - - - 44 - 44
------ --------- -------- --------- -------- ---------
Balance at September 30, 2001 $ 327 $ 113,904 $(11,260) $ - $(39,525) $ 63,446
====== ========= ======== ========= ======== =========
See notes to consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Years Ended
------------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ----------- --------------
OPERATING ACTIVITIES:
Net (loss) income $ (51,835) $ 46,687 $ 5,520
Deduct income from and (loss) gain on disposition of
discontinued operations (1,048) (59,337) (6,279)
----------- ----------- -----------
Loss from continuing operations (52,883) (12,650) (759)
Adjustments to reconcile net (loss) income to net cash (used in )
provided by operating activities:
Depreciation and other amortization 15,737 7,201 2,632
Deferred tax expense 13,120 7,110 842
Amortization of debt issuance costs 53 2 -
Write-down of goodwill 9,816 - -
Loss on assets to be disposed of 1,389 1,773 -
Purchased in-process research and development 250 6,590 -
Provision for uncollectible note receivable - 5,387 -
Write-down of technology license - 4,000 -
Gain on sale of preferred stock investment - (2,905) (898)
Gain on sale of division - - (667)
Minority interest in net losses of consolidated joint venture (8,246) (7,918) (2,191)
Other 365 757 221
Changes in assets and liabilities:
Decrease (increase) in trade accounts receivable 39 (513) 4,200
(Increase) decrease in inventories (4,175) (2,480) 2,382
Increase in prepaid expenses and other assets (6,350) (1,595) (1,511)
Increase (decrease) in trade accounts payable 7,050 1,215 (323)
(Decrease) increase in accrued expenses (762) 4,304 (2,340)
Increase in other liabilities 1,023 1,107 1,559
----------- ----------- -----------
Net cash (used in) provided by continuing operations (23,574) 11,385 3,147
Net cash (used in) provided by discontinued operations (1,392) (42,118) 18,664
----------- ----------- -----------
Net cash (used in) provided by operating activities (24,966) (30,733) 21,811
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (26,086) (25,836) (10,445)
Investment purchases of available-for-sale securities (13,015) (50,115) -
Investment purchases of held-to-maturity securities (6,002) (17,434) -
Proceeds from sales of available-for-sale securities 16,994 46,150 -
Proceeds from held-to-maturity securities 23,477 - -
Business acquisitions, net of cash acquired (2,750) 613 (732)
Purchase of investment - (2,640) -
Proceeds from sale of preferred stock - 8,125 4,822
Purchase of preferred stock - - (9,144)
Proceeds from sale of discontinued operations - 208,976 -
Proceeds from sale of division - - 1,567
----------- ----------- -----------
Net cash (used in) provided by investing activities (7,382) 167,839 (13,932)
----------- ----------- -----------
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
Fiscal Years Ended
-----------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ----------- -------------
FINANCING ACTIVITIES:
Repayment of term loans (6,313) (91,704) (10,173)
Proceeds from term loans 5,095 - 2,582
Net increase (decrease) in revolving loan balances 5,948 (13,162) 3,086
Proceeds from termination of interest rate swaps - 950 -
Minority interest capital contributions 2,382 11,628 5,725
Stock options exercised 283 772 353
Purchases of warrants - - (292)
Exercise of warrants 6 742 -
Purchases of treasury stock (9,641) (13,850) (9,114)
----------- ----------- -----------
Net cash used in financing activities (2,240) (104,624) (7,833)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (34,588) 32,482 46
Cash and cash equivalents at beginning of year 36,625 4,143 4,097
----------- ----------- -----------
Cash and cash equivalents at end of year $ 2,037 $ 36,625 $ 4,143
=========== =========== ===========
Supplemental Disclosures:
Payments for income taxes and interest were as follows (in thousands):
Fiscal Years Ended
-----------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ------------ -------------
Income tax payments - continuing operations $ 375 $ 6,344 $ 677
Income tax payments - discontinued operations 2,201 341 432
Interest payments (net of capitalized interest) -
continuing operations 1,507 2,140 714
Interest payments (net of capitalized interest) -
discontinued operations 9 4,688 6,855
Non-cash investing activities were as follows (in thousands):
Fiscal Years Ended
----------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ----------- -------------
Business acquisitions purchased with Company common
stock $ 15,067 $ 40,614 $ 1,373
Business acquisitions purchased with notes payable - - 3,033
The purchases of property, plant and equipment and the proceeds from term loans
for the fiscal years ended September 30, 2001, October 1, 2000 and September 26,
1999 do not include $3,500,000, $3,211,000 and $20,372,000, respectively,
related to property held under capitalized leases (Note 15).
During the fiscal years ended September 30, 2001, October 1, 2000 and September
26, 1999, the Company made matching contributions to its 401(k) Savings Plan of
$124,000, $219,000 and $199,000, respectively, through the re-issuance of
19,933, 17,206 and 39,344 shares of its common stock from treasury,
respectively.
During the fiscal year ended September 30, 2001, the Company made special
discretionary contributions to its 401(k) Savings Plan for the plan years ended
December 31, 2000 and December 31, 1999. These special contributions were valued
at approximately $2,235,000 and were funded through the re-issuance of 298,612
shares of common stock from treasury. The estimated liability and related
compensation expense for the special discretionary contributions accrued at
October 1, 2000 approximated $1,698,000 for continuing operations and $459,000
for discontinued operations.
See notes to consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended September 30, 2001,
October 1, 2000 and September 26, 1999
1. THE COMPANY
The accompanying consolidated financial statements relate to Uniroyal
Technology Corporation, its wholly-owned subsidiaries, Uniroyal HPP
Holdings, Inc., Uniroyal Compound Semiconductors, Inc. (formerly
Uniroyal Optoelectronics, Inc.), BayPlas3, Inc., BayPlas7, 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"). BayPlas7, Inc. includes its 98%
owned subsidiary, Uniroyal Engineered Products, LLC, which includes its
operating divisions, Uniroyal Engineered Products ("UEP") and Uniroyal
Adhesives and Sealants ("UAS"). The remaining ownership in Uniroyal
Engineered Products, LLC is split between Uniroyal Technology
Corporation and Uniroyal Compound Semiconductors, Inc. Uniroyal
Compound Semiconductors, Inc. includes its wholly-owned subsidiaries,
NorLux Corp., Uniroyal Optoelectronics, LLC and Uniroyal
Optoelectronics Service Corporation. Uniroyal Liability Management
Company includes its wholly-owned subsidiary BayPlas2, Inc. See Note 6
for information regarding the sale of UAS. See Note 8 regarding the
purchase of the minority interest in the Uniroyal Optoelectronics, LLC
joint venture. See Note 12 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 ULMC;
therefore, the accompanying consolidated financial statements include
the results of operations of ULMC and its subsidiary, BayPlas2, Inc.,
which is 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
design, development and manufacture of optoelectronic devices and
optoelectronic solutions. Uniroyal Optoelectronics Service Corporation
was established during the fiscal year ended September 30, 2001 and
leases employees to Uniroyal Optoelectronics, LLC and ULMC. UnitechNJ,
Inc. is a special purpose subsidiary created during 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 during the fiscal year ended October 1, 2000 to
hold certain assets of the Company. BayPlas7, Inc. is a special purpose
subsidiary created during the fiscal year ended September 30, 2001 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 and specialty chemicals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going Concern
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business;
and, as a consequence the consolidated financial statements do not
include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and
classifications of liabilities that might be necessary should the
Company be unable to continue as a going concern. See further
discussion at Note 3.
Consolidation
The consolidated financial statements include the accounts of Uniroyal
Technology Corporation, its wholly-owned subsidiaries and its
majority-owned subsidiary. 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 subsidiary.
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 September 30, 2001 ("Fiscal 2001"), October 1,
2000 ("Fiscal 2000") and September 26, 1999 ("Fiscal 1999"). Fiscal
2000 encompassed a 53-week period as compared to Fiscal 2001 and Fiscal
1999 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
accounting principles generally accepted in the United States of
America 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 sale 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 have been used to manage interest rate
exposures. The interest rate differentials to be paid or received under
such swaps were 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 2001, Fiscal 2000 and Fiscal
1999 approximated $810,000, $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.
