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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to______
Commission file number 0-20686
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.)
2 N. Tamiami Trail, Suite 900
Sarasota, FL 34236
(Address of principal executive offices) (Zip Code)
(941) 361-2100
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 .
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock as of the
latest practicable date.
Total number of shares of outstanding stock as of July 28, 2002
Common stock 28,357,626
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
ASSETS
June 30, September 30,
2002 2001
-------------- --------------
Current assets:
Cash and cash equivalents $ 114 $ 2,035
Trade accounts receivable (less estimated reserve for doubtful
accounts of $4 and $5, respectively) (Note 2) 2,061 1,167
Inventories (Note 3) 4,895 6,604
Accrued income taxes receivable - 5,334
Net assets of discontinued operations of UEP (Note 4) 7,493 7,377
Net assets of discontinued operations of UAS (Note 5) - 14,103
Prepaid expenses and other current assets 2,069 1,876
------------- -------------
Total current assets 16,632 38,496
Property, plant and equipment - net 52,547 59,588
Property, plant and equipment held for sale - net 1,454 1,597
Investments (Note 6) 1,011 -
Goodwill - net (Note 7) 12,473 23,430
Other assets - net (Note 8) 1,725 9,578
------------- -------------
TOTAL ASSETS $ 85,842 $ 132,689
============= =============
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, September 30,
2002 2001
------------- --------------
Current liabilities:
Current portion of long-term debt (Note 9) $ 18,198 $ 10,760
Trade accounts payable 17,755 12,917
Net liabilities of discontinued operations of UAS (Note 5) 557 -
Net liabilities of discontinued operations of HPPI (Note 10) 1,454 1,910
Accrued expenses:
Compensation and benefits 4,539 4,310
Interest 192 151
Taxes, other than income 359 240
Accrued Income taxes 219 -
Other 1,380 2,372
------------- -------------
Total current liabilities 44,653 32,660
Long-term debt, net of current portion - 12,196
Other liabilities 24,023 24,162
------------- -------------
Total liabilities 68,676 69,018
------------- -------------
Commitments and contingencies (Note 11)
Minority interest 225 225
Stockholders' equity:
Preferred stock:
Series C - 0 shares issued and outstanding; par value $0.01; 450
shares authorized - -
Common stock:
32,662,611 shares issued or to be issued; par value $0.01;
100,000,000 shares authorized 327 327
Additional paid-in capital 112,270 113,904
Deficit (58,302) (11,260)
------------- -------------
Less treasury stock at cost - 4,304,985 and 4,794,869 54,295 102,971
shares, respectively (37,354) (39,525)
------------- -------------
Total stockholders' equity 16,941 63,446
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 85,842 $ 132,689
============= =============
See notes to condensed consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
--------------------------- ----------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
------------ ----------- ----------- ------------
Net sales $ 3,470 $ 1,164 $ 7,986 $ 3,334
Costs and expenses:
Costs of goods sold 4,634 2,008 15,776 4,508
Selling and administrative (Note 12) 3,140 6,085 12,138 20,323
Depreciation and other amortization 2,681 3,516 10,207 10,131
Loss on assets to be disposed of (Note 8) 974 502 16,974 1,295
----------- ----------- ----------- -----------
Loss before interest, income taxes, minority
interest and discontinued operations (7,959) (10,947) (47,109) (32,923)
Interest income 30 210 98 1,542
Interest expense (511) (352) (1,735) (1,257)
----------- ----------- ----------- -----------
Loss before income taxes, minority interest
and discontinued operations (8,440) (11,089) (48,746) (32,638)
Income tax benefit (Note 13) 120 2,805 831 7,907
----------- ----------- ----------- -----------
Loss before minority interest and discon-
tinued operations (8,320) (8,284) (47,915) (24,731)
Minority interest in losses of consolidated
joint venture - 1,901 - 7,359
----------- ----------- ----------- -----------
Loss from continuing operations (8,320) (6,383) (47,915) (17,372)
Income (loss) from discontinued operations (net
of income taxes) (Notes 4 and 5) - 623 (197) 874
Gain (loss) on disposition of discontinued
operations (net of income taxes) (Notes 4,
5 and 10) 217 (370) 1,070 (395)
----------- ----------- ----------- -----------
Net loss $ (8,103) $ (6,130) $ (47,042) $ (16,893)
=========== =========== =========== ===========
Net (loss) income per share - basic (Note 14)
- ---------------------------------------------
Loss from continuing operations $ (0.30) $ (0.24) $ (1.71) $ (0.67)
Income from discontinued operations 0.01 0.01 0.03 0.02
----------- ----------- ----------- -----------
Net loss $ (0.29) $ (0.23) $ (1.68) $ (0.65)
=========== =========== =========== ===========
Net (loss) income per share - diluted (Note 14)
- ----------------------------------------------
Loss from continuing operations $ (0.30) $ (0.24) $ (1.71) $ (0.67)
Income from discontinued operations 0.01 0.01 0.03 0.02
----------- ----------- ----------- -----------
Net loss $ (0.29) $ (0.23) $ (1.68) $ (0.65)
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
------------ ----------- ----------- -----------
Net loss $ (8,103) $ (6,130) $ (47,042) $ (16,893)
------------ ----------- ----------- -----------
Other comprehensive (loss) income:
Unrealized gain on securities available
for sale, net of income taxes:
Unrealized gain on securities
available for sale (net of income
tax expense of $34) - - - 53
Reclassification adjustment for
gains realized in net income - - - (9)
----------- ----------- ------------ -----------
Net unrealized gain - - - 44
----------- ----------- ------------ -----------
Comprehensive loss $ (8,103) $ (6,130) $ (47,042) $ (16,849)
============ =========== ============ ===========
See notes to condensed consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
------------------------------------
June 30, July 1,
2002 2001
------------- --------------
OPERATING ACTIVITIES:
Net loss $ (47,042) $ (16,893)
Deduct income from discontinued operations (873) (479)
------------- -------------
Loss from continuing operations (47,915) (17,372)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and other amortization 10,207 10,131
Deferred tax benefit - 703
Loss on assets to be disposed of 16,974 1,295
Litigation settlement 785 -
Minority interest in net losses of consolidated joint venture - (7,359)
Other 1 192
Changes in assets and liabilities:
(Increase) decrease in trade accounts receivable (894) 810
Decrease (increase) in inventories 1,709 (3,453)
Decrease (increase) in prepaid expenses and other assets 8,255 (8,053)
Increase in trade accounts payable 5,616 1,704
Decrease in other accrued expenses (237) (504)
(Decrease) increase in other liabilities (1,013) 753
------------- -------------
Net cash used in continuing operations (6,512) (21,153)
Net cash provided by (used in) discontinued operations 1,305 (621)
------------- -------------
Net cash used in operating activities (5,207) (21,774)
------------- -------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (Note 15) (4,249) (17,950)
Investment purchases of available-for-sale securities - (13,015)
Investment purchases of held-to-maturity securities - (6,002)
Proceeds from sales of available-for-sale securities - 16,994
Proceeds from held-to-maturity securities - 23,477
Proceeds from sale of investment 1,326 -
Business acquisition - (2,750)
Proceeds from sale of discontinued operations 14,425 -
------------- -------------
Net cash provided by investing activities 11,502 754
------------- -------------
FINANCING ACTIVITIES (Note 15):
Net (decrease) increase in revolving loan balance (1,618) 3,169
Repayment of term loans (6,598) (4,759)
Proceeds from term loan - 95
Investment by joint venture partner - 2,382
Purchase of treasury stock - (7,547)
Stock options exercised - 209
------------- -------------
Net cash used in financing activities (8,216) (6,451)
------------- -------------
Net decrease in cash (1,921) (27,471)
Cash and cash equivalents at beginning of period 2,035 36,623
------------- -------------
Cash and cash equivalents at end of period $ 114 $ 9,152
============= =============
See notes to condensed consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months and Nine Months Ended
June 30, 2002 and July 1, 2001
1. BASIS OF PRESENTATION
The Interim Condensed Consolidated Financial Statements relate to
Uniroyal Technology Corporation, its wholly-owned subsidiaries,
Uniroyal HPP Holdings, Inc., Uniroyal Compound Semiconductors, Inc.,
UnitechIND, Inc. (formerly BayPlas3, Inc.), UEP Holdings, Inc.
(formerly BayPlas7, Inc.), UnitechOH, Inc. and UnitechNJ, Inc., and,
its majority-owned subsidiary, Uniroyal Liability Management Company,
Inc. (collectively, the "Company"). Uniroyal HPP Holdings, Inc.
includes its wholly-owned subsidiary, High Performance Plastics, Inc.
("HPPI"). UEP Holdings, Inc. includes its 99% owned subsidiary,
Uniroyal Engineered Products, LLC, which includes its operating
divisions, Uniroyal Engineered Products ("UEP") and Uniroyal Adhesives
and Sealants ("UAS"). Uniroyal Compound Semiconductors, Inc. owns the
remaining 1% interest in Uniroyal Engineered Products, LLC. Uniroyal
Compound Semiconductors, Inc. includes its wholly-owned subsidiaries,
NorLux Corp. ("NorLux"), Sterling Semiconductor, Inc. ("Sterling") and
Uniroyal Optoelectronics, Inc. ("UOE"). Uniroyal Liability Management
Company includes its wholly-owned subsidiary ULMC2CORP. See Note 4 for
information regarding the proposed sale of UEP. See Note 5 for
information regarding the sale of UAS. See Note 8 for information
regarding the proposed sale of Sterling. See Note 10 for information
regarding the sale of HPPI.
The Interim Condensed Consolidated Financial Statements of the Company
are unaudited and should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto for the
fiscal years ended September 30, 2001, October 1, 2000 and September
26, 1999. The Company's fiscal year ends on the Sunday following the
last Friday in September.
Certain reclassifications were made to the prior year Interim Condensed
Consolidated Financial Statements to conform to current period
presentations. In the opinion of the Company, all adjustments necessary
for a fair presentation of such Interim Condensed Consolidated
Financial Statements have been included. Such adjustments consist only
of normal recurring items. Interim results are not necessarily
indicative of results for a full year. The Interim Condensed
Consolidated Financial Statements and notes thereto are presented as
permitted by the Securities and Exchange Commission and do not contain
certain information included in the Company's annual consolidated
financial statements and notes thereto.
Liquidity and Capital Resources
The Company has experienced liquidity strains, which are now critical,
as it has sought to reposition its operations away from the mature,
industrial-based activities and into the high-growth compound
semiconductor technology industry. The transition to the Compound
Semiconductor and Optoelectronics business segment has required
significant investment spending related to start-up costs and capital
expenditures. Many of the markets served by 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. The ability of the Company to
operate as a going concern and the ultimate success of the Company
depend on its ability to obtain additional financing, either outside or
within a bankruptcy reorganization, to continue reducing operating
costs and, ultimately, to generate higher sales levels to attain
profitability.
The accompanying condensed 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 result, these 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.
