SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date or earliest event reported) February 12, 2002
UNIROYAL TECHNOLOGY CORPORATION
-------------------------------
(Exact name of registrant as specified in its charter)
Delaware
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(State of other jurisdiction of incorporation)
0-20686 65-0341868
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(Commission File Number) (IRS Employer Identification No.)
Two North Tamiami Trail, Suite 900
Sarasota, Florida 34236
-------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (941) 361-2100
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(Former name or former address, if changed
since last report.)
Item 5. Other Events
On January 7, 2002, Uniroyal Technology Corporation (the
"Company"), formalized its intent to sell its Uniroyal Engineered
Products division, which comprises its Coated Fabrics segment.
Included in this Form 8-K as Appendix A are the Company's
Consolidated Financial Statements as of September 30, 2001 and October
1, 2000, and for the fiscal years ended September 30, 2001, October 1,
2000 and September 26, 1999, and the related Consolidated Financial
Statement Schedule restated to show the Coated Fabrics segment as a
discontinued operation.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNIROYAL TECHNOLOGY CORPORATION
Date: February 12, 2002 By:/s/ George J. Zulanas, Jr.
-----------------------------
George J. Zulanas, Jr., Executive
Vice President, Treasurer and
Chief Financial Officer
Appendix A. Consolidated Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
Consolidated Financial Statements as of September 30, 2001 and October
1, 2000 and for the Years Ended September 30, 2001, October 1, 2000 and
September 26, 1999:
Independent Auditors' Report F-2
Consolidated Balance Sheets as of September
30, 2001 and October 1, 2000 F-3
Consolidated Statements of Operations for the
Years Ended September 30, 2001, October 1,
2000 and September 26, 1999 F-5
Consolidated Statements of Comprehensive
(Loss) Income for the Years Ended September
30, 2001, October 1, 2000 and September 26,
1999 F-6
Consolidated Statements of Changes in
Stockholders' Equity for the Years Ended
September 30, 2001, October 1, 2000 and
September 26, 1999 F-7
Consolidated Statements of Cash Flows for the
Years Ended September 30, 2001, October 1,
2000 and September 26, 1999 F-8
Notes to Consolidated Financial Statements F-10
Consolidated Financial Statement Schedule:
Independent Auditors' Report S-1
Schedule II - Valuation and Qualifying
Accounts S-2
Schedules Omitted - Certain other schedules
have been omitted because they are not
required or because the information required
therein has been included in Notes to
Consolidated Financial Statements.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Uniroyal Technology Corporation
We have audited the accompanying consolidated balance sheets of Uniroyal
Technology Corporation and subsidiaries (the "Company") as of September 30, 2001
and October 1, 2000, and the related consolidated statements of operations,
comprehensive (loss) income, changes in stockholders' equity and cash flows for
each of the three years in the period ended September 30, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 30,
2001 and October 1, 2000 and the results of its operations and its cash flows
for each of the three years in the period ended September 30, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 2, 3
and 25 to the consolidated financial statements, the Company's recurring losses
from operations and negative cash flow from operating activities raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans concerning these matters are also described in Notes 3 and
25. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Tampa, Florida
December 21, 2001
(February 11, 2002 as to Note 25)
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
September 30, October 1,
2001 2000
------------- -----------
Current assets:
Cash and cash equivalents (Notes 2 and 3) $ 2,035 $ 36,623
Short-term investments (Notes 2 and 4) - 12,425
Trade accounts receivable (less estimated reserve for
doubtful accounts of $5 and $5, respectively) (Notes 2 and 11) 1,167 1,065
Inventories (Notes 2, 5 and 11) 6,604 2,280
Accrued income taxes receivable 5,334 -
Deferred income taxes - net (Notes 2 and 14) - 5,460
Net assets of discontinued operations of UAS (Note 6) 14,103 10,832
Net assets of discontinued operations of UEP (Note 25) 14,591 16,029
Prepaid expenses and other current assets 1,876 1,278
----------- -----------
Total current assets 45,710 85,992
Property, plant and equipment - net (Notes 2 and 7) 59,588 38,225
Property, plant and equipment held for sale - net (Note 2) 1,597 2,301
Investments (Note 2 and 4) - 8,902
Goodwill - net (Notes 2, 8 and 9) 23,430 26,519
Deferred income taxes - net (Notes 2 and 14) - 7,828
Other assets - net (Notes 2 and 10) 9,578 9,865
----------- -----------
TOTAL ASSETS $ 139,903 $ 179,632
=========== ===========
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, October 1,
2001 2000
------------- -----------
Current liabilities:
Current portion of long-term debt (Note 11) $ 17,974 $ 6,558
Trade accounts payable 12,917 6,305
Net liabilities of discontinued operations of HPPI (Note 12) 1,910 4,632
Accrued expenses:
Compensation and benefits 4,310 7,553
Interest 151 156
Taxes, other than income 240 109
Accrued income taxes - 623
Other 2,372 1,374