During Fiscal 2001, the Company made a decision to terminate its lease
for a new facility in Sterling, Virginia for the operations of Sterling
Semiconductor, Inc. The decision was made as a result of construction
delays and breaches of contract. As a result of the lease termination,
the Company recorded a write-off of approximately $686,000 for the
impairment of assets at that facility. This amount is included in the
statement of operations within loss on assets to be disposed of. The
Company is currently involved in litigation regarding the lease
termination (Note 15).
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 20). The Company expects to dispose of
the remaining Port Clinton assets, including real property, during the
second quarter of the fiscal year ending September 29, 2002 ("Fiscal
2002") 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 $756,000 at
September 30, 2001. 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 additional impairment losses of
$544,000 in Fiscal 2001 and $1,773,000 in Fiscal 2000, related to
machinery and equipment and real property at Port Clinton.
During Fiscal 1998, the Company decided to sell its Stirling facility.
In accordance with SFAS No. 121, the Company had previously recorded a
write-down of the facility in Fiscal 1998. In Fiscal 2001, the Company
recorded an additional write-down of the facility of approximately
$159,000. The Company expects the disposition of the Stirling facility
to be completed in Fiscal 2002. The Company is carrying the facility at
fair value less cost to sell based upon recent purchase offers. The
fair value less cost to sell approximates $841,000 at September 30,
2001. The Stirling operations (excluding the facility) were sold to
Spartech Corporation in Fiscal 2000. See Note 12.
Amortization
Debt issuance costs are included in other assets and are amortized
using the interest method over the life of the related debt. Trademarks
are included in other assets and are amortized using the straight-line
method over periods ranging from 14 to 20 years. Goodwill is amortized
on a straight-line basis over five years for the high technology
business and 15 years for all others. Goodwill is reported net of
accumulated amortization of $7,579,000 and $1,896,000 at September 30,
2001 and October 1, 2000, respectively.
Research and Development Expenses
Research and development expenditures are expensed as incurred.
Research and development expenditures were $4,352,000, $1,113,000 and
$608,000 in Fiscal 2001, Fiscal 2000 and Fiscal 1999, 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.
At September 30, 2001, the Company established a deferred tax asset
valuation allowance of approximately $17,870,000 because management
could not conclude that it is more likely than not that the deferred
tax asset could be realized.
Stock-Based Compensation
The Company accounts for employee stock option grants using the
intrinsic-value method in accordance with Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees. Under
APB Opinion No. 25, compensation costs for each stock option granted is
computed as the amount by which the quoted market price of the
Company's common stock on the date of grant exceeds the amount the
employee must pay to acquire the common stock. The amount of
compensation cost, if any, is charged to income over the vesting
period.
In Fiscal 1997, the Company adopted only the disclosure provisions of
SFAS No. 123, Accounting for Stock-Based Compensation. Pro forma
information regarding net income and earnings per share, as calculated
under the provisions of SFAS No. 123, are disclosed in Note 16.
Comprehensive (Loss) 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 (loss) income. The net unrealized
gain on securities available for sale is shown net of tax (expense)
benefit of ($34,000), $28,000 and ($63,000) for the years ended
September 30, 2001, October 1, 2000, September 26, 1999, respectively.
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 the 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. 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 adopted
SFAS No. 133 (as amended by SFAS No. 138) as of October 2, 2000. The
adoption of this statement had no impact on the Company's financial
position or results of operations.
In June 2001, the FASB issued SFAS No. 141, Business Combinations,
which requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 and that more of
the pooling-of-interest method is no longer allowed. The Company has
adopted this standard for business combinations after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 requires that upon adoption,
amortization of goodwill will cease and instead, the carrying value of
goodwill will be evaluated for impairment on an annual basis.
Identifiable intangible assets will continue to be amortized over their
useful lives and reviewed for impairment in accordance with SFAS No.
121. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. The Company is evaluating the impact of the adoption
of SFAS No. 142 and has not yet determined the effect of adoption on
its financial position and results of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which replaces SFAS No.
121. The accounting model for long-lived assets to be disposed of by
sale applies to all long-lived assets, including discontinued
operations, and replaces the provisions of APB Opinion No. 30,
Reporting Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of segments of a
business. SFAS No. 144 requires that those long-lived assets be
measured at the lower of the carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be
measured at net realizable value or include amounts for operating
losses that have not yet occurred. SFAS No. 144 also broadens the
reporting of discontinued operations to include all components of an
entity with operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The provisions of SFAS No. 144 are
effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally are to be applied prospectively.
The Company has not yet evaluated the impact the adoption of SFAS No.
144 will have on its financial statements.
Reclassifications
Certain prior years' amounts have been reclassified to conform with the
current year's presentation.
3. LIQUIDITY
The Company has experienced losses from continuing operations in each
of the three years ended September 30, 2001 and has an accumulated
deficit of $11,260,000 as of September 30, 2001. Cash used in
operations for the years ended September 30, 2001 and October 1, 2000
was $24,966,000 and $30,733,000, respectively, and it is likely that
cash flow from operations will be negative throughout Fiscal 2002. The
Company had a working capital deficiency at September 30, 2001 of
$2,765,000 compared to working capital of $48,988,000 as of October 1,
2000. At September 30, 2001, the Company's principal source of
liquidity is $2,037,000 of cash and cash equivalents and $1,087,000 of
availability under a revolving credit facility. Such conditions raise
substantial doubt that the Company will be able to continue as a going
concern for a reasonable period of time without receiving additional
funding.
The operating results for Fiscal 2001 and Fiscal 2000 have occurred
while the Company has been repositioning its operations away from the
mature, industrial-based activities and into the high-growth compound
semiconductor technology industry. The transition to this business
segment has required significant investment spending related to
start-up costs and capital expenditures. Many of the markets in this
business segment are characterized by long lead times for new products
requiring significant working capital investments and extensive
testing, qualification and approval by the Company's customers and end
users of products. This business segment is marked by intense
competition requiring the Company to introduce new products in a timely
and cost-effective manner. This business segment started operations in
the second quarter of Fiscal 2000 and has a limited operating history.
The segment faces risks and difficulties as an early stage business in
a high-growth and rapidly evolving industry. These factors have placed
a significant strain on the financial resources of the Company.
Management has sought to generate additional financial resources by
reducing operating costs and selling certain assets and by seeking
additional sources of financing, including bank and other lender
financing as well as private placements. The ultimate success of the
Company depends on its ability to obtain additional financing, to
continue reducing operating costs and, ultimately to generate higher
sales levels to attain profitability.
On November 9, 2001, the Company sold certain net assets of UAS, which
comprised its Specialty Adhesives segment (Note 6). Net cash proceeds
at closing approximated $8,000,000 after the repayment of the Emcore
Corporation note and the pay-down of a portion of the revolving line of
credit related to UAS assets (Note 11).
4. INVESTMENTS
At September 30, 2001, the Company had no investments. During Fiscal
2001, the Company's remaining investments matured or were liquidated.
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, was as
follows (in thousands):
Held-to-Maturity Available-for-Sale Total
---------------- ------------------ -----------
Short-term:
Corporate debt securities $ 12,425 $ - $ 12,425
----------- ---------- -----------
Long-term:
Corporate debt securities 5,009 1,000 6,009
State debt security - 2,750 2,750
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 were carried at amortized cost. During
Fiscal 2001, the Company liquidated its remaining held-to-maturity
securities portfolio, some prior to their scheduled maturity date, and
recognized a loss of approximately $22,000 upon disposal. The fair
value of the held-to-maturity debt securities approximated $17,372,000
at October 1, 2000, based upon broker quotes. The gross unrecognized
holding loss approximated $62,000 at October 1, 2000.