The Company continues to experience losses from continuing operations
and negative cash flows, and had an accumulated deficit of $58,302,000
as of June 30, 2002. Net cash used by continuing operations for the
three quarters ended June 30, 2002 was $6,512,000 and it is likely that
cash flow from continuing operations will be negative throughout Fiscal
2002 and into Fiscal 2003. The Company had a working capital deficiency
at June 30, 2002 of $28,021,000 compared to working capital of
$5,836,000 as of September 30, 2001. At June 30, 2002, the Company's
principal source of liquidity was $114,000 of cash and cash equivalents
and $781,000 of availability under a revolving credit facility subject
to certain limitations on its use. The Company will need additional
funding for operations during the coming year. These 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. Such funding may be available only as part of a bankruptcy
reorganization.
As of June 30, 2002, the Company has defaulted on certain promissory
note payments, capital lease payments and vendor payments due. The
Company has reclassified $7,348,000 of capital lease debt outstanding
at June 30, 2002 from long-term to short-term based upon default
notices received. The Company has received preliminary modification
agreements with respect to certain capital lease agreements and
continues to work with its debt holders and vendors on achievable
payment plans. If the Company is unable to come to an agreement with
these parties, they may seek possession of leased property or judicial
remedies.
The Company's strategy to provide liquidity to fund its operations
during the coming year consists of reducing operating costs, selling
certain assets and obtaining additional financing. The Company has
taken steps to reduce future operating costs and cash flows, including
the termination of its split dollar life insurance plan and certain
other benefit plans for executives and the termination of its defined
benefit retirement plan on December 28, 2001. These terminations
resulted in a reduction of net assets and additional expense to the
Company of approximately $471,000, which was recorded in the first
quarter of Fiscal 2002. These terminations will result in savings to
the Company of approximately $800,000 in expense and approximately
$560,000 of cash flow during Fiscal 2002. The Company is expected to
realize total future cash flow savings of approximately $10,000,000
from the termination of these programs. In addition, in January 2002,
the Company laid off 90 employees in an effort to reduce operating
costs and preserve cash.
The Company's strategy also includes selling its Sterling Semiconductor
subsidiary and its Coated Fabrics segment. On April 17, 2002, the
Company entered into a definitive stock purchase agreement with Umicore
USA, Inc. ("Umicore") for the sale of 100% of the common stock of
Sterling. The sale was subject to various contingencies, including
completion of due diligence and obtaining regulatory approval. The
agreement was terminated in June 2002. The Company is currently
involved in negotiations with several interested parties for the sale
of Sterling. The negotiations have indicated a further impairment of
the Sterling net assets as discussed in Note 8. Achievement of maximum
value for the sale of Sterling may only be possible through a
bankruptcy reorganization. The Company intends to sell its Coated
Fabrics segment during the next year although there are currently no
active negotiations. If the Company is successful in selling its
Sterling Semiconductor subsidiary and Coated Fabrics segment, its
operations will consist of its Optoelectronics operations.
Pending completion of the sale of Sterling Semiconductor and our Coated
Fabrics segment, and even if the Company successfully completes these
sales, the Company will need to obtain additional financing which could
require selling other assets at unfavorable terms or borrowing funds
which might not be available or might only be available to us at terms
we would not deem acceptable. Many of the elements required to
accomplish the Company's liquidity strategy are beyond its control.
Nonetheless, the Company's current need for liquidity is critical.
Sales of assets or necessary financing may require bankruptcy
reorganization. Therefore, its failure to successfully implement any
significant aspect of its liquidity strategy described above would have
a material adverse effect on our financial condition and results of
operations.
2. ACCOUNTS RECEIVABLE
The Company has concentration of credit risk among its customer base.
At June 30, 2002, three customers comprise $1,496,000 or 73% (38%, 22%
and 13%, respectively) of the Company's total accounts receivable of
continuing operations. Approximately $418,000 of this amount is 1-30
days past due. The Company performs ongoing credit evaluations of its
customers' financial condition and does not require collateral or other
security to support financial instruments subject to credit risk. The
Company has a history of minimal uncollectible accounts from continuing
operations and has an allowance for doubtful accounts of approximately
$4,000 at June 30, 2002.
3. INVENTORIES
Inventories consisted of the following (in thousands):
June 30, September 30,
2002 2001
------------- ------------
Raw materials, work in process and supplies $ 3,650 $ 5,191
Finished goods 1,245 1,413
------------- ------------
Total $ 4,895 $ 6,604
============= ============
4. DISCONTINUED OPERATIONS OF UEP
On January 7, 2002, the Company formalized a plan to sell its Uniroyal
Engineered Products division, which comprises its Coated Fabrics
segment. The Company is marketing the Coated Fabrics business through
an investment banker. The Company anticipates that a sale will occur
within one year.
The accompanying Interim Condensed Consolidated Financial Statements
reflect the operations of UEP as discontinued operations in accordance
with Accounting Principles Board ("APB") Opinion No. 30, Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions ("APB No.
30").
The net assets of the discontinued operations of UEP have been
segregated on the June 30, 2002 and September 30, 2001 interim
condensed consolidated balance sheets, the components of which are as
follows (in thousands):
Net Assets of Discontinued Operations of UEP
June 30, September 30,
2002 2001
----------- -------------
Assets:
Cash $ 5 $ 2
Trade accounts receivable 3,662 3,010
Inventories 6,177 6,506
Prepaids and other assets 71 36
Property, plant and equipment - net 6,180 7,300
Other assets - net 1,953 2,096
----------- -----------
Total assets 18,048 18,950
----------- -----------
Liabilities:
Current portion of long-term debt 5,765 7,380
Trade accounts payable 3,127 2,341
Compensation and benefits 867 825
Taxes, other than income 64 52
Other accrued expenses 208 180
Long-term debt 132 269
Other liabilities 392 526
----------- -----------
Total liabilities 10,555 11,573
----------- -----------
Net assets of discontinued operations of UEP $ 7,493 $ 7,377
=========== ===========
The results of operations for all periods presented have been restated
for discontinued operations of UEP. The operating results of
discontinued operations of UEP are as follows (in thousands):
For the Three Months Ended
---------------------------------
June 30, July 1,
2002 2001
------------ ------------
Net sales $ 7,827 $ 6,989
Cost of goods sold 6,075 5,589
Selling and administrative 935 1,188
Depreciation and other amortization 447 442
------------ -----------
Income (loss) before interest and income taxes 370 (230)
Interest expense - net (4) (7)
------------ -----------
Income (loss) before income taxes 366 (237)
Income tax benefit - 10
------------ -----------
Net income (loss) from discontinued operations
of UEP $ 366 $ (227)
============ ===========
For the Nine Months Ended
----------------------------------
June 30, July 1,
2002 2001
------------ ------------
Net sales $ 21,248 $ 21,465
Cost of goods sold 16,979 17,187
Selling and administrative 2,550 3,255
Depreciation and other amortization 1,337 1,318
----------- -----------
Income (loss) before interest and income taxes 382 (295)
Interest expense - net (13) (17)
----------- -----------
Income (loss) before income taxes 369 (312)
Income tax expense - (84)
----------- -----------
Net income (loss) from discontinued operations
of UEP $ 369 $ (396)
=========== ===========
5. DISCONTINUED OPERATIONS OF UAS
On August 24, 2001, the Company entered into an asset purchase
agreement for the sale of UAS, which comprised its Specialty Adhesives
segment. The transaction closed on November 9, 2001 for a purchase
price of $21,620,000. Proceeds consisted of approximately $14,620,000,
in cash, $2,500,000 and $1,000,000 in subordinated promissory notes of
the purchaser (face value), $1,500,000 in preferred stock of the
purchaser's parent (face value), warrants to purchase 5% of the
outstanding common stock of the purchaser's parent and $2,000,000 of
payments contingent on the future earnings achievement of the UAS
business sold. Approximately $195,000 out of the initial cash proceeds
was withheld by the purchaser pending the settlement of certain
purchase price adjustments. The Company has estimated an amount due
from the buyer of approximately $125,000. The buyer has estimated an
additional amount due from the Company of approximately $178,000. Both
parties are working towards resolution of the disputed amounts. The
Company recorded a gain on this transaction of approximately $79,000,
net of certain transaction costs during the first three quarters of
Fiscal 2002.
In connection with this transaction the Company paid approximately
$212,000 to an investment banking firm that employs relatives of one of
the Company's executive officers.
On February 1, 2002, the Company received, from a party affiliated with
the purchaser of UAS, $1,326,000 for the sale of the $2,500,000 (face
value) subordinated promissory note, warrants and $1,500,000 (face
value) preferred stock received in connection with the UAS sale. In
anticipation of the sale of the note, preferred stock and warrants, the
Company had recorded the above instruments at its estimated fair value
of $1,326,000 as of the date of the UAS sale.
The accompanying Interim Condensed Consolidated Financial Statements
reflect the operations of UAS as discontinued operations in accordance
with APB No. 30.
The net (liabilities) assets of the discontinued operations of UAS have
been segregated on the June 30, 2002 and September 30, 2001 interim
condensed consolidated balance sheets, the components of which are as
follows (in thousands):
Net (Liabilities) Assets of Discontinued Operations of UAS
June 30, September 30,
2002 2001
----------- ------------
Assets:
Cash $ - $ 2
Trade accounts receivable - 1,469
Inventories - 2,786
Prepaids and other assets 137 96
Property, plant and equipment - net - 10,305
Goodwill - net - 3,792
Other assets - net 531 879
----------- ----------
Total assets 668 19,329
----------- ----------
Liabilities:
Trade accounts payable 41 3,159
Compensation and benefits 411 376
Taxes, other than income 232 226
Other accrued expenses 541 1,357
Other liabilities - 108
----------- ----------
Total liabilities 1,225 5,226
----------- ----------
Net (liabilities) assets of discontinued operations
of UAS $ (557) $ 14,103
=========== ==========
The results of operations for all periods presented have been restated
for discontinued operations of UAS. The operating results of
discontinued operations of UAS are as follows (in thousands):
For the Three Months Ended
---------------------------------
June 30, July 1,
2002 2001
----------- -----------
Net sales $ - $ 10,048
Cost of goods sold - 7,502
Selling and administrative 34 784
Depreciation and other amortization - 312
Loss on sale of UAS 31 -
----------- ----------
(Loss) income before interest and income taxes (65) 1,450
Interest income - net 2 4
----------- ----------
(Loss) income before income taxes (63) 1,454
Income tax expense - (604)
----------- ----------
Net (loss) income from discontinued operations of UAS
$ (63) $ 850
=========== ==========
For the Nine Months Ended
---------------------------------
June 30, July 1,
2002 2001
----------- -----------
Net sales $ 4,024 $ 22,776
Cost of goods sold 3,092 17,802
Selling and administrative 273 2,275
Depreciation and other amortization 109 852
Gain on sale of UAS (79) -
---------- ----------
Income before interest and income taxes 629 1,847
Interest income - net 6 16
---------- ----------
Income before income taxes 635 1,863
Income tax expense - (593)
---------- ----------
Net income from discontinued operations of UAS $ 635 $ 1,270
=========== ==========
6. INVESTMENTS
Proceeds from the sale of UAS (Note 5) included a $1,000,000
subordinated promissory note at 10% stated interest rate, a $2,500,000
(face value) subordinated promissory note at 10% stated interest rate,
$1,500,000 (face value) of 12% preferred stock of the parent
corporation of the purchaser and warrants to purchase five percent of
the issued and outstanding common stock of the parent corporation of
the purchaser.
As of November 9, 2001, the $1,000,000 subordinated promissory note was
valued at its face amount. The $2,500,000 subordinated note, $1,500,000
of preferred stock and warrants were valued at their estimated fair
value of $1,326,000 which represented the value received upon the sale
of these instruments in a transaction, with a party affiliated with the
purchaser of UAS, on February 1, 2002.
The $1,000,000 subordinated promissory note is due and payable on
November 9, 2008. Interest is payable quarterly at 10% per annum.
Eighty percent of each quarterly interest payment shall be paid in cash
and twenty percent of each quarterly interest payment shall be added to
the principal of the note and paid upon maturity. To the extent any
interest payment cannot be made in cash pursuant to a subordination
agreement, such payment shall be paid in the form of a promissory note
with similar terms. Interest payments are also subject to deferral if
certain minimum fixed charge coverages are not maintained.
As of June 30, 2002, the Company has accrued approximately $54,000 of
interest receivable related to this note. Interest payments by the
maker have been suspended pending resolution of purchase price
adjustments (Note 5).
7. GOODWILL
As of March 31, 2002, the Company recorded a $9,519,000 impairment loss
related to goodwill at Sterling in connection with the proposed sale of
Sterling (Note 8).
The Company has also evaluated the remaining goodwill of $12,473,000
related to UOE for potential impairment. The current projected
undiscounted cash flows, which reflect assumptions based upon current
operations and activities, support the value of goodwill as of June 30,
2002. However, given that the Company is only nine months out of the
development stage and due to the current liquidity issues and market
conditions in general, there are no assurances that the Company will be
able to achieve future cash flow projections. The Company intends to
obtain an outside valuation of UOE in connection with the
implementation of SFAS No. 142, Goodwill and Other Intangible Assets,
as of September 30, 2002.
8. LOSS ON ASSETS TO BE DISPOSED OF
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," the net assets of Sterling were
determined to be impaired and a $16,000,000 loss on assets to be
disposed of was recorded as of March 31, 2002. The impairment loss was
measured as the amount by which the carrying amount of the net assets
exceeded the fair value of the net assets. The estimate of fair value
(less costs to sell) was based upon the expected future undiscounted
cash flows from the sale of Sterling. The amount of the impairment loss
was allocated to eliminate the remaining goodwill at Sterling
($9,519,000), to eliminate the remaining intangible assets of Sterling
($3,864,000) and to reduce the value of the fixed assets at Sterling
($2,617,000).
On June 30, 2002, the Company recorded an additional impairment charge
of approximately $831,000 related to the fixed assets of Sterling,
$95,000 related to the Port Clinton, Ohio facility and $48,000 related
to the Stirling, New Jersey facility. The impairment losses were
measured as the amount by which the carrying amount of the net assets
exceeded the fair value of the net assets. The estimates of fair value
of the net assets (less costs to sell) were based upon the expected
future undiscounted cash flows from the proposed sale of the Sterling
business (Note 1) and recent sales contracts for the Stirling, New
Jersey and Port Clinton facilities.
9. CURRENT PORTION OF LONG-TERM DEBT
On November 9, 2001, concurrent with the closing of the sale of UAS,
the Company repaid in cash the $5,000,000 note payable to Emcore
Corporation and related accrued interest of $83,750. Also during the
first quarter of Fiscal 2002, the Company issued from treasury, 18,186
shares of stock as payment of additional interest on the note. The
stock was valued on the date of issuance at approximately $64,000.
During the first three quarters of Fiscal 2002, the Company executed
unsecured promissory notes payable to certain vendors in an effort to
address delinquent payables issues. The notes are short-term in nature
and bear interest at rates ranging from 4.75% to 10.0%. The balance of
these vendor notes payable approximates $3,521,000 at June 30, 2002.
At June 30, 2002, the Company has reclassified $7,348,000 of the
long-term portion of capital leases to short-term as a result of
default notices received from the lessors. The Company has received
preliminary modification agreements with respect to certain capital
lease agreements and continues to work with its debt holders and
vendors on achievable payment plans.
10. DISCONTINUED OPERATIONS OF HPPI
The Company sold its High Performance Plastics segment during Fiscal
2000. The accompanying Condensed Consolidated Financial Statements
reflect the run-out operations of the High Performance Plastics segment
as discontinued operations in accordance with APB No. 30.
Net liabilities of the discontinued operations have been segregated on
the June 30, 2002 and September 30, 2001 interim condensed consolidated
balance sheets, the components of which are as follows (in thousands):
Net Liabilities of Discontinued Operations of HPPI
June 30, September 30,
2002 2001
----------- -------------
Assets:
Cash $ 111 $ 109
Prepaid and other assets - 194
----------- -----------
Total assets 111 303
----------- -----------
Liabilities:
Current note payable 658 1,000
Trade payables 348 45
Other accrued expenses 559 1,168
----------- -----------
Total liabilities 1,565 2,213
----------- -----------
Net liabilities of discontinued operations of HPPI $ 1,454 $ 1,910
=========== ===========
The results of operations for all periods presented have been restated
for discontinued operations. The operating results of discontinued
operations are as follows (in thousands):
For the Three Months Ended
---------------------------------
June 30, July 1,
2002 2001
----------- -----------
Selling and administrative $ 50 $ 111
----------- -----------
Loss before interest and income taxes (50) (111)
Interest expense - net (7) (1)
----------- -----------
Loss before income taxes (57) (112)
Income tax expense (29) (258)
----------- -----------
Loss from discontinued operations of HPPI $ (86) $ (370)
=========== ===========
For the Nine Months Ended
----------------------------------
June 30, July 1,
2002 2001
----------- ------------
Selling and administrative $ 73 $ 146
----------- ------------
Loss before interest and income taxes (73) (146)
Interest (expense) income - net (29) 4
----------- -----------
Loss before income taxes (102) (142)
Income tax expense (29) (253)
----------- -----------
Loss from discontinued operations of HPPI $ (131) $ (395)
=========== ===========
11. 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 sought approximately
$8,106,000 for alleged default under a lease and benefits that the
landlord believed it would have received under such lease. The Company
filed an answer seeking not less than $7,000,000 for breaches of
contract, fraud and constructive fraud on the part of the plaintiff. On
February 11, 2002, the Company reached a settlement and on April 26,
2002 executed a settlement agreement with the plaintiff whereby the
Company has paid AFG-NVC, LLC $650,000 in the form of a secured
promissory note and 300,000 shares of the Company's common stock
(valued at approximately $135,000 at the time of settlement). The
promissory note is secured by a security interest in the Company's
Stirling, New Jersey facility which is currently held for sale. The
term of the note is one year and is due in full at maturity. Interest
is payable quarterly at 8% per annum. The Company recorded the $785,000
settlement during the first quarter of Fiscal 2002.
The Company and certain of its officers are currently defendants in
five putative class action securities lawsuits filed in July 2002 in
the United States District Court for the Middle District of Florida.
The suits allege, among other things, violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), in connection with the valuation of a promissory note held by
the Company in December 1999, the write-down of goodwill in the
Company's subsidiary Sterling in December 2001, and statements made in
filings with the Securities and Exchange Commission (the "SEC") and in
press releases concerning Sterling. Management intends to defend these
suits vigorously. The Company and certain of its officers are currently
defendants in a putative class action securities lawsuit filed by
certain former shareholders of Sterling in July 2002 in the United
States District Court for the Eastern District of Virginia. This suit
alleges, among other things, violations of Sections 11, 12 and 15 of
the Securities Act of 1933, as amended, and Sections 10(b) and 20(a) of
the Exchange Act in connection with the exchange of common stock of the
Company for securities of Sterling in May 2000. The plaintiffs allege
that the Company misrepresented the timing of the attainment of
commercial viability of the Company's subsidiary UOE. Management
intends to defend this suit vigorously.
The Company and certain of its subsidiaries have been served with
several actions brought by vendors seeking approximately $3,770,000 for
purchases of equipment, supplies and services for which the Company or
such subsidiaries have failed to make payments. In one suit the vendor
has obtained pretrial attachment to certain of the Company's bank
accounts, effectively freezing approximately $142,000 of the Company's
cash. This amount has been reclassified from cash to prepaid and other
assets as of June 30, 2002. The Company is seeking to resolve these
matters by settlement. The Company has settled one such suit for
non-payment of approximately $180,000 due in connection with equipment
purchased by UOE. The suit was settled by return of the equipment to
the vendor and the loss of an approximate $45,000 deposit by UOE.
Related to another suit, the Company has estimated and provided for an
additional loss of approximately $186,000. The range of loss for this
suit approximated $186,000 - $550,000. The Company recorded its
estimate at the minimum amount of the range as no amount within the
range is a better estimate than any other amount. The inability to
resolve these matters could have a material adverse impact on the
businesses of the subsidiaries involved. Sterling is currently subject
to judgment liens of approximately $93,000 in such actions.
Uniroyal Retiree Benefits, Inc. ("URBI"), which provides health care
and life insurance services to certain persons who retired from
predecessors of the Company and certain other employers, filed an
action in June 2002 in the United States Bankruptcy Court for the
Northern District of Indiana seeking reopening of a 1995 order in an
adversary proceeding and a contempt citation against the Company in
connection with the Company's failure to make payments to URBI
aggregating $665,457.08. The court has reopened the action and
scheduled a hearing.
Mechanics' liens have been filed against premises occupied by UOE in
Tampa, Florida and by Sterling in Sterling, Virginia. The claims in
connection with such liens aggregate approximately $2,411,000 in the
case of UOE and approximately $2,132,000 in the case of Sterling. The
existence of such liens violates the terms of the leases for such
premises. The failure to cure such defaults could result in the
termination of the leases, which could have a material adverse effect
on the businesses of UOE and Sterling. The landlord of the Tampa
facility filed an eviction notice in Hillsborough County Court based in
part on the existence of mechanics' liens against the premises. A
forbearance agreement was entered into with the landlord which has
since expired. The Company is currently in discussions with the
landlord regarding extension of the forbearance agreement.
Although the liabilities with respect to the equipment, supplies and
services have been recorded, the impact of any unfavorable outcome over
and above the recorded liabilities, if any other than those previously
discussed, is not estimable.
The Company knows of no other pending legal proceedings to which the
Company or any of its subsidiaries is a party or of which their
property is the subject other than routine litigation incidental to the
Company's business, an adverse outcome of which would not be expected
to have a material impact on 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 cleanup-related costs of a
non-capital nature when it is probable both that a liability has been
incurred and that the amount can be reasonably estimated. The ultimate
amounts of environmental liabilities cannot be precisely determined and
estimates of such liabilities made by management, after consultation
with internal and external environmental consultants, require
assumptions about future events due to a number of uncertainties
including the extent of contamination, the appropriate remedy, the
financial viability of other potentially responsible parties and the
final apportionment, if any, among the potentially responsible parties.