Available-for-sale debt securities were 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 were 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 Fiscal
2001 or Fiscal 2000.
Available-for-sale equity securities were 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 were based upon the specific identification method.
During Fiscal 2001, the realized gain on the sale of available-for-sale
equity securities approximated $15,000. 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). During Fiscal 2000, there were no
realized gains or losses on the sale of available-for-sale equity
securities other than those discussed in Note 18.
There were no investments at September 26, 1999, other than the
investment in Emcore Corporation preferred stock discussed in Note 18.
5. INVENTORIES
Inventories consisted of the following (in thousands):
September 30, October 1,
2001 2000
------------- ----------
Raw materials, work in process and supplies $ 7,468 $ 4,482
Finished goods 5,642 4,453
---------- ----------
Total $ 13,110 $ 8,935
========== ==========
6. DISCONTINUED OPERATIONS OF UAS
On June 26, 2001 (the measurement date), the Company entered into a
letter of intent to sell certain net assets of UAS, which comprises its
Specialty Adhesives segment. Then, on August 24, 2001, the Company
entered into an asset purchase agreement for the sale of UAS. The
transaction closed on November 9, 2001 for a purchase price of
$21,620,000. Proceeds consisted of approximately $14,620,000, in cash,
$3,500,000 in subordinated promissory notes of the purchaser,
$1,500,000 in preferred stock of the purchaser's parent and $2,000,000
of payments contingent on the future earnings achievement of the UAS
business sold. The Company will record a gain of approximately
$2,500,000 on the sale in the first quarter of Fiscal 2002 after the
settlement of certain purchase price adjustments and the calculation of
transaction costs.
The consolidated financial statements presented herein have been
restated to reflect the discontinued operations of UAS in accordance
with APB Opinion No. 30.
The net assets of the discontinued operations of UAS have been
segregated on the September 30, 2001 and October 1, 2000 consolidated
balance sheets, the components of which are as follows (in thousands):
Net Assets of Discontinued Operations of UAS
September 30, October 1,
2001 2000
------------- ------------
Assets:
Cash $ 2 $ 2
Trade receivables 1,469 1,277
Inventories 2,786 2,144
Prepaids and other assets 96 82
Property, plant and equipment - net 10,305 10,564
Goodwill - net 3,792 1,253
Other assets - net 879 1,024
----------- -----------
Total assets 19,329 16,346
----------- -----------
Liabilities:
Current portion of long-term debt - 1
Trade payables 3,159 3,302
Compensation and benefits 376 591
Taxes, other than income 226 236
Other accrued expenses 1,357 1,249
Other liabilities 108 135
----------- -----------
Total liabilities 5,226 5,514
----------- -----------
Net assets of discontinued operations of UAS $ 14,103 $ 10,832
=========== ===========
The results of operations for all periods presented have been restated
for discontinued operations. The operating results of the discontinued
operations of UAS are as follows (in thousands):
Fiscal Years Ended
---------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ----------- -------------
Net sales $ 31,372 $ 31,579 $ 28,388
Cost of goods sold 24,325 24,363 21,987
Selling and administrative 2,693 3,610 2,842
Depreciation and other amortization 1,154 944 873
----------- ----------- -----------
Income before interest expense and income taxes 3,200 2,662 2,686
Interest income - net 19 23 18
----------- ----------- -----------
Income before taxes 3,219 2,685 2,704
Income tax expense (898) (694) (694)
----------- ----------- -----------
Net income from discontinued operations of UAS $ 2,321 $ 1,991 $ 2,010
=========== =========== ===========
The following note relates to the business of the Specialty Adhesives
segment.
Acquisition
On December 18, 2000, the Company completed the acquisition of the net
assets of the solvent-based industrial adhesives business of Henkel
Corporation for $2,750,000 in cash, which became part of the operations
of UAS.
The business combination was accounted for by the purchase method in
accordance with APB Opinion No. 16, Business Combinations. The results
of operations of the above named business is included in the
consolidated financial statements from the date of acquisition forward
as part of the discontinued operations of UAS.
The fair market value of purchased assets was determined to be zero;
therefore, the entire purchase price has been allocated to goodwill on
the date of acquisition. The acquired goodwill was to be amortized over
its estimated useful life of 15 years.
The pro forma effect of this acquisition on the Company's net sales,
income (loss) from continuing operations, net income (loss) and
earnings (loss) per share, had the acquisition occurred on September
28, 1998, is not considered material, either quantitatively or
qualitatively.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in
thousands):
Estimated September 30, October 1,
Useful Lives 2001 2000
------------ ------------- -----------
Land and improvements - $ 203 $ 203
Buildings and improvements 5-40 years 14,170 9,635
Machinery, equipment and office
furnishings 3-20 years 64,616 47,138
Construction in progress - 12,989 6,484
--------- ---------
91,978 63,460
Accumulated depreciation (25,090) (16,638)
--------- ---------
Total $ 66,888 $ 46,822
========== =========
Depreciation expense was $8,556,000, $4,692,000 and $2,424,000 for
Fiscal 2001, Fiscal 2000 and Fiscal 1999, respectively.
8. ACQUISITION OF MINORITY INTEREST
As of September 29, 1997, the Company entered into a technology
agreement with Emcore Corporation ("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
10 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, Mr. Russell resigned from the
Board of Directors of the Company and Mr. Curd resigned from the Board
of Directors of Emcore.
Uniroyal Optoelectronics, Inc. (now known as Uniroyal Compound
Semiconductors, Inc.), a wholly-owned subsidiary of Uniroyal Technology
Corporation, entered into a joint venture (Uniroyal Optoelectronics,
LLC ("UOE")) with Emcore which Uniroyal Optoelectronics, Inc. managed
and owned a 51% interest through June 2001 and a 64.3% interest
thereafter until August 2, 2001. Emcore was the 49% owner through June
2001 and 35.7% owner until August 2, 2001. 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 2001, Fiscal 2000 and
Fiscal 1999, Emcore made additional capital contributions to the joint
venture of $2,382,000, $11,628,000 and $5,500,000, respectively. During
Fiscal 2001 and Fiscal 2000, the Company made additional capital
contributions to the joint venture of approximately $17,700,000 and
$17,827,000, respectively. The Company did not make any capital
contributions to the joint venture in Fiscal 1999.
On August 2, 2001, the Company purchased Emcore's remaining 35.7%
interest in UOE. The primary reason for the purchase was the Company's
desire to have full control of the venture. The purchase was
consummated through the issuance of 1,965,924 shares of the Company's
common stock valued at approximately $15,067,000 (net of approximately
$67,000 of stock registration costs). The Company common stock issued
was valued based upon the average market value of such shares over the
2-day period before and after the terms of the acquisition were agreed
to and announced. The Company is required to register these shares of
the Company's common stock issued to Emcore and anticipates that the
registration statement will be filed shortly after the filing of the
Company's Annual Report on Form 10-K.
The acquisition of the Emcore minority interest was accounted for by
the purchase method in accordance with SFAS No. 141, Business
Combinations.
The results of 100% of the UOE operations are included in the
consolidated financial statements for the period August 2, 2001 through
September 30, 2001. Emcore's share of the losses prior to August 2,
2001 are shown as minority interest in the consolidated statements of
operations. The purchase price was allocated to assets purchased and
liabilities assumed based upon the percentage of interest purchased
(35.7%) applied to the difference between fair market value and net
book value of the assets and liabilities on the date of acquisition.
The fair market values were based upon an independent appraisal and
management estimates at the date of acquisition. The purchase price was
allocated as follows (in thousands):
Property, plant and equipment $ 352
Intangible assets 928
Goodwill 12,408
Minority interest 1,446
-----------
Total assets acquired 15,134
Current liabilities (67)
-----------
Net assets acquired $ 15,067
===========
Of the $928,000 of acquired intangible assets, $678,000 was assigned to
core technology with a weighted average useful life of 5 years and
$250,000 was assigned to in-process research and development assets
("IPR&D") that were written off at the date of acquisition in
accordance with SFAS No. 2, Accounting for Research and Development
Costs, as clarified by FASB Interpretation No. 4, Applicability of FASB
Statement No. 2 to Business Combinations Accounted for the Purchase
Method. The write-off of the IPR&D was charged to expense and was
determined through established valuation techniques. This amount was
expensed at acquisition because technological feasibility had not been
established and no future alternate uses existed. The $12,408,000 of
goodwill was assigned to the Compound Semiconductor and Optoelectronics
segment, is expected to be deductible for tax purposes, and, in
accordance with SFAS No. 141, is not amortizable.