The estimates do not take into consideration any potential increases in
disposal costs but are based upon current cost estimates. Since the
ultimate outcome of these matters may differ from the estimates used in
our assessment to date, the recorded liabilities will be periodically
evaluated, as additional information becomes available, to ascertain
whether the accrued liabilities are adequate. The Company recorded a
liability for environmental matters as of June 30, 2002 and September
30, 2001 of approximately $1,024,000 and $977,000, respectively, which
represents the probable outcome of these contingent matters. The
Company expects the majority of the costs included in the environmental
reserves to be disbursed over the next 28 years. The Company does not
reduce its estimated obligations for proceeds from other potentially
responsible parties or insurance companies. Proceeds, if any, would be
recorded as an offset to environmental expense when received. The
Company does not expect that adjustments to estimates, which are
reasonably possible in the near term and that may result in changes to
recorded amounts, will have a material effect on our financial position
or results of operations.
The following table shows the activity and balances related to
environmental accruals from September 30, 2001 through June 30, 2002
(in thousands). The expenses and liabilities for environmental
remediation are included within the discontinued operations of UAS and
HPPI.
Balance at Charges to Balance at
9/30/01 Expense Payments 6/30/02
------------ ------------- ------------ ------------
UAS Environmental
remediation liability $ - $ 566,000 $ (45,000) $ 521,000
HPPI Environmental
remediation liability 977,000 25,000 (499,000) 503,000
------------ ------------ ------------ ------------
Total environmental
remediation liability $ 977,000 $ 591,000 $ (544,000) $ 1,024,000
============ ============ ============ ============
The Company may become subject to claims relating to certain
environmental matters. The operations of predecessor companies and
certain of their affiliates produced waste materials that, prior to
1980, were disposed of at some 36 known unregulated sites throughout
the United States. After 1980, waste disposal was limited to sites
permitted under federal and state environmental laws and regulations.
If any of the disposal sites are found to be releasing hazardous
substances into the environment, under current federal and state
environmental laws, the appropriate company might be subject to
liability for clean-up and containment costs.
Pursuant to a 1992 settlement agreement with the United States
Environmental Protection Agency (the "EPA"), the United States
Department of the Interior and the States of Wisconsin and Indiana (the
"EPA Settlement Agreement") in the event that the United States,
Wisconsin or Indiana asserts a claim against the Company for response
costs associated with pre-petition disposal activities at certain
sites, the governmental party will be entitled to pursue its claim in
the ordinary course, and the Company will be entitled to assert all of
its defenses. However, if and when the Company is held liable, and if
the liability is determined to arise from pre-petition disposal
activities of its predecessors, the Company may pay the liability in
discounted "plan dollars" (i.e., the value of the consideration that
the party asserting such claim would have received if the liability
were treated as a general unsecured claim under the Plan of
Reorganization of our predecessors). Such payment may be made in cash
or in the Company's stock, or a combination thereof, at the Company's
option. Claims arising from real property owned by the Company are not
affected by the EPA Settlement Agreement.
Coated Fabrics Segment
In October 2001, the EPA sent the Company a General Notice and Notice
of Potential Liability concerning the Chemical Recovery Systems site in
Elyria, Ohio. While a unit of Uniroyal, Inc. in Port Clinton, Ohio is
alleged to have sent hazardous materials to the site between 1974 and
1981, the Company's records do not support the allegation. The Company
does not have sufficient information to ascertain the level, if any, of
its liability in respect to the site. In any event, if the Company is
found to have liability in connection with the site, such liability
will be subject to the terms of the EPA Settlement Agreement.
Specialty Adhesives Segment
In connection with the July 1996 acquisition of a manufacturing
facility in South Bend, Indiana for the UAS operations, the Company
assumed costs of remediation of soil and ground water contamination.
Under the terms of the agreement for the purchase of the facility, the
Company placed $1,000,000 in an escrow account to be used for the
remediation. The $1,000,000 represented the total estimate of the
clean-up cost over a five to seven year period and was treated as a
part of the purchase price of the facility. As of November 9, 2002, the
Company had spent approximately $764,000 of related remediation costs
and had approximately $266,000 left in the original environmental
escrow account. In accordance with the asset purchase agreement for the
sale of UAS on November 9, 2001, $300,000 of the sales proceeds were
placed in another environmental escrow account pursuant to the terms of
an environmental escrow agreement with the purchaser of UAS.
Upon the sale of UAS in November 2001, the Company recorded the
$566,000 in the environmental escrow accounts as both an asset and a
liability within the net liabilities of the discontinued operations of
UAS. The Company has recently received a cost opinion from an
independent environmental consulting and engineering firm that
estimated the remediation costs for the South Bend facility at $416,000
over a four-to-five year period. Because of the uncertainty regarding
the ultimate costs, the Company will not reverse any portion of the
environmental liability established for the South Bend facility
($521,000 as of June 30, 2002) until such point in time that the funds
from the environmental escrow accounts, in excess of the anticipated
remediation costs, are released to the Company, which release is
subject to certain conditions.
High Performance Plastics Segment
During the second quarter of Fiscal 2000, the Company established a
$3,843,000 reserve for future environmental remediation costs of the
Stamford, Connecticut, Hackensack, New Jersey and Stirling, New Jersey
facilities used by HPPI in their operations, which reserve was included
within the discontinued operations of HPPI. The majority of this
environmental reserve ($3,693,000) related to a portion of the Stamford
real property acquired by the Company in October of 1995. Prior to the
purchase of this property in 1995, the previous owner had performed
extensive environmental remediation and the Company received an
environmental report showing lack of further contamination. In
connection with the sale of HPPI in February of 2000, the Company
conducted an environmental assessment in compliance with the laws of
the State of Connecticut. The environmental assessment indicated that
the portion of the Stamford real estate that was acquired by the
Company in 1995 was contaminated with total petroleum hydrocarbons, DDT
and other pesticide chemicals. The initial reserve for the Stamford
environmental remediation costs, established in the second quarter of
Fiscal 2000, was based upon cost estimates from independent
environmental contractors. The Company spent approximately $1,557,000
on remediation costs for the Stamford property during Fiscal 2000 and
charged the expenditures against the reserve established above. At the
end of Fiscal 2000, the Company adjusted its environmental reserves for
HPPI (primarily as it related to the Stamford facility) to $1,070,000.
The adjustment was included with the gain on the disposition of
discontinued operations and was based upon the revised estimates from
third party environmental consultants. The remediation cost estimate
was reduced primarily as a result of a revised remediation methodology
which was ultimately approved by the Connecticut Department of
Environmental Protection in November of 2001. The Company spent
approximately $50,000 of remediation costs on the Stamford real
property during Fiscal 2001 and $494,000 during the first three
quarters of Fiscal 2002. As of June 30, 2002, the Company estimated,
and has reserved for, environmental remediation costs at the Stamford
facility of approximately $253,000 which are expected to be incurred
over the next 28 years. The purchaser of HPPI has deferred taking title
to this portion of the Stamford real property until it is comfortable
with the environmental condition of the property.
The balance of the HPPI environmental reserve established in February
of 2000 ($150,000) related to the Hackensack, New Jersey real property
and the Stirling, New Jersey property (which is currently listed as
held-for-sale). The reserves were established at that time based upon
ongoing environmental assessments at those facilities and trust
agreements entered into with the State of New Jersey. Remediation
expenditures for Hackensack and Stirling were minimal during Fiscal
2000. The Company spent approximately $43,000 between the two
facilities on remediation efforts during Fiscal 2001 and $5,000 during
the first three quarters of Fiscal 2002. At June 30, 2002, the Company
(through both internal and external environmental consultants) has
estimated that the remediation costs for both facilities approximates
$250,000 which is expected to be incurred over a three-year period. The
Company's remediation cost estimates for the Hackensack real property
are based on the fact that the majority of the original contamination
identified has naturally biodegraded and the remaining contamination
has resulted from an upstream property, the owner of which will be
responsible for the clean-up. The purchaser of HPPI has deferred taking
title to the Hackensack real property until it is comfortable with the
environmental condition of the property.
Based on information available as of June 30, 2002, 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.
12. START-UP COSTS
UOE and NorLux emerged from the development stage during the first
quarter of Fiscal 2002. During the three and nine month periods ended
July 1, 2001, approximately $3,251,000 and $12,515,000 of start-up
costs for UOE and NorLux were included in selling and administrative
costs.
13. INCOME TAXES
At September 30, 2001, the Company established a deferred tax 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. As a result, no income tax benefit was recognized
during the three and nine month periods ended June 30, 2002 for losses
incurred during the period. During the nine month period ended June 30,
2002, an income tax benefit of approximately $908,000 was recognized
related to a federal tax refund due the Company as a result of recently
enacted tax legislation. This benefit was partially offset by income
tax expense of a consolidated subsidiary which is not part of the
overall consolidated tax group.
The provision for income tax benefit for the three and nine month
periods ended July 1, 2001 was calculated through the use of the
estimated annual income tax rates based on projected annualized income.
The Internal Revenue Service has identified transactions similar to the
Uniroyal Liability Management Company formation and subsequent sale of
its stock as a tax shelter and has required taxpayers, including the
Company, to register with the Office of Tax Shelters section of the
Internal Revenue Service. During Fiscal 2000 and Fiscal 1999 the
Company recognized tax benefits of approximately $14,638,000 and
$2,278,000, respectively, related to the capital loss generated from
the sale of a portion of the stock of this subsidiary. On August 9,
2002, the IRS notified the Company of its intent to audit tax years
1999 - 2001. The IRS has sought to disallow some or all of the capital
losses associated with similar transactions of other companies.
Management believes the Company's position is well supported and would
vigorously contest any such disallowance. If the IRS were to disallow
some or all of the capital loss claimed, it is likely and anticipated
that any resolution of this matter would entail efforts to resolve it
favorably including administrative appeals and litigation extending
over several years. Although the Company's available net operating loss
carrybacks would be expected to offset the majority of any unfavorable
resolution of this matter, the potential impact of taxes and interest
on the underpayment of taxes could have a material impact on our cash
flows and statement of operations of up to $3,000,000.
14. LOSS PER COMMON SHARE
For the three and nine month periods ended June 30, 2002, the weighted
average number of common shares outstanding for the calculation of
basic and diluted earnings per share was 28,217,879 and 28,000,915,
respectively. Inclusion of warrants to purchase 732,790 shares of
common stock at $2.1875 per share and additional stock options to
purchase 6,275,727 shares of common stock at various prices in the
calculation of diluted earnings per share would have been antidilutive.
For the three and nine month periods ended July 1, 2001, the weighted
average number of common shares outstanding for the calculation of
basic and diluted earnings per share was 26,153,559 and 25,954,340,
respectively. Inclusion of warrants to purchase 735,770 shares of
common stock at $2.1875 per share and additional stock options to
purchase 4,365,972 shares of common stock at various prices in the
calculation of diluted earnings per share would have been antidilutive.
15. STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information are as follows:
Payments for income taxes and interest expense were (in thousands):
Nine Months Ended
---------------------------------
June 30, July 1,
2002 2001
----------- ------------
Interest payments (net of capitalized
interest) - continuing operations $ 817 $ 1,184
Interest payments (net of capitalized
interest) - discontinued operations 37 27
Income tax payments - continuing
operations 48 373
Income tax payments - discontinued
operations 28 267
For the nine months ended June 30, 2002 and July 1, 2001, purchases of
property, plant and equipment and net cash used in financing activities
do not include $28,000 and $3,500,000, respectively, related to
property held under capital leases. The leases relate to equipment
purchased for the Compound Semiconductor and Optoelectronics segment.
During the nine months ended June 30, 2002 and July 1, 2001, the
Company made matching contributions to its 401(K) Savings Plan of
$139,000 and $124,000, respectively, through the re-issuance of 43,301
and 19,905 common shares from the treasury, respectively.
During the nine months ended June 30, 2002 and July 1, 2001, the
Company reissued from treasury 37,189 and 8,641, respectively,
restricted shares of its common stock under the 2000 Stock Plan.
Compensation expense recorded in connection with the grants
approximated $119,000 and $54,000, respectively.
16. SEGMENT INFORMATION
After disposal of the Company's other businesses, the Company operates
in only one business segment. Segment information for the three and
nine month periods ended June 30, 2002 and July 1, 2001 is as follows
(in thousands):
For the Three Months Ended For the Nine Months Ended
--------------------------- ---------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
----------- ------------ ----------- -----------
Net Sales:
Compound Semiconductor
and Optoelectronics $ 3,470 $ 1,164 $ 7,986 $ 3,334
=========== =========== =========== ===========
Loss before interest, income taxes,
minority interest and discontinued
operations:
Compound Semiconductor
and Optoelectronics $ (5,824) $ (8,238) $ (40,121) $ (26,476)
Corporate (2,135) (2,709) (6,988) (6,447)
----------- ----------- ---------- -----------
Total $ (7,959) $ (10,947) $ (47,109) $ (32,923)
=========== =========== =========== ===========
Balance sheet segment information as of June 30, 2002 and September
30, 2001 is as follows (in thousands):
June 30, September 30,
2002 2001
------------ -------------
Identifiable Assets:
Compound Semiconductor
and Optoelectronics $ 74,233 $ 98,251
Corporate 4,116 12,958
Discontinued operations 7,493 21,480
------------ -----------
Total $ 85,842 $ 132,689
============ ===========
ITEM 2. Management's Discussion and Analysis Of Financial Condition and
Results Of Operations
The Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the condensed consolidated
financial statements and footnotes contained in this Form 10-Q for the period
ended June 30, 2002. In addition to historical information, this report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Act of 1934. Forward-looking
statements are based upon 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 guarantees of future performance,
and we have no specific intention to update these statements. Forward-looking
statements include statements which are predictive in nature, which depend upon
or refer to future events or conditions and which include words such as
"expects," "anticipates," "intends," "plans," "believes," "estimates," "may,"
"will," "believe," 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.
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 our ability to obtain necessary working capital;
o our ability to obtain necessary financing;
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 our ability to obtain sales orders;
o increased competition;
o price erosion of our products;
o the variability of future operating results;
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 acceptance of our products in the marketplace;
o availability, retention and performance of key personnel;
o relations with employees, customers and suppliers;
o our ability to obtain and protect key intellectual property;
o economic conditions generally and in our industries; and
o our ability to complete sales of assets on satisfactory terms.
Overview
Uniroyal Technology Corporation is transitioning from a plastics and chemical
company to a high technology company focused primarily on high brightness
light-emitting diodes and lighting solutions. In the last two years the Company
has sold two plastics and chemicals business segments and has re-deployed the
proceeds from those asset sales into paying down debt and investing in
technology and capital spending within the high technology businesses. The
Company has announced it intends to sell its remaining plastics and chemicals
business segment (Coated Fabrics) sometime in the next twelve months. The
operating results of the Coated Fabrics business segment, as well as certain
expenses of the previously sold business segments, are reported as discontinued
operations in the Company's Statement of Operations.
The Company continues to experience losses from continuing operations and
negative cash flows and is facing critical liquidity strains. See "Liquidity and
Capital Resources."
During May 2000, the Company acquired, for approximately 2.0 million shares of
Uniroyal common stock and employee stock options, all of the outstanding shares
of Sterling Semiconductor, Inc., a technology company developing and
manufacturing semiconductor materials made from silicon carbide. When purchased,
Sterling was primarily in its early stages of development and continues to be so
today. Since late Fiscal 2001 and continuing into Fiscal 2002, the Company has
been experiencing severe liquidity constraints which caused the Company to
re-examine its strategic direction because of the investment required at its
high brightness light-emitting diode facility as well as at the silicon carbide
operations. The Company has announced that it intends to sell the silicon
carbide operations and is currently in discussions with several interested
parties. The Company will now focus on its high brightness light-emitting diode
business. The financial performance of Sterling is included in the results of
the Compound Semiconductor and Optoelectronics business segment.
The market for high brightness light-emitting diodes is estimated by a
syndicated research firm to be $1.5 billion and is expected to triple in size
over the next five years. The markets utilizing high brightness light-emitting
diodes include back-lighting for wireless handsets, full color displays and
signage, traffic signals, general illumination, automotive and other lighting
applications. The Company expects to participate in all of the previously
mentioned markets.
Third Quarter Fiscal 2002 Compared with
the Third Quarter Fiscal 2001
Net Sales. The Company's net sales from continuing operations increased 198% in
the third quarter of Fiscal 2002 to $3,470,000 from $1,164,000 in the third
quarter of Fiscal 2001. The increase is attributable to gains from sales of high
brightness light-emitting diodes which more than offset a decline in the
Company's silicon carbide operation. High brightness light-emitting diodes
accounted for 84% of the total sales this quarter versus 32% for the third
quarter of the previous year.
The growth in the high brightness light-emitting diodes business was due
primarily to increased volume of ultraviolet (UV) product which was shipped
primarily to Asian customers. Also, during the third quarter of this year, the
Company shipped lower priced product from inventories in an effort to raise cash
and upgrade the quality of the inventories.
Average selling prices have declined substantially in the marketplace versus the
previous year, which resulted in lower dollar sales levels, offsetting the
dramatic increase in the volume of die shipped this quarter. The Company
continues to target development toward value-added products which command
premium selling prices, such as blue product with low forward voltage, as well
as green and amber colors which are in high demand. Sales for these products,
which are primarily in development stage, were moderate this quarter.
Revenues of silicon carbide products declined in the third quarter of this year
versus the third quarter of the previous year due to lower revenue from
government contracts as well as lower sales of product used in commercial
applications. The primary reason for the decline was the Company's cash flow
difficulties which resulted in the availability of lower quantities of raw
materials for production.
Cost of Sales. Cost of sales increased by $2,626,000 to $4,634,000 in the third
quarter of Fiscal 2002 from $2,008,000 in the third quarter of Fiscal 2001. The
increase is primarily attributable to the emergence of Uniroyal Optoelectronics,
LLC ("UOE") and NorLux Corp. ("NorLux") from the development stage at the
beginning of Fiscal 2002. During the third quarter of Fiscal 2001, UOE and
NorLux incurred start-up costs of approximately $3,251,000 which were classified
within selling and administrative expense.
Selling and Administrative. Selling and administrative costs decreased
$2,945,000 to $3,140,000 in the third quarter of Fiscal 2002 from $6,085,000 in
the third quarter of Fiscal 2001. The decrease is primarily attributable to the
emergence of UOE and NorLux from the development stage at the beginning of
Fiscal 2002 as previously discussed. The decrease in selling and administrative
expenses related to start-up costs of UOE and NorLux was partially offset by an
increase in unallocated corporate overhead costs. During the third quarter of
Fiscal 2001, approximately $593,000 of corporate overhead was allocated to the
operations of Uniroyal Adhesives & Sealants ("UAS") and Uniroyal Engineered
Products ("UEP"). No corporate overhead was allocated to the discontinued
operations of UAS or UEP during the third quarter of Fiscal 2002.
Depreciation and Other Amortization. Depreciation and other amortization
decreased $835,000 to $2,681,000 in the third quarter of Fiscal 2002 from
$3,516,000 in the third quarter of Fiscal 2001. The decrease is primarily due to
the net effect of the increase in depreciation expense of $805,000 as a result
of capital expenditures and the decrease in the amortization of Sterling
goodwill and intangibles of $1,640,000 due to the impairment and related
reduction of Sterling goodwill at September 30, 2001 and the additional
impairment and related reduction of Sterling goodwill and intangible assets at
March 31, 2002.
Loss on Assets to be Disposed Of. The loss on assets to be disposed of was
$974,000 during the third quarter of Fiscal 2002 versus $502,000 during the
third quarter of Fiscal 2001. An $879,000 loss on assets to be disposed of
during the third quarter of Fiscal 2002 relates to asset impairments at Sterling
of $831,000 as a result of the revised proposals for the sale of Sterling,
$95,000 related to the Port Clinton, Ohio facility held-for-sale and $48,000
related to the Stirling, New Jersey facility held-for-sale. The $502,000 loss on
assets to be disposed of during the third quarter of Fiscal 2001 related to a
write-off of certain assets to be disposed of at Sterling of $450,000 and a
write-down of $52,000 related to the Stirling, New Jersey facility
held-for-sale.
Interest Income (Expense). Interest income decreased $180,000 to $30,000 during
the third quarter of Fiscal 2002 from $210,000 during the third quarter of
Fiscal 2001. The decrease is primarily due to the reduction of cash available
for investment purposes as the Company continued to invest for capital expansion
and incur start-up costs within the Compound Semiconductor and Optoelectronics
segment.
Interest expense increased $159,000 to $511,000 during the third quarter of
Fiscal 2002 from $352,000 during the third quarter of Fiscal 2001. The increase
is primarily due to the capitalization of $258,000 of interest expense during
the third quarter of Fiscal 2001 as part of the construction costs of UOE and
Sterling. No interest was capitalized during the third quarter of Fiscal 2002.
The increase in interest expense due to lack of interest capitalization was
partially offset by a reduction in interest expense due to an overall decrease
in capital lease debt.
Income Tax Benefit. The income tax benefit decreased $2,685,000 to $120,000
during the third quarter of Fiscal 2002 from $2,805,000 during the third quarter
of Fiscal 2001. In the fourth quarter of Fiscal 2001, the Company recorded a
deferred tax valuation allowance. As a result, no deferred tax benefit was
recognized during the third quarter of Fiscal 2002 for losses incurred during
the period. The tax benefit recognized in the third quarter of Fiscal 2002 is a
result of tax returns filed and is partially offset by income tax expense of a
consolidated subsidiary which is not part of the overall consolidated tax group.
The provision for income tax benefit for the third quarter of Fiscal 2001 was
calculated through the use of estimated annual income tax rates based upon
projected annualized income.
Minority Interest in Net Losses of Consolidated Joint Venture. The allocation of
minority interest in the UOE joint venture ceased in August 2001 as a result of
the buyout by the Company of the joint venture partners' remaining interest.
During the third quarter of Fiscal 2001, 49% of the losses in UOE were allocated
to the joint venture partner.
Discontinued Operations. Income from discontinued operations, net of income
taxes, represented the operational results of UAS and UEP in the third quarter
of Fiscal 2001 prior to the measurement date as defined in Accounting Principles
Board Opinion No. 30, "Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB No. 30"). During the third quarter of Fiscal 2002, the
operations of UEP, after the measurement date of January 7, 2002, and the
run-out activity of UAS after its sale on November 9, 2001, are included in the
gain on disposition of discontinued operations line. The gain (loss) on
disposition of discontinued operations, net of income taxes, also includes
run-out expenses of the High Performance Plastics Segment which was sold in
February 2000.
First Three Quarters Fiscal 2002 Compared with
the First Three Quarters Fiscal 2001
Net Sales. The Company's net sales from continuing operations increased 140% in
the first three quarters of Fiscal 2002 to $7,986,000 from $3,334,000 in the
first three quarters of Fiscal 2001. Sales of high brightness light-emitting
diodes, which accounted for 74% of the overall sales, increased in the first
three quarters of Fiscal 2002 versus the first three quarters of Fiscal 2001.
The primary reason for the increase in the sales of high brightness
light-emitting diodes was increased shipments of ultraviolet product, which was
used primarily for currency counterfeit detection. Sales of ultraviolet products
accounted for 44% of the total sales for the first three quarters of Fiscal
2002. For the first three quarters of Fiscal 2001, sales of high brightness
light-emitting diode products accounted for 18% of the total sales from
continuing operations.
Revenue of silicon carbide products declined in the first three quarters of
Fiscal 2002 by 31% due to lower revenue from government contracts as well as
lower sales of product used for commercial applications. The primary reason for
the decline was the Company's cash flow difficulties, which resulted in the
availability of lower quantities of raw materials for production and delays in
shipment of equipment necessary to fulfill revenue for government contracts.
Such equipment was installed in April but will not be operational until
September of 2002 which should lead to increased revenue from government
contracts in the fourth quarter of Fiscal 2002.
Cost of Sales. Cost of sales increased by $11,268,000 to $15,776,000 in the
first three quarters of Fiscal 2002 from $4,508,000 in the first three quarters
of Fiscal 2001. The increase is primarily attributable to the emergence of UOE
and NorLux from the development stage at the beginning of Fiscal 2002. During
the first three quarters of Fiscal 2001 UOE and NorLux incurred start-up costs
of approximately $12,515,000 which were classified within selling and
administrative expense. The balance of the increase is primarily due to start-up
costs associated with increased capacity and personnel put in place.
Selling and Administrative. Selling and administrative costs decreased
$8,185,000 to $12,138,000 in the first three quarters of Fiscal 2002 from
$20,323,000 in the first three quarters of Fiscal 2001. The decrease is
primarily attributable to the emergence of UOE and NorLux from the development
stage at the beginning of Fiscal 2002 as previously discussed. The decrease in
selling and administrative expenses related to start-up costs of UOE and NorLux
was partially offset by a $785,000 charge in the first three quarters of Fiscal
2002 for settlement of outstanding litigation; a $471,000 non-cash charge in the
first three quarters of Fiscal 2002 for the realignment of executive benefit
programs; and an increase in unallocated corporate overhead costs. During the
first three quarters of Fiscal 2001, approximately $1,547,000 of corporate
overhead was allocated to the operations of UAS and UEP compared to $213,000
allocated to the operations of UEP during the first three quarters of Fiscal
2002.
Depreciation and Other Amortization. Depreciation and other amortization was
$10,207,000 in the first three quarters of Fiscal 2002 compared to $10,131,000
in the first three quarters of Fiscal 2001. The resulting change from the prior
year is negligible but is primarily due to the net effect of the increase in
depreciation expense of $2,873,000 as a result of capital expenditures, the
increase in the amortization of UOE intangible assets of $251,000 associated
with the buyout of the UOE minority interest in August 2001, and the decrease in
the amortization of Sterling goodwill and other intangible assets of $3,066,000
due to the impairment and related reduction of Sterling goodwill at September
30, 2001 and the additional impairment and related reduction of Sterling's
goodwill and intangible assets at March 31, 2002.
Loss on Assets to be Disposed Of. The loss on assets to be disposed of was
$16,974,000 during the first three quarters of Fiscal 2002 versus $1,295,000
during the first three quarters of Fiscal 2001. During the first three quarters
of Fiscal 2002, there was a $16,831,000 asset impairment at Sterling as a result
of the proposed sale of Sterling, a $95,000 impairment charge related to the
Port Clinton, Ohio facility held-for-sale and a $48,000 impairment charge
related to the Stirling, New Jersey facility held-for-sale. The $1,295,000 loss
on assets to be disposed of during the first three quarters of Fiscal 2001
related to a write-off of certain assets to be disposed of at Sterling of
$686,000, a write-down of $159,000 related to the Stirling, New Jersey facility
held-for-sale and a write-down of $450,000 related to the Port Clinton, Ohio
facility held-for-sale.
Interest Income (Expense). Interest income decreased $1,444,000 to $98,000
during the first three quarters of Fiscal 2002 from $1,542,000 during the first
three quarters of Fiscal 2001. The decrease is primarily due to the reduction of
cash available for investment purposes as the Company continued to invest for
capital expansion and start-up costs within the Compound Semiconductor and
Optoelectronics segment.
Interest expense increased $478,000 to $1,735,000 during the first three
quarters of Fiscal 2002 from $1,257,000 during the first three quarters of
Fiscal 2001. The increase is primarily due to the capitalization of $616,000 of
interest expense during the first three quarters of Fiscal 2001 as part of the
construction costs of UOE and Sterling compared to $25,000 of interest
capitalized during the first three quarters of Fiscal 2002. The increase in
interest expense due to lack of interest capitalization was partially offset by
a reduction in interest expense due to an overall decrease in capital lease
debt.
Income Tax Benefit. The income tax benefit decreased $7,076,000 to $831,000
during the first three quarters of Fiscal 2002 from $7,907,000 during the first
three quarters of Fiscal 2001. In the fourth quarter of Fiscal 2001, the Company
recorded a deferred tax valuation allowance. As a result, no deferred tax
benefit was recognized during the first three quarters of Fiscal 2002 for losses
incurred during the period. During the first three quarters of Fiscal 2002, an
income tax benefit of approximately $908,000 was recognized related to a federal
tax refund due the Company as a result of recently enacted legislation. This
benefit was partially offset by income tax expense of a consolidated subsidiary
which is not part of the overall consolidated tax group.
The provision for income tax benefit for the first three quarters of Fiscal 2001
was calculated through the use of estimated annual income tax rates based upon
projected annualized income.
Minority Interest in Net Losses of Consolidated Joint Venture. The allocation of
minority interest in the UOE joint venture ceased in August 2001 as a result of
the buyout by the Company of the joint venture partners' remaining interest.
During the first three quarters of Fiscal 2001, 49% of the losses in UOE were
allocated to the joint venture partner.
Discontinued Operations. Income (loss) from discontinued operations, net of
income taxes, represented the operational results of UAS and UEP in the first
three quarters of Fiscal 2001 prior to the measurement date as defined in APB
No. 30. During the first three quarters of Fiscal 2002, the operations of UEP,
after the measurement date of January 7, 2002, and the run-out activity of UAS
after its sale on November 9, 2001, are included in the gain on disposition of
discontinued operations line. The gain (loss) on disposition of discontinued
operations, net of income taxes, also includes run-out expenses of the High
Performance Plastics Segment which was sold in February 2000.
Liquidity and Capital Resources
For the first three quarters of Fiscal 2002, continuing operations used
$6,512,000 of cash compared to $21,153,000 of cash used by continuing operations
during the first three quarters of Fiscal 2001. The decrease in cash used by
continuing operations for the first three quarters of Fiscal 2002 resulted
primarily from the receipt of a $6,322,000 income tax refund and an increase in
trade accounts payable.
Net cash provided by investing activities for the first three quarters of Fiscal
2002 was $11,502,000 compared to net cash provided by investing activities of
$754,000 for the first three quarters of Fiscal 2001. The net proceeds from the
sale of the Specialty Adhesives segment more than offset the expenditures for
capital equipment in Fiscal 2002.
Net cash used in financing activities during the first three quarters of Fiscal
2002 was $8,216,000 compared to $6,451,000 used during the first three quarters
of Fiscal 2001. Proceeds from the sale of the Specialty Adhesives segment during
the first quarter of Fiscal 2002 were used to repay a $5,000,000 loan from
Emcore Corporation and pay down a portion of the revolving line of credit. Other
term loan repayments reflect normal amortization of capital leases.
The Company has experienced liquidity strains, which are now critical, as it has
sought to reposition its operations away from the mature, industrial-based
activities and into the high-growth compound semiconductor technology industry.
The transition to the Compound Semiconductor and Optoelectronics business
segment has required significant investment spending related to start-up costs
and capital expenditures. Many of the markets served by 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. The ability of the Company to operate as
a going concern and the ultimate success of the Company depend on its ability to
obtain additional financing, either outside or within a bankruptcy
reorganization, to continue reducing operating costs and, ultimately, to
generate higher sales levels to attain profitability.
The accompanying condensed 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 result,
these 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.
The Company continues to experience losses from continuing operations and
negative cash flows, and had an accumulated deficit of $58,302,000 as of June
30, 2002. Net cash used by continuing operations for the three quarters ended
June 30, 2002 was $6,512,000 and it is likely that cash flow from continuing
operations will be negative throughout Fiscal 2002 and into Fiscal 2003. The
Company had a working capital deficiency at June 30, 2002 of $28,021,000
compared to working capital of $5,836,000 as of September 30, 2001. At June 30,
2002, the Company's principal source of liquidity was $114,000 of cash and cash
equivalents and $781,000 of availability under a revolving credit facility
subject to certain limitations on its use. The Company will need additional
funding for operations during the coming year. These 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. Such
funding may be available only as part of a bankruptcy reorganization.
As of June 30, 2002, the Company has defaulted on certain promissory note
payments, capital lease payments and vendor payments due. The Company has
reclassified $7,348,000 of capital lease debt outstanding at June 30, 2002 from
long-term to short-term based upon default notices received. The Company has
received preliminary modification agreements with respect to certain capital
lease agreements and continues to work with its debt holders and vendors on
achievable payment plans. If the Company is unable to come to an agreement with
these parties, they may seek possession of leased property or judicial remedies.