Included in selling and general administrative expenses of the Company
for Fiscal 2001, Fiscal 2000 and Fiscal 1999 are $14,672,000,
$12,667,000 and $4,345,000, respectively, of UOE start-up costs.
In July 1998, UOE entered into a supply agreement with Emcore whereby
Emcore agreed to supply epitaxial wafers, dies and package-ready
devices to UOE until UOE was ready to produce its own products. During
Fiscal 2000 and Fiscal 1999, UOE sales of approximately $1,643,000 and
$479,000, respectively, were attributable to product supplied by
Emcore. No sales were attributable to product supplied by Emcore in
Fiscal 2001. The supply agreement was terminated in connection with the
acquisition of Emcore's minority interest on August 2, 2001.
In July 1998, UOE 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 2001 and Fiscal 2000 for training and research and development.
UOE reached commercial production levels in the first quarter of Fiscal
2002 and accordingly emerged from the development stage on October 1,
2001.
9. 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 September 30,
2001. The purchase price was allocated to the estimated fair value of
assets purchased, liabilities assumed and 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. In the fourth
quarter of Fiscal 2001, the Company recorded a write-down of Sterling
goodwill of approximately $9,816,000. The write-down was in accordance
with SFAS No. 121. Goodwill was determined to be impaired after revised
undiscounted future cash flows were determined to be less than the
carrying amount of goodwill. The amount of the write-off was then
calculated as the excess of goodwill over the fair value of Sterling.
The estimated fair value of the Company was determined through
discounted cash flow models. Factors in the fourth quarter that led to
impairment include the buyout of Emcore's minority interest on August
2, 2001 (Note 8) and the re-evaluation of the Compound Semiconductor
and Optoelectronics segment which included revised strategies and
projections.
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, 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 poly type 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):
Expected Date for
Discount Economic Percent Full Commercial
IPR&D Technology Description Rate Life Complete Fair Value 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 approximated $13,200,000 in May of
2000 and $10,900,000 at September 30, 2001. Progress has been made on
purchased IPR&D projects during Fiscal 2001. The expected dates for
full commercial viability remain the same. 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 (in thousands) 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 give 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.
Fiscal Year Ended
-------------------------------
October 1, September 26,
2000 1999
----------- -------------
Pro forma net sales $ 38,838 $ 44,774
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 of which one of the
Company's directors is a principal and approximately $137,000 paid to a
law firm of which one of the Company's directors is a senior partner.
10. OTHER ASSETS
Other assets consisted of the following (in thousands):
September 30, October 1,
2001 2000
------------- ------------
Intangible assets $ 6,183 $ 5,695
Trademarks 2,256 2,464
Technology license - 1,000
Deposits 116 139
Other 3,119 2,853
---------- ----------
Total $ 11,674 $ 12,151
========== ==========
Intangible assets were acquired in connection with the Sterling
acquisition (Note 9), in connection with the acquisition of Emcore's
minority interest (Note 8), and as a result of certain miscellaneous
licensing arrangements. Intangible assets are reported net of
accumulated amortization of $1,697,000 at September 30, 2001 and
$407,000 at October 1, 2000. Trademarks are reported net of accumulated
amortization of $1,800,000 and $1,592,000 at September 30, 2001 and
October 1, 2000, 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 8). 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. In conjunction with
the purchase of Emcore's minority interest (Note 8), the technology
license agreement was terminated and the remaining value of the
technology license was reclassified to intangible assets and will be
amortized over the estimated life of the technology of five years.
11. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
September 30, October 1,
2001 2000
------------- ----------
Revolving credit agreement $ 7,214 $ 1,266
Secured promissory note 5,000 -
Unsecured promissory notes 1,739 3,069
Capital lease obligations 16,652 17,828
---------- ----------
30,605 22,163
Less current portion (18,140) (6,701)
---------- ----------
Long-term debt, net
of current portion $ 12,465 $ 15,462
========== ==========
Debt amounts become due during subsequent fiscal years ending in
September as follows (in thousands):
2002 $ 18,140
2003 6,585
2004 4,758
2005 1,048
2006 74
----------
Total debt $ 30,605
==========
Tyco Capital Revolving Credit Agreement
On April 14, 1998, the Company entered into an Amendment and Consent
Agreement with Tyco Capital (formerly The CIT Business/Credit Group,
Inc.) ("Tyco") 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
Tyco revolving credit agreement was assumed by Uniroyal Engineered
Products, Inc. (now known as Uniroyal Engineered Products, LLC). The
collateral securing the credit line includes only the assets of
Uniroyal Engineered Products, LLC. Interest on the Tyco 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 matured
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 September 30, 2001.
All of Uniroyal Engineered Products, LLC'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 September
30, 2001. At September 30, 2001, the Company had approximately
$7,214,000 of outstanding borrowings under the revolving credit
agreement and $1,087,000 of availability. The Company had $1,266,000 of
outstanding borrowings under this agreement at October 1, 2000. The
weighted average interest rate on the Tyco revolving credit agreement
was 9.1% during Fiscal 2001 and Fiscal 2000.
Secured Promissory Note
In connection with the August 2, 2001 acquisition of Emcore's minority
interest in UOE (Note 8), the Company received a $5,000,000 loan, at
prime rate, from Emcore. The Company incurred additional interest of
433 shares of the Company's common stock per day from September 28,
2001 until the note was repaid on November 9, 2001.
The loan was evidenced by a convertible note, the principal and accrued
interest of which was convertible into the Company's common stock on
the earlier of September 20, 2001 and the completion of the sale of
UAS. The conversion price for the note was based upon the trading price
of the Company's common stock, but would be no more than $8.39 or less
than $6.87 per share and was subject to customary antidilution
adjustments. The weighted average interest rate of this obligation was
7.0% in Fiscal 2001. The maturity date of the loan was the earlier of
the completion of the sale of UAS (Note 6) or August 2, 2003.
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 September 30,
2001, the balance of this note payable is zero.
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 was 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 September 30, 2001,
the balance of these notes approximates $1,250,000.
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 2001 and Fiscal 2000 were
primarily related to the Company's Compound Semiconductor and
Optoelectronics segment. The Company is a guarantor of the majority of
the lease obligations. The weighted average interest rate on these
obligations was 9.5% in Fiscal 2001 and 8.9% in Fiscal 2000.
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
-----------
2002 $ 6,380
2003 6,616
2004 4,996
2005 1,076
2006 71
---------
19,139
Less imputed interest (2,487)
---------
Total $ 16,652
=========
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.
12. DISCONTINUED OPERATIONS OF HPPI
On December 24, 1999, the Company entered into a definitive agreement
to sell certain net assets of HPPI, which comprises 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"). In Fiscal 2000, the ultimate purchase price
adjustments had not been agreed to by both parties. The Company
estimated, and had provided for, an ultimate reduction in purchase
price of approximately $5,100,000, which would have resulted 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 had provided for, Spartech was seeking an additional purchase
price reduction up to approximately $4,237,000. After consideration of
the estimated purchase price adjustments of $5,100,000 during Fiscal
2000, the Company recorded a gain on the sale of approximately
$55,821,000 (net of taxes of approximately $38,146,000).
On August 27, 2001, the Company and Spartech agreed to the final
purchase price adjustment. The settlement resulted in the loss of the
$5,000,000 holdback as well as an additional $1,000,000 payment to be
made by the Company to Spartech. The $1,000,000 payment is evidenced by
an unsecured promissory note at prime rate. The note is repayable in
four increments of $250,000. The first increment was due November 1,
2001 and has been paid. The remaining payments are due February 1,
2002, May 1, 2002 and August 1, 2002. As a result of the settlement,
the Company recorded a loss of approximately $522,000 (net of taxes of
approximately $306,000) in Fiscal 2001.
The accompanying consolidated financial statements reflect HPPI as
discontinued operations in accordance with APB Opinion No. 30.
Net liabilities of the discontinued operations of HPPI have been
segregated on the September 30, 2001 and October 1, 2000 balance
sheets, the components of which are as follows (in thousands):
Net Liabilities of Discontinued Operations of HPPI
September 30, October 1,
2001 2000
------------- -----------
Assets:
Cash $ 109 $ 100
Trade receivables - 21
Deferred income tax - 186
Prepaids and other 194 466
----------- -----------
Total assets 303 773
----------- -----------
Liabilities:
Current portion of long-term debt 1,000 158
Trade payables 45 432
Other accrued expenses 1,168 4,815
----------- -----------
Total liabilities 2,213 5,405
----------- -----------
Net liabilities of discontinued
operations of HPPI $ 1,910 $ 4,632
=========== ===========
The results of operations for all periods presented have been restated
for the HPPI discontinued operations. The operating results of the HPPI
discontinued operations are as follows (in thousands):
Fiscal Years Ended
--------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------ ----------- -------------
Net sales $ - $ 55,001 $ 130,219
Cost of goods sold - 44,434 93,367
Selling and administrative 221 3,933 15,538
Depreciation and other amortization - 2,511 5,652
Loss on assets to be disposed of - - 144
Loss (gain) on sale of segment 828 (96,027) -
----------- ----------- -----------
Income before interest expense and income taxes 1,049 100,150 15,518
Interest expense - net - (3,620) (8,574)
----------- ----------- -----------
Income before taxes (1,049) 96,530 6,944
Income tax expense (224) (39,184) (2,675)
----------- ----------- -----------
Net (loss) income and gain on disposition of
discontinued operations of HPPI $ (1,273) $ 57,346 $ 4,269
=========== =========== ===========
The following information relates to the business of HPPI.
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.
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. 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.
13. OTHER LIABILITIES
Other liabilities consisted of the following (in thousands):
September 30, October 1,
2001 2000
------------- -----------
Accrued retirement benefits $ 23,756 $ 22,482
Taxes, other than income - 2
Other 932 1,181
----------- -----------
Total $ 24,688 $ 23,665
=========== ===========
14. INCOME TAXES
The effective tax rate differs from the statutory federal income tax
rate for the following reasons (in thousands):
Fiscal Years Ended
-------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ----------- -------------
Income tax benefit calculated at the
statutory rate applied to loss before
income taxes and discontinued
operations $ (16,167) $ (13,808) $ (1,354)
Increase (decrease) resulting from:
Capital loss from medical benefits
subsidiary - - (15,980)
Valuation allowance 17,870 (13,702) 13,702
Goodwill 6,273 3,358 -
State income tax (1,642) (1,870) 30
Research and development credit - (894) -
Other 358 40 388
--------- --------- ---------
Income tax expense (benefit) $ 6,692 $ (26,876) $ (3,214)
========= ========= =========
Income tax expense (benefit) consisted of the following components (in
thousands):
Fiscal Years Ended
--------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ------------ -------------
Current:
Federal $ (6,284) $ (31,340) $ (3,691)
State (144) (2,646) (365)
----------- ----------- ----------
Total $ (6,428) $ (33,986) $ (4,056)
=========== =========== ==========
Net deferred tax expense:
Federal $ 12,045 $ 6,334 $ 447
State 1,075 776 395
----------- ----------- ----------
Total $ 13,120 $ 7,110 $ 842
=========== =========== ==========
Total:
Federal $ 5,761 $ (25,006) $ (3,244)
State 931 (1,870) 30
----------- ----------- ----------
Total $ 6,692 $ (26,876) $ (3,214)
=========== =========== ==========
The components of the deferred tax assets and liabilities were as
follows (in thousands):
September 30, 2001
-------------------------------------------------
Assets Liabilities Total
----------- ----------- -----------
Current
-------
Accrued expenses deductible in future
Periods $ 1,415 $ - $ 1,415
Valuation allowance (1,415) - (1,415)
----------- ----------- -----------
Total - - -
=========== =========== ===========
Non-Current
-----------
Tax loss carryforward benefits $ 5,269 $ - $ 5,269
Acquired tax loss carryforward benefits 4,741 - 4,741
Tax credit carryforward benefits 2,109 - 2,109
Book basis in excess of tax basis of assets - (6,257) (6,257)
Long-term accrual of expenses deductible
in future periods 10,593 - 10,593
Valuation allowance (16,455) - (16,455)
----------- ----------- -----------
Total $ 6,257 $ (6,257) $ -
=========== =========== ===========
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
=========== =========== ===========
The Company has established a valuation allowance as it has not
determined that it is more likely than not that the deferred tax asset
is realizable, based upon the Company's projected future taxable
income.
As of September 30, 2001, the Company has net operating loss
carryforwards for tax purposes of approximately $10,000,000 that expire
in the year 2021 as well as research and development tax credit
carryforwards of approximately $1,200,000 expiring in years beginning
in 2007.
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 HPPI.
15. COMMITMENTS AND CONTINGENCIES
Litigation
On February 23, 2001, the Company and its wholly owned subsidiary,
Sterling, were served with a complaint by AFG-NVC, LLC in the Loudoun
County, Virginia Circuit Court. The complaint seeks approximately
$8,106,000 for alleged default under a lease and benefits that the
landlord believes it would have received under such lease. The Company
has filed an answer seeking not less than $7,000,000 for breaches of
contract, fraud and constructive fraud on the part of the plaintiff.
The case is currently in discovery. At the present time, the amount of
liability, if any, cannot be reasonably estimated.
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.
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 September 30, 2001, the Company
had incurred approximately $746,000 of related remediation costs. In
connection with the sale of UAS in November 2001 (Note 6), we placed an
additional $300,000 in escrow.
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 had removed approximately 60% of the soil on the property in
Fiscal 2000 at a cost of approximately $1,600,000. Fiscal 2001
expenditures approximated $50,000. The Company has retained
environmental consultants to review its options with regard to the
remaining soil on the premises and expects to complete remediation
under a program approved by the Connecticut Department of Environmental
Protection in December 2001. The environmental assessment of the
Hackensack, New Jersey facility is still underway. At September 30,
2001, the Company has estimated the clean-up costs for both facilities
to approximate $1,000,000. At September 30, 2001, the estimates for
environmental clean-up costs are included in the Net Liabilities of
Discontinued Operations of HPPI. Spartech has agreed to lease the
parcels for a nominal amount until after remediation is complete.
Based on information available as of September 30, 2001, 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 7) consisted of the following (in thousands):
September 30, October 1,
2001 2000
------------ ----------
Buildings and improvements $ 5,429 $ 5,429
Machinery, equipment and office
furnishings 20,279 18,202
Construction in progress 1,845 -
---------- ----------
27,553 23,631
Less accumulated amortization (5,458) (2,117)
---------- ----------
Total $ 22,095 $ 21,514
========== ==========
Amortization of assets recorded under capital leases is included with
depreciation expense.
The Company leases equipment, vehicles and warehouse and office space
and contracts for various services 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 and service agreements during subsequent fiscal years ending in
September are as follows (in thousands):
Fiscal Year
-----------
2002 $ 1,964
2003 1,911
2004 1,730
2005 943
2006 769
Subsequent years 2,061
--------
Total $ 9,378
========
Rent expense was approximately $1,456,000, $988,000 and $556,000 for
Fiscal 2001, Fiscal 2000 and Fiscal 1999, 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 September 30, 2001 and October 1, 2000, participant
deferrals, which are included in other liabilities, were $1,145,000 and
$938,000, respectively. The expense during Fiscal 2001, Fiscal 2000 and
Fiscal 1999 was $207,000, $212,000 and $208,000, 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 were 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 September 30, 2001 and
October 1, 2000, $2,135,000 has been capitalized to reflect the cash
surrender value of these contracts due the Company.