The Company's strategy to provide liquidity to fund its operations during the
coming year consists of reducing operating costs, selling certain assets and
obtaining additional financing. The Company has taken steps to reduce future
operating costs and cash flows, including the termination of its split dollar
life insurance plan and certain other benefit plans for executives and the
termination of its defined benefit retirement plan on December 28, 2001. These
terminations resulted in a reduction of net assets and additional expense to the
Company of approximately $471,000, which was recorded in the first quarter of
Fiscal 2002. These terminations will result in savings to the Company of
approximately $800,000 in expense and approximately $560,000 of cash flow during
Fiscal 2002. The Company is expected to realize total future cash flow savings
of approximately $10,000,000 from the termination of these programs. In
addition, in January 2002, the Company laid off 90 employees in an effort to
reduce operating costs and preserve cash.
The Company's strategy also includes selling its Sterling Semiconductor
subsidiary and its Coated Fabrics segment. On April 17, 2002, the Company
entered into a definitive stock purchase agreement with Umicore USA, Inc.
("Umicore") for the sale of 100% of the common stock of Sterling. The sale was
subject to various contingencies, including completion of due diligence and
obtaining regulatory approval. The agreement was terminated in June 2002. The
Company is currently involved in negotiations with several interested parties
for the sale of Sterling. Achievement of maximum value for the sale of Sterling
may only be possible through a bankruptcy reorganization. The Company intends to
sell its Coated Fabrics segment during the next year although there are
currently no active negotiations. If the Company is successful in selling its
Sterling Semiconductor subsidiary and Coated Fabrics segment, its operations
will consist of its Optoelectronics operations.
Pending completion of the sale of Sterling Semiconductor and our Coated Fabrics
segment, and even if the Company successfully complete these sales, the Company
will need to obtain additional financing which could require selling other
assets at unfavorable terms or borrowing funds which might not be available or
might only be available to us at terms we would not deem acceptable. Many of the
elements required to accomplish the Company's liquidity strategy are beyond its
control. Nonetheless, the Company's current need for liquidity is critical.
Sales of assets or necessary financing may require bankruptcy reorganization.
Therefore, its failure to implement any significant aspect of its liquidity
strategy described above successfully would have a material adverse effect on
our financial condition and results of operations.
Income Taxes
The Internal Revenue Service has identified transactions similar to the Uniroyal
Liability Management Company formation and subsequent sale of its stock as a tax
shelter and has required taxpayers, including the Company, to register with the
Office of Tax Shelters section of the Internal Revenue Service. During Fiscal
2000 and Fiscal 1999 the Company recognized tax benefits of approximately
$14,638,000 and $2,278,000, respectively, related to the capital loss generated
from the sale of a portion of the stock of this subsidiary. On August 9, 2002,
the IRS notified the Company of its intent to audit tax years 1999 - 2001. The
IRS has sought to disallow some or all of the capital losses associated with
similar transactions of other companies. Management believes the Company's
position is well supported and would vigorously contest any such disallowance.
If the IRS were to disallow some or all of the capital loss claimed, it is
likely and anticipated that any resolution of this matter would entail efforts
to resolve it favorably including administrative appeals and litigation
extending over several years. Although the Company's available net operating
loss carrybacks would be expected to offset the majority of any unfavorable
resolution of this matter, the potential impact of taxes and interest on the
underpayment of taxes could have a material impact on our cash flows and
statement of operations of up to $3,000,000.
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
cleanup-related costs of a non-capital nature when it is probable both that a
liability has been incurred and that the amount can be reasonably estimated. The
ultimate amounts of environmental liabilities cannot be precisely determined and
estimates of such liabilities made by management, after consultation with
internal and external environmental consultants, require assumptions about
future events due to a number of uncertainties including the extent of
contamination, the appropriate remedy, the financial viability of other
potentially responsible parties and the final apportionment, if any, among the
potentially responsible parties. The estimates do not take into consideration
any potential increases in disposal costs but are based upon current cost
estimates. Since the ultimate outcome of these matters may differ from the
estimates used in our assessment to date, the recorded liabilities will be
periodically evaluated, as additional information becomes available, to
ascertain whether the accrued liabilities are adequate. The Company recorded a
liability for environmental matters as of June 30, 2002 and September 30, 2001
of approximately $1,024,000 and $977,000, respectively, which represents the
probable outcome of these contingent matters. The Company expects the majority
of the costs included in the environmental reserves to be disbursed over the
next 28 years. The Company does not reduce its estimated obligations for
proceeds from other potentially responsible parties or insurance companies.
Proceeds, if any, would be recorded as an offset to environmental expense when
received. The Company does not expect that adjustments to estimates, which are
reasonably possible in the near term and that may result in changes to recorded
amounts, will have a material effect on our financial position or results of
operations.
The following table shows the activity and balances related to environmental
accruals from September 30, 2001 through June 30, 2002 (in thousands). The
expenses and liabilities for environmental remediation are included within the
discontinued operations of UAS and HPPI.
Balance at Charges to Balance at
9/30/01 Expense Payments 6/30/02
------------ ------------ ----------- ------------
UAS Environmental
remediation liability $ - $ 566,000 $ (45,000) $ 521,000
HPPI Environmental
remediation liability 977,000 25,000 (499,000) 503,000
------------ ------------ ------------ ------------
Total environmental
remediation liability $ 977,000 $ 591,000 $ (544,000) $ 1,024,000
============ ============ ============ ============
The Company may become subject to claims relating to certain environmental
matters. The operations of predecessor companies and certain of their affiliates
produced waste materials that, prior to 1980, were disposed of at some 36 known
unregulated sites throughout the United States. After 1980, waste disposal was
limited to sites permitted under federal and state environmental laws and
regulations. If any of the disposal sites are found to be releasing hazardous
substances into the environment, under current federal and state environmental
laws, the appropriate company might be subject to liability for clean-up and
containment costs.
Pursuant to a 1992 settlement agreement with the United States Environmental
Protection Agency (the "EPA"), the United States Department of the Interior and
the States of Wisconsin and Indiana (the "EPA Settlement Agreement") in the
event that the United States, Wisconsin or Indiana asserts a claim against the
Company for response costs associated with pre-petition disposal activities at
certain sites, the governmental party will be entitled to pursue its claim in
the ordinary course, and the Company will be entitled to assert all of its
defenses. However, if and when the Company is held liable, and if the liability
is determined to arise from pre-petition disposal activities of its
predecessors, the Company may pay the liability in discounted "plan dollars"
(i.e., the value of the consideration that the party asserting such claim would
have received if the liability were treated as a general unsecured claim under
the Plan of Reorganization of our predecessors). Such payment may be made in
cash or in the Company's stock, or a combination thereof, at the Company's
option. Claims arising from real property owned by the Company are not affected
by the EPA Settlement Agreement.
Coated Fabrics Segment
In October 2001, the EPA sent the Company a General Notice and Notice of
Potential Liability concerning the Chemical Recovery Systems site in Elyria,
Ohio. While a unit of Uniroyal, Inc. in Port Clinton, Ohio is alleged to have
sent hazardous materials to the site between 1974 and 1981, the Company's
records do not support the allegation. The Company does not have sufficient
information to ascertain the level, if any, of its liability in respect to the
site. In any event, if the Company is found to have liability in connection with
the site, such liability will be subject to the terms of the EPA Settlement
Agreement.
Specialty Adhesives Segment
In connection with the July 1996 acquisition of a manufacturing facility in
South Bend, Indiana for the UAS operations, the Company assumed costs of
remediation of soil and ground water contamination. Under the terms of the
agreement for the purchase of the facility, the Company placed $1,000,000 in an
escrow account to be used for the remediation. The $1,000,000 represented the
total estimate of the clean-up cost over a five to seven year period and was
treated as a part of the purchase price of the facility. As of November 9, 2002,
the Company had spent approximately $764,000 of related remediation costs and
had approximately $266,000 left in the original environmental escrow account. In
accordance with the asset purchase agreement for the sale of UAS on November 9,
2001, $300,000 of the sales proceeds were placed in another environmental escrow
account pursuant to the terms of an environmental escrow agreement with the
purchaser of UAS.
Upon the sale of UAS in November 2001, the Company recorded the $566,000 in the
environmental escrow accounts as both an asset and a liability within the net
liabilities of the discontinued operations of UAS. The Company has recently
received a cost opinion from an independent environmental consulting and
engineering firm that estimated the remediation costs for the South Bend
facility at $416,000 over a four-to-five year period. Because of the uncertainty
regarding the ultimate costs, the Company will not reverse any portion of the
environmental liability established for the South Bend facility ($521,000 as of
June 30, 2002) until such point in time that the funds from the environmental
escrow accounts, in excess of the anticipated remediation costs, are released to
the Company, which release is subject to certain conditions.
High Performance Plastics Segment
During the second quarter of Fiscal 2000, the Company established a $3,843,000
reserve for future environmental remediation costs of the Stamford, Connecticut,
Hackensack, New Jersey and Stirling, New Jersey facilities used by HPPI in their
operations, which reserve was included within the discontinued operations of
HPPI. The majority of this environmental reserve ($3,693,000) related to a
portion of the Stamford real property acquired by the Company in October of
1995. Prior to the purchase of this property in 1995, the previous owner had
performed extensive environmental remediation and the Company received an
environmental report showing lack of further contamination. In connection with
the sale of HPPI in February of 2000, the Company conducted an environmental
assessment in compliance with the laws of the State of Connecticut. The
environmental assessment indicated that the portion of the Stamford real estate
that was acquired by the Company in 1995 was contaminated with total petroleum
hydrocarbons, DDT and other pesticide chemicals. The initial reserve for the
Stamford environmental remediation costs, established in the second quarter of
Fiscal 2000, was based upon cost estimates from independent environmental
contractors. The Company spent approximately $1,557,000 on remediation costs for
the Stamford property during Fiscal 2000 and charged the expenditures against
the reserve established above. At the end of Fiscal 2000, the Company adjusted
its environmental reserves for HPPI (primarily as it related to the Stamford
facility) to $1,070,000. The adjustment was included with the gain on the
disposition of discontinued operations and was based upon the revised estimates
from third party environmental consultants. The remediation cost estimate was
reduced primarily as a result of a revised remediation methodology which was
ultimately approved by the Connecticut Department of Environmental Protection in
November of 2001. The Company spent approximately $50,000 of remediation costs
on the Stamford real property during Fiscal 2001 and $494,000 during the first
three quarters of Fiscal 2002. As of June 30, 2002, the Company estimated, and
has reserved for, environmental remediation costs at the Stamford facility of
approximately $253,000 which are expected to be incurred over the next 28 years.
The purchaser of HPPI has deferred taking title to this portion of the Stamford
real property until it is comfortable with the environmental condition of the
property.
The balance of the HPPI environmental reserve established in February of 2000
($150,000) related to the Hackensack, New Jersey real property and the Stirling,
New Jersey property (which is currently listed as held-for-sale). The reserves
were established at that time based upon ongoing environmental assessments at
those facilities and trust agreements entered into with the State of New Jersey.