As of September 30, 2001, the Company had employment contracts with
four officers of the Company, providing for total annual payments of
approximately $1,631,000 plus bonuses through September 1, 2002.
Effective October 16, 2001, the compensation of the four officers was
reduced by amounts ranging from 15% to 25% for an undetermined length
of time.
16. STOCKHOLDERS' EQUITY
The Company's certificate of incorporation provides that the authorized
capital stock of the Company consists of 100,000,000 shares of common
stock and 1,000 shares of preferred stock, each having a par value of
$0.01 per share. At September 30, 2001, 32,662,611 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 2001, Fiscal 2000 and Fiscal 1999.
Treasury Stock Transactions
During Fiscal 2001 and Fiscal 2000, the Company received 1,116,185 and
109,149 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 $9,154,000 in Fiscal
2001 and $1,368,000 in Fiscal 2000 (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 September 30, 2001 and
October 1, 2000.
During Fiscal 2001 and Fiscal 2000, the Company repurchased 1,304,700
and 1,008,496 shares, respectively, of its common stock in the open
market for approximately $9,641,000 and $13,547,000, respectively.
During Fiscal 2001, the Company issued 2,132,040 shares of its common
stock (189,026 of which came from treasury) to directors, officers and
employees of the Company upon the exercise of stock options.
During Fiscal 2001 the Company received 6,420 shares of its common
stock from one of its benefit plans in settlement of a prior year
purchase issue. During Fiscal 2000, the Company repurchased 47,984 of
its common stock from its benefit plans for approximately $303,000.
Warrants
The Company has 366,395 warrants outstanding to purchase an aggregate
of 732,790 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 2001, 1,490 warrants were
exercised resulting in cash proceeds of approximately $6,500 and the
issuance of 2,980 shares of the Company's common stock. During Fiscal
2000, 169,650 warrants were exercised resulting in cash proceeds of
approximately $742,000 and the issuance of 339,300 shares of the
Company's common stock.
Stock Compensation Plans
At September 30, 2001, the Company has seven 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
---------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ------------ -------------
Net (loss) income:
As reported $ (51,835) $ 46,687 $ 5,520
Pro forma $ (61,109) $ 43,090 $ 4,778
(Loss) earnings per share - basic and diluted:
As reported $ (1.97) $ 1.87 $ 0.23
Pro forma $ (2.32) $ 1.73 $ 0.20
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
September 30, 2001, October 1, 2000 and September 26, 1999,
respectively: expected volatility of 72.84%, 58.65% and 44.16%,
dividend yield of 0% for all years, risk-free interest rates of 4.68%,
6.23% and 6.014% and expected lives of 2 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 retainers
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 $95,000, $118,000 and
$109,000 during Fiscal 2001, Fiscal 2000 and Fiscal 1999, 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. Up to 5,304,000 shares of common stock may be granted and
outstanding 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. After Fiscal 2001, no more options are to be granted under this
plan.
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 35,000
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.
During Fiscal 2000, the Company adopted the 2000 Stock Plan available
for directors, officers and employees of the Company. The maximum
number of shares reserved for award is 250,000 shares of the Company's
common stock. Under the 2000 Stock Plan, restricted shares of common
stock are awarded to participating employees of the Company who meet or
exceed an annual spending goal of 10% of the employee's base salary
plus bonus potential on the purchase of the Company's common stock. If
the employee meets the goal, the Company will issue restricted common
stock to the employee with a value representing 25% of the dollar
amount paid for the purchased common shares. Each non-officer director
of the Company may participate in the plan by spending at least $25,000
to purchase stock during a calendar year. If that goal is met, the
Company will issue restricted common stock representing 25% of the
dollar amount paid for the purchased common shares for purchases up to
$37,500. The number of shares of restricted common stock to be awarded
is calculated based upon the closing market price of the Company's
common stock on the last trading day of the calendar year. The
restrictions on the common stock lapse ratably on an annual basis over
a 3-year period. During Fiscal 2001, the Company issued 8,641
restricted shares of its common stock and recorded compensation expense
of approximately $54,000 under the 2000 Stock Plan. No restricted stock
was issued or compensation expense recorded under the 2000 Stock Plan
in Fiscal 2000.
During Fiscal 2001, the Company adopted the 2001 Stock Option Plan for
certain key employees. Up to 5,000,000 shares of common stock of the
Company may be granted under this plan. 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. Unless the grant certificate states otherwise, stock options
under this plan will vest 20% each year over a five-year period.
During Fiscal 2001, the Company adopted the 2001 Non-Executive Stock
Option Plan for employees of the Company who are not officers or
directors of the Company. Up to 3,000,000 shares of common stock of the
Company may be granted under this plan. The stock options are
exercisable over a period determined by the Board of Directors or its
Compensation Committee, but no longer than ten years from the date
granted. Unless the grant certificate states otherwise, the vesting
period for stock options under this plan will vest 20% each year over a
five year period.
The following table summarizes all stock option transactions for the
fiscal years ended September 30, 2001, October 1, 2000 and September
26, 1999:
Fiscal Years Ended
---------------------------------------------------------------------------------
September 30, 2001 October 1, 2000 September 26, 1999
------------------------ ------------------------ -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Price Price Price
----------- ------------ ---------- --------- ---------- ----------
Outstanding at
Beginning of Year 5,936,619 $ 7.87 3,695,060 $ 2.87 4,352,786 $ 2.53
Grants 2,307,328 $ 8.17 3,382,079 $ 11.37 374,200 $ 3.88
Exercised (2,132,040) $ 4.43 (1,125,520) $ 1.91 (996,926) $ 1.71
Forfeited (44,688) $ 10.12 (15,000) $ 13.59 (35,000) $ 3.92
---------- ---------- ----------
Outstanding at End
of Year 6,067,219 $ 9.17 5,936,619 $ 7.87 3,695,060 $ 2.87
========== ========== ==========
Exercisable at End
of Year 2,397,025 2,676,093 2,059,210
========== ========== ==========
Weighted-average
fair value of
options granted
during the year $ 4.83 $ 8.30 $ 1.85
The following table summarizes information about stock options at
September 30, 2001:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------- -------------------------------
Number Weighted-Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 9/30/01 Contractual Life Exercise Price At 9/30/01 Exercise Price
--------------- ------------- ------------------ -------------- ------------- --------------
$ 0.00 - $ 2.99 1,216,730 2.92 Years $ 1.62 1,216,730 $ 1.62
$ 3.00 - $ 5.99 687,002 4.97 Years $ 4.44 534,178 $ 4.41
$ 6.00 - $ 8.99 1,696,589 9.01 Years $ 7.91 73,869 $ 7.19
$ 9.00 - $ 11.99 808,500 4.07 Years $ 9.47 219,700 $ 10.56
$ 12.00 - $ 14.99 155,148 7.59 Years $ 13.12 65,548 $ 12.74
$ 15.00 - $ 17.99 1,212,500 8.55 Years $ 17.18 5,600 $ 16.21
$ 18.00 - $ 20.99 2,750 8.68 Years $ 19.45 150 $ 18.00
$ 21.00 - $ 23.99 285,000 1.68 Years $ 23.03 280,650 $ 23.06
$ 29.25 3,000 8.50 Years $ 29.25 600 $ 29.25
--------- ---------
6,067,219 6.20 Years $ 9.17 2,397,025 $ 6.09
========= =========
17. 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
was substantially offset by legal costs incurred.
18. 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.
19. 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 predecessor companies, 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):
September 30, October 1, September 26,
2001 2000 1999
------------- ----------- -------------
Service cost $ 106 $ 132 $ 61
Interest cost 2,523 2,184 1,864
Amortization of prior service credit (14) (14) (14)
Amortization of transition obligation 375 683 1,114
Recognized actuarial loss 420 310 151
--------- --------- ---------
Net periodic benefit cost $ 3,410 $ 3,295 $ 3,176
========= ========= =========
A reconciliation of the beginning and ending balances of benefit
obligations and the funded status of the plans are as follows (in
thousands):
September 30, October 1,
2001 2000
------------ ----------
Change in benefit obligations:
Benefit obligation at beginning of year $ 31,669 $ 28,651
Service cost before expenses 106 132
Interest cost 2,523 2,184
Benefit payments (2,710) (2,827)
Actuarial (gain)/loss 4,212 3,529
--------- ---------
Benefit obligation at end of year $ 35,800 $ 31,669
========= =========
Reconciliation of funded status:
Benefit obligation at end of year $ 35,800 $ 31,669
Unrecognized actuarial loss (9,772) (5,980)
Unrecognized prior service credit 218 232
Unrecognized transition obligation (2,624) (2,999)
--------- ---------
Net amount recognized at year-end $ 23,622 $ 22,922
========= =========
The weighted average discount rate assumptions were 7.25% at September
30, 2001, 7.5% at October 1, 2000 and 6.75% at September 26, 1999.
The assumed healthcare cost trend rate used in measuring the healthcare
benefits for Fiscal 2001 through Fiscal 2005 was a 7.5% average annual
rate of increase in the per capita cost healthcare benefits. This rate
is assumed to change over the years as follows: 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 2021 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
2001(in thousands):
1% Point Increase 1% Point Decrease
----------------- -----------------
Effect on total of service and interest
cost components for 2001 $ 313 $ (261)
Effect on year-end 2001 post-retirement
benefit obligation 3,878 (3,258)
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):
September 30, October 1, September 26,
2001 2000 1999
------------- ----------- -------------
Service cost $ 488 $ 487 $ 525
Interest cost 72 35 -
---------- ---------- ----------
Net periodic benefit cost $ 560 $ 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 2001 and Fiscal 2000 (in thousands):
September 30, October 1,
2001 2000
------------- ----------
Accrued benefit obligation at beginning of year $ 962 $ 525
Service cost 488 487
Interest cost 72 35
Benefits paid or transferred - (85)
---------- ----------
Accrued benefit obligation at end of year $ 1,522 $ 962
========== ==========
Projected benefit obligation $ 1,566 $ 903
Unrecognized (loss) gain (44) 59
---------- ----------
Accrued benefit obligation at end of year $ 1,522 $ 962
========== ==========
The discount rate used as of September 30, 2001 and October 1, 2000 was
7.25% and 8.0%, 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 $454,000 and $482,000 were paid by the
Company in Fiscal 2001 and Fiscal 2000, respectively, for these
policies. As of September 30, 2001 and October 1, 2000, approximately
$981,000 and $660,000, 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 provided additional retirement benefits to the union wage
employees of the UEP division through a defined contribution savings
plan through December 2000. The plan provided for employee
contributions and employer matching contributions to employee savings.
Employer contributions were at rates per hour ranging generally from
$.05 to $.66 based on years of service. The expenses pertaining to this
plan amounted to approximately $13,000, $32,000 and $54,000 for Fiscal
2001, Fiscal 2000 and Fiscal 1999, 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 $199,000,
$111,000 and $63,000 for Fiscal 2001, Fiscal 2000 and Fiscal 1999,
respectively. During Fiscal 2001, Fiscal 2000 and Fiscal 1999, the
Company contributed 19,993, 17,206 and 39,344 shares of its common
stock with a market value of approximately $124,000, $219,000 and
$199,000, respectively, to the savings plan. These contributions
included contributions to employees of discontinued operations for UAS
in Fiscal 2001 and UAS and HPPI in Fiscal 2000 and Fiscal 1999.
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 was made to eligible plan participants
employed by the Company and certain of the Company's subsidiaries
during Fiscal 2001. The amount of the contribution was approximately
$2,235,000 and was made through a re-issuance of 298,612 shares of the
Company's common stock from treasury. As of September 30, 2000,
approximately $1,698,000 had been accrued and charged to selling and
administrative expenses of continuing operations and approximately
$459,000 had been accrued and charged to discontinued operations. Of
the remaining expense recognized in Fiscal Year 2001, $55,000 was
charged to selling and administrative of continuing operations and
$23,000 was charged to discontinued operations.
20. SALE OF THE AUTOMOTIVE DIVISION OF THE COATED FABRICS SEGMENT
In Fiscal 1999, the Company finalized its sale of the automotive
operations of the Coated Fabrics segment in Port Clinton, Ohio to
Canadian General-Tower, Limited. The original sale agreement was signed
on October 17, 1997 and the closings occurred in stages between October
1997 and July 1999. In connection with the finalization of the sale,
the Company recognized a gain of $667,000 in Fiscal 1999.
21. INCOME (LOSS) PER COMMON SHARE
For the years ended September 30, 2001, October 1, 2000 and September
26, 1999, the weighted average number of common shares outstanding for
the calculation of basic and diluted earnings per share was 26,286,148,
24,937,364 and 24,315,992, respectively. Inclusion of stock options to
purchase 6,067,219, 5,936,619 and 3,695,060, respectively, shares of
common stock at various prices and warrants to purchase 732,790,
735,770 and 1,075,070, respectively, shares of common stock at $2.1875
per share in the calculation of diluted earnings per share would have
been antidilutive.
22. RELATED PARTY TRANSACTIONS
The Company had an agreement with an investment banking firm, in which
one of the Company's directors is a principal, that expired on December
31, 2000. The investment banking firm has provided financial advisory
services to the Company for fees of approximately $2,452,000 and
$157,000 during Fiscal 2000 and Fiscal 1999, 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. No fees were paid to this
investment banking firm in Fiscal 2001.
During the fiscal years ended September 30, 2001, October 1, 2000 and
September 26, 1999, the Company incurred legal fees of approximately
$117,000, $448,000 and $299,000, 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.
During Fiscal 2001, the Company incurred legal fees of approximately
$530,000 to two other law firms of which two of the Company's directors
are partners. During Fiscal 2000, the Company incurred approximately
$117,000 of legal fees to one of these firms. No legal fees were paid
to either of these firms during Fiscal 1999.
During Fiscal 2000, the Company paid approximately $17,000 to a
relative of one of the Company's executive officers for consulting
services. No fees were paid to this relative in Fiscal 2001 or Fiscal
1999.
23. 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 two reportable segments:
Coated Fabrics and Compound Semiconductor and Optoelectronics. The
Coated Fabrics segment manufactures vinyl coated fabric products. 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,
LLC's operating division, Uniroyal Engineered Products. The Compound
Semiconductor and Optoelectronics segment includes Uniroyal Compound
Semiconductors, Inc. and its subsidiaries, 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 $3,568,000, $3,491,000 and
$1,972,000 in Fiscal 2001, Fiscal 2000 and Fiscal 1999, respectively.
There were no sales to one customer in Fiscal 2001 and Fiscal 2000 that
represented more than 10% of consolidated net sales. Sales to one
customer of the Coated Fabrics segment represented approximately 14.5%
of consolidated net sales in Fiscal 1999.