Remediation expenditures for Hackensack and Stirling were minimal during Fiscal
2000. The Company spent approximately $43,000 between the two facilities on
remediation efforts during Fiscal 2001 and $5,000 during the first three
quarters of Fiscal 2002. At June 30, 2002, the Company (through both internal
and external environmental consultants) has estimated that the remediation costs
for both facilities approximates $250,000 which is expected to be incurred over
a three-year period. The Company's remediation cost estimates for the Hackensack
real property are based on the fact that the majority of the original
contamination identified has naturally biodegraded and the remaining
contamination has resulted from an upstream property, the owner of which will be
responsible for the clean-up. The purchaser of HPPI has deferred taking title to
the Hackensack real property until it is comfortable with the environmental
condition of the property.
Based on information available as of June 30, 2002, 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.
Critical Accounting Policies and Estimates
The preparation of condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires the
Company to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. These estimates and assumptions are based
on historical experiences and various other factors that are believed to be
reasonable under the circumstances. Due to the inherent uncertainty involved in
making estimates, actual results reported in future periods could differ from
these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies are affected by
significant estimates and judgments that are important to the portrayal of the
Company's financial condition and operating results:
o Revenue is recognized upon shipment of products to customers
provided that title and risk of loss has transferred, collection
of the resulting receivable is probable, product returns are
estimable and there are no remaining significant obligations. In
the case of contract revenues with the United States Government,
contract revenues are recognized by the relationship of costs
incurred to total estimated contract costs. The Company provides
for future product returns at the time revenue is recognized based
on historical experience.
o The Company maintains an allowance for doubtful accounts for
estimated losses resulting from the inability of our customers to
make required payments. The allowance is determined based upon a
number of factors, including delinquency rates, bankruptcy
filings, historical charge-off patterns and management judgment.
If the financial condition of a customer were to deteriorate,
resulting in an impairment of its ability to make payments, an
additional allowance may be required which would reduce income in
the period in which the facts that give rise to the adjustment
become known.
o Inventories are valued using the lower of cost or estimated market
value. Inventory obsolescence reserves are based upon the
difference between the cost of the inventory and the estimated
market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than
those projected by management, additional inventory write-down may
be required.
o The Company recorded a valuation allowance to reduce its deferred
tax assets to zero as management could not conclude that it is
more likely than not that the deferred tax assets would be
realized. The allowance is based upon assessments of historical
losses and projected future operating results. If and when the
Company generates future taxable income against which these tax
assets may be applied, some portion or all of the valuation
allowance would be reversed and an increase in net income would be
reported in future years.
o The carrying values of long-lived assets, including goodwill and
identifiable intangible assets, are reviewed when events and
circumstances indicate that the carrying value of the asset may
not be recoverable. The carrying value of a long-lived asset is
considered impaired when the anticipated undiscounted cash flow
from such asset is less than its carrying value. In that event, a
loss is recognized based upon the amount by which the carrying
value exceeds the fair value of the long-lived asset. Fair value
is determined generally using the cash flows discounted at a rate
commensurate with the risk involved. Where available, the Company
would also obtain appraisals or use other indicators of fair
value. For assets to be disposed of, the fair value is reduced
for the cost of the disposal. The cash flows used in such
analyses involve considerable management estimates and judgments.
Should the actual cash flows vary from the estimated amounts,
additional write-downs of the asset may be warranted in a future
period.
o The Company uses significant assumptions in determining its
post-retirement medical expense and obligations. These assumptions
include determining an appropriate discount rate, medical trend
rate, retirement date, mortality and participation rates. The
Company uses a qualified actuary to calculate the post-retirement
medical expense and obligations based upon these assumptions and
actual employee census data.
o Management estimates and judgment are required in determining
when, or if, an accrual should be recorded for a contingent
matter, particularly for environmental and litigation issues. The
Company records an estimated loss from a contingency when
information becomes available that indicates it is probable that
an asset has been impaired or a liability has been incurred and
the amount of the loss is reasonably estimable.
Recent Accounting Pronouncements
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 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.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 addresses the accounting for gains and losses from the
extinguishment of debt, economic effects and accounting practices of
sale-leaseback transactions and makes technical corrections to existing
pronouncements. The Company has not yet determined the impact of the adoption of
this statement.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employees Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). Charges
relating to the exit of an activity or disposal of long-lived assets will be
recorded when they are incurred and measurable. Prior to SFAS No. 146 these
charges were accrued at the time of commitment to exit or dispose and activity.
The Company has not yet determined the impact of the adoption of this statement.
Effects of Inflation
The markets in which the Company sells products are competitive. Thus, in an
inflationary environment the Company may not in all instances be able to pass
through to consumers general price increases; certain of 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.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risks
The Company is exposed to various market risks, including changes in interest
rates. The Company's earnings and cash flows are subject to fluctuations due to
changes in interest rates on its floating rate revolving credit advances and
investment portfolio. The Company's risk management policy includes the use of
derivative financial instruments (interest rate swaps) to manage its interest
rate exposure on long-term variable rate debt. The counter parties are major
financial institutions. The Company does not enter into derivatives or other
financial instruments for trading or speculative purposes. No interest rate
swaps are outstanding at June 30, 2002.
At June 30, 2002, the Company had approximately $114,000 of cash and cash
equivalents subject to variable short-term interest rates and approximately
$5,596,000 of floating rate revolving credit advances. 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 expense of approximately
$55,000 on an annual basis.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
(a) 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
sought approximately $8,106,000 for alleged default under a lease
and benefits that the landlord believed it would have received
under such lease. The Company filed an answer seeking not less
than $7,000,000 for breaches of contract, fraud and constructive
fraud on the part of the plaintiff. On February 11, 2002, the
Company reached a settlement and on April 26, 2002, executed
settlement documents with the plaintiff whereby the Company paid
AFG-NVC, LLC $650,000 in the form of a secured promissory note
and 300,000 shares of the Company's common stock (valued at
approximately $135,000 at the time of settlement). The promissory
note is secured by a security interest in the Company's Stirling,
New Jersey facility which is currently held for sale. The term of
the note is one year and is due in full at maturity. Interest is
payable quarterly at 8% per annum. The Company recorded the
$785,000 settlement during the first quarter of Fiscal 2002.
(b) The Company and certain of its officers are currently defendants
in five putative class action securities lawsuits filed in July
2002 in the United States District Court for the Middle District
of Florida. The suits allege, among other things, violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), in connection with the valuation
of a promissory note held by the Company in December 1999, the
write-down of goodwill in the Company's subsidiary Sterling in
December 2001, and statements made in filings with the Securities
and Exchange Commission (the "SEC") and in press releases
concerning Sterling. Management intends to defend these suits
vigorously.
(c) The Company and certain of its officers are currently defendants
in a putative class action securities lawsuit filed by certain
former shareholders of Sterling in July 2002 in the United States
District Court for the Eastern District of Virginia. This suit
alleges, among other things, violations of Sections 11, 12 and 15
of the Securities Act of 1933, as amended, and Sections 10(b) and
20(a) of the Exchange Act in connection with the exchange of
common stock of the Company for securities of Sterling in May
2000. The plaintiffs allege that the Company misrepresented the
timing of the attainment of commercial viability of the Company's
subsidiary UOE. Management intends to defend this suit
vigorously.
(d) The Company and certain of its subsidiaries have been served with
several actions brought by vendors seeking approximately
$3,770,000 for purchases of equipment, supplies and services for
which the Company or such subsidiaries have failed to make
payments. In one suit the vendor has obtained pretrial attachment
to certain of the Company's bank accounts, effectively freezing
approximately $142,000 of the company's cash. This amount has
been reclassified from cash to prepaid and other assets as of
June 30, 2002. The Company is seeking to resolve these matters by
settlement. The Company has settled one such suit for non-payment
of approximately $180,000 due in connection with equipment
purchased by UOE. The suit was settled by return of the equipment
to the vendor and the loss of an approximate $45,000 deposit by
UOE. Related to another suit, the Company has estimated and
provided for an additional loss of approximately $186,000. The
range of loss for this suit approximated $186,000 - $550,000. The
company recorded its estimate at the minimum amount of the range
as no amount within the range is a better estimate than any other
amount. The inability to resolve these matters could have a
material adverse impact on the businesses of the subsidiaries
involved. Sterling is currently subject to judgment liens of
approximately $93,000 in such actions.
(e) Uniroyal Retiree Benefits, Inc. ("URBI"), which provides health
care and life insurance services to certain persons who retired
from predecessors of the Company and certain other employers,
filed an action in June 2002 in the United States Bankruptcy
Court for the Northern District of Indiana seeking reopening of a
1995 order in an adversary proceeding and a contempt citation
against the Company in connection with the Company's failure to
make payments to URBI aggregating $665,457.08. The court has
reopened the action and scheduled a hearing.
(f) Mechanics' liens have been filed against premises occupied by UOE
in Tampa, Florida and by Sterling in Sterling, Virginia. The
claims in connection with such liens aggregate approximately
$2,411,000 in the case of UOE and approximately $2,132,000 in the
case of Sterling. The existence of such liens violates the terms
of the leases for such premises. The failure to cure such
defaults could result in the termination of the leases, which
could have a material adverse effect on the businesses of UOE and
Sterling. The landlord of the Tampa facility filed an eviction
notice in Hillsborough County Court based in part on the
existence of mechanics' liens against the premises. A forbearance
agreement was entered into with the landlord which has since
expired. The Company is currently in discussions with the
landlord regarding extension of the forbearance agreement.
(g) Although the liabilities with respect to the equipment, supplies
and services have been recorded, the impact of any unfavorable
outcome over and above the recorded liabilities, if any other
than those previously discussed, is not estimable.
(h) The Company knows of no other pending legal proceedings to which
the Company or any of its subsidiaries is a party or of which any
of their property is the subject other than routine litigation
incidental to the Company's business, an adverse outcome of which
would not be expected to have a material impact on the Company's
results of operations, cash flows or financial position.
(i) No legal proceedings, other than those previously mentioned, were
terminated during the nine months ended June 30, 2002, other than
routine litigation incidental to the Company's business.
Item 2. Changes in Securities
None.
Item 3. Default upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
In compliance with Section 906 of the Sarbanes-Oxley Act of 2002,
the Company has provided certifications of its chief executive
officer and chief financial officer to the Securities and
Exchange Commission. These certifications were provided
accompanying this report as supplemental correspondence.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation of
Uniroyal Technology Corporation. (1)
3.2 By-Laws of Uniroyal Technology Corporation as amended to
March 16, 2001 and restated. (1)
(1) Contained in Uniroyal Technology Corporation's
Quarterly Report on Form 10-Q for the quarterly period
ended April 1, 2001 filed on May 9, 2001.
(b) Reports on Form 8-K
Form 8-K filed on May 13, 2002 related to the pro-forma
information of the proposed sale of Sterling Semiconductor, Inc.
Form 8-K filed on June 18, 2002 related to Nasdaq's approval of
Uniroyal Technology Corporation's application to list its common
stock on the Nasdaq Small Cap Market.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: August 19, 2002 By: \s\ George J. Zulanas, Jr.
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George J. Zulanas, Jr., Executive Vice
President, Treasurer and Chief
Financial Officer