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 2001, Fiscal 2000 and Fiscal 1999 was as
follows (in thousands):
September 30, October 1, September 26,
2001 2000 1999
------------- ----------- -------------
Net Sales:
Coated Fabrics $ 27,799 $ 33,651 $ 42,341
Compound Semiconductor and Optoelectronics 5,063 3,023 485
---------- ---------- ----------
Total $ 32,862 $ 36,674 $ 42,826
========== ========== ==========
Operating (loss) income:
Coated Fabrics $ (216) $ 227 $ 4,814
Compound Semiconductor and Optoelectronics (45,505) (25,841) (5,080)
Corporate (8,560) (22,882) (5,102)
---------- ---------- ----------
Total $ (54,281) $ (48,496) $ (5,368)
========== ========== ==========
Identifiable assets:
Coated Fabrics $ 18,950 $ 20,915 $ 23,547
Compound Semiconductor and Optoelectronics 98,251 74,823 22,474
Corporate 12,958 77,948 45,110
Discontinued operations 14,103 10,832 10,981
---------- ---------- ----------
Total $ 144,262 $ 184,518 $ 102,112
========== ========== ==========
Depreciation and other amortization:
Coated Fabrics $ 1,762 $ 1,719 $ 1,702
Compound Semiconductor and Optoelectronics 13,566 4,906 210
Corporate 409 576 720
---------- ---------- ----------
Total $ 15,737 $ 7,201 $ 2,632
========== ========== ==========
Capital Expenditures:
Coated Fabrics $ 284 $ 587 $ 535
Compound Semiconductor and Optoelectronics 28,660 16,613 21,353
Corporate - 147 787
Discontinued operations 642 11,700 8,142
---------- ---------- ----------
Total $ 29,586 $ 29,047 $ 30,817
========== ========== ==========
Included in each segment's operating income are the following corporate
overhead allocations for Fiscal 2001, Fiscal 2000 and Fiscal 1999,
respectively: $973,000, $1,178,000 and $1,499,000 for the Coated
Fabrics segment and $1,616,00, $1,207,000 and $875,000 for the Compound
Semiconductor and Optoelectronics segment.
In Fiscal 2001, the amount of loss on assets to be disposed of included
in Corporate approximates $703,000. The amount of loss on assets to be
disposed of included in the Compound Semiconductors and Optoelectronics
segment approximates $686,000. The acquired IPR&D of $250,000 is
included in the Compound Semiconductor and Optoelectronics segment. The
write-down of goodwill of $9,816,000 is included in the Compound
Semiconductor and Optoelectronics segment.
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 IPR&D 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 the automotive coated fabrics
division is included in the Coated Fabrics segment.
24. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (in thousands):
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Fiscal 2001
-----------
Net sales $ 7,824 $ 8,822 $ 8,153 $ 8,063
Gross profit 1,400 1,148 556 549
Net loss $ (4,862) (5,901)(1) (6,130)(2) (34,942)(3)
Basic loss per share $ (0.19) $ (0.23) $ (0.23) $ (1.28)
Diluted loss per share $ (0.19) $ (0.23) $ (0.23) $ (1.28)
(1) Includes the following unusual adjustment:
o loss on assets to be disposed of of approximately $492,000
(net of tax).
(2) Includes the following unusual adjustment:
o loss on assets to be disposed of of approximately $316,000
(net of tax).
(3) Includes the following unusual adjustments:
o write-down of goodwill of approximately $9,816,000 for which
there is no tax effect;
o establishment of a deferred tax
asset valuation allowance of approximately $17,870,000;
o write-off of purchased in-process research and development of
approximately $157,000 (net of tax);
o loss on assets to be disposed of of approximately $59,000 (net
of tax); and
o loss of approximately $522,000 (net of taxes) resulting from
the finalization of the HPPI purchase price.
Fiscal 2000 First Quarter Second Quarter Third Quarter Fourth Quarter
----------- ------------- -------------- ------------- --------------
Net sales $ 9,319 $ 9,490 $ 8,842 $ 9,023
Gross profit 2,517 1,711 2,060 1,403
Net income (loss) 2,420 60,225 (1) (1,827) (14,131) (2)
Basic earnings (loss) per
share $ 0.10 $ 2.44 $ (0.07) $ (0.54)
Diluted earnings (loss)
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 HPPI;
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 HPPI 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.
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 September 30, 2001, and
October 1, 2000, and the related consolidated statements of operations,
comprehensive (loss) income, changes in stockholders' equity and cash flows for
the years ended September 30, 2001, October 1, 2000, and September 26, 1999, and
have issued our report thereon dated December 21, 2001 (included in this Form
10-K and which report is unqualified and contains an explanatory paragraph
regarding the Company's ability to continue as a going concern). Our audits also
included the accompanying consolidated financial statement schedule listed in
Item 14 of 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 21, 2001
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 BALANCE
BEGINNING COSTS AND TO OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCTS. DEDUCTION PERIOD
------------------------------- --------- ----------- --------- --------- ----------
Allowance for Doubtful Accounts: (a) (b)
Year ended September 30, 2001 $ 75 $ 187 $ - $ (101) $ 161
========= ========= ========= ========= =========
Year ended October 1, 2000 $ 24 $ 109 $ 5 $ (63) $ 75
========= ========== ========= ========= =========
Year ended September 26, 1999 $ 23 $ - $ 2 $ (1) $ 24
========= ========== ========= ========= =========
Allowance for Customer Claims:
Year ended September 30, 2001 $ 364 $ 233 $ - $ (388) $ 209
========= ========== ========= ========= =========
Year ended October 1, 2000 $ 651 $ 911 $ - $ (1,198) $ 364
========= ========== ========= ========= =========
Year ended September 26, 1999 $ 888 $ 3,280 $ - $ (3,517) $ 651
========= ========== ========= ========= =========
Inventory Reserves:
Year ended September 30, 2001 $ 779 $ 1,255 $ - $ (665) $ 1,369
========= ========== ========= ========= =========
Year ended October 1, 2000 $ 718 $ 537 $ 50 $ (526) $ 779
========= ========== ========= ========= =========
Year ended September 26, 1999 $ 1,977 $ 224 $ - $ (1,483) $ 718
========= ========== ========= ========= =========
Deferred Tax Valuation Allowance:
Year ended September 30, 2001 $ - $ 17,870 $ - $ - $ 17,870
========= ========== ========= ========= =========
Year ended October 1, 2000 $ 13,702 $ (13,702) $ - $ - $ -
========= ========== ========= ========= =========
Year ended September 26, 1999 $ - $ 13,702 $ - $ - $ 13,702
========= ========== ========= ========= =========
(a) Represents recovery of amounts previously written-off and reserves
established upon business acquisitions.
(b) Includes write-off of uncollectible accounts, customer returns and the
write-off of obsolete inventory.
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 27, 2001
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/ Howard F. Curd
- ------------------------------------------------- ------------------------
Robert L. Soran, Director, President and Howard F. Curd, Director
Chief Operating Officer Date: December 27, 2001
Date: December 27, 2001
/s/ George J. Zulanas, Jr. /s/ Curtis L. Mack
- ------------------------------------------------- ------------------------
George J. Zulanas, Jr., Executive Vice President, Curtis L. Mack, Director
Treasurer and Chief Financial Officer Date: December 27, 2001
Date: December 27, 2001
/s/ Howard R. Curd /s/ Roland H. Meyer
- ------------------------------------------------- -------------------------
Howard R. Curd, Director, Chairman of the Board Roland H. Meyer, Director
and Chief Executive Officer Date: December 27, 2001
Date: December 27, 2001
/s/ Peter C. B. Bynoe /s/ John A. Porter
- ------------------------------------------------ ------------------------
Peter C. B. Bynoe, Director John A. Porter, Director
Date: December 27, 2001 Date: December 27, 2001
/s/ Thomas E. Constance
- ------------------------------------------------
Thomas E. Constance, Director
Date: December 27, 2001
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 the Board Peter C.B. Bynoe, Director
and Chief Executive Officer Date: December 27, 2001
Date: December 27, 2001
/s/ Robert L. Soran /s/ Thomas E. Constance
- ----------------------------------------------- -----------------------------
Robert L. Soran, Director, President and Chief Thomas E. Constance, Director
Operating Officer Date: December 27, 2001
Date: December 27, 2001
/s/ Howard F. Curd
------------------------
Howard F. Curd, Director
Date: December 27, 2001
/s/ Curtis L. Mack
------------------------
Curtis L. Mack, Director
Date: December 27, 2001
/s/ Roland H. Meyer
-------------------------
Roland H. Meyer, Director
Date: December 27, 2001
/s/ John A. Porter
------------------------
John A. Porter, Director
Date: December 27, 2001