----------- -----------
Total current liabilities 39,874 27,310
Long-term debt, net of current portion (Note 11) 12,196 15,094
Other liabilities (Note 13) 24,162 22,844
----------- -----------
Total liabilities 76,232 65,248
----------- -----------
Commitments and contingencies (Note 15)
Minority interest (Notes 1, 2 and 8) 225 7,535
Stockholders' equity (Note 16):
Preferred stock:
Series C - 0 shares issued and outstanding; par value
$0.01; 450 shares authorized - -
Common stock:
32,662,611 and 30,707,976 shares issued or to be issued,
respectively; par value $0.01; 100,000,000 shares
authorized 327 307
Additional paid-in capital 113,904 94,296
Retained (deficit) earnings (11,260) 40,575
Accumulated other comprehensive loss - net - (44)
----------- -----------
102,971 135,134
Less treasury stock at cost - 4,794,869 and 4,841,059 shares,
respectively (39,525) (28,285)
----------- -----------
Total stockholders' equity 63,446 106,849
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 139,903 $ 179,632
=========== ===========
See notes to consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Fiscal Years Ended
-----------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ---------- -------------
Net sales $ 5,063 $ 3,023 $ 485
Costs, expenses and (other income):
Costs of goods sold 6,721 2,960 436
Selling and administrative (Note 8) 26,977 29,116 10,199
Depreciation and other amortization 13,975 5,482 930
Write-down of goodwill (Note 9) 9,816 - -
Loss on assets to be disposed of (Note 2) 1,389 1,116 -
Purchased in-process research and development (Notes 8 and 9) 250 6,590 -
Provision for uncollectible note receivable (Note 17) - 5,387 -
Write-down of technology license (Note 10) - 4,000 -
Gain on sale of preferred stock investment (Note 18) - (2,905) (898)
----------- ----------- -----------
Loss before interest, income taxes, minority interest and
discontinued operations (54,065) (48,723) (10,182)
Interest income 1,590 3,164 205
Interest expense (1,724) (2,086) (973)
----------- ----------- -----------
Loss before income taxes, minority interest and discontinued
operations (54,199) (47,645) (10,950)
Income tax (expense) benefit (Notes 2 and 14) (6,549) 27,186 5,266
----------- ----------- -----------
Loss before minority interest and discontinued operations (60,748) (20,459) (5,684)
Minority interest in net losses of consolidated joint venture 8,246 7,918 2,191
----------- ----------- -----------
Loss from continuing operations before discontinued operations (52,502) (12,541) (3,493)
Income from discontinued operations, net of income tax expense of
$736, $2,042 and $5,421, respectively (Notes 6, 12 and 25) 889 3,407 9,013
(Loss) gain on disposition of discontinued operations, net of income
tax expense of $529 and $38,146, respectively (Notes 6 and 12) (222) 55,821 -
----------- ----------- -----------
Net (loss) income $ (51,835) $ 46,687 $ 5,520
=========== =========== ===========
Net (loss) income per common share - basic (Notes 2 and 21)
- -----------------------------------------------------------
Loss from continuing operations $ (2.00) $ (0.50) $ (0.14)
Income from discontinued operations 0.03 2.37 0.37
----------- ----------- ----------
Net (loss) income $ (1.97) $ 1.87 $ 0.23
=========== =========== ===========
Net (loss) income per common share - assuming dilution (Notes 2
- ---------------------------------------------------------------
and 21)
- ---------
Loss from continuing operations $ (2.00) $ (0.50) $ (0.14)
Income from discontinued operations 0.03 2.37 0.37
----------- ----------- -----------
Net (loss) income $ (1.97) $ 1.87 $ 0.23
=========== =========== ===========
See notes to consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
Fiscal Years Ended
------------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ---------- -------------
Net (loss) income $ (51,835) $ 46,687 $ 5,520
----------- ----------- -----------
Net unrealized gain (loss) on securities available for sale,
net of taxes:
Unrealized gain (loss) on securities
available for sale 53 (44) 648
Less: reclassification adjustment for gains
realized in net income (9) (100) (548)
----------- ----------- -----------
Net unrealized gain (loss) 44 (144) 100
----------- ----------- -----------
Comprehensive (loss) income (Note 2) $ (51,791) $ 46,543 $ 5,620
=========== =========== ===========
See notes to consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2001, OCTOBER 1, 2000 AND SEPTEMBER 26, 1999
(In thousands)
Accumulated
Additional Retained Other
Common Paid-In Earnings Comprehensive Treasury Stockholders'
Stock Capital (Deficit) Income (Loss) Stock Equity
------ ---------- ---------- ------------- ---------- -------------
Balance at September 27, 1998 $ 284 $ 54,471 $(11,632) $ - $(10,812) $ 32,311
Common stock issued for acquisitions - 775 - - 598 1,373
Common stock issued under stock option plans 10 1,688 - - (1,345) 353
Common stock issued to employee benefit plan - 199 - - - 199
Amounts received pursuant to Directors' stock option plan - 121 - - - 121
Purchases of treasury stock - - - - (9,114) (9,114)
Tax benefit from exercise of stock options - 562 - - - 562
Purchases of warrants - (292) - - - (292)
Net income - - 5,520 - - 5,520
Comprehensive income - - - 100 - 100
------ --------- -------- --------- -------- ---------
Balance at September 26, 1999 294 57,524 (6,112) 100 (20,673) 31,133
Common stock issued for acquisition 15 40,599 - - - 40,614
Common stock issued under stock option plans 13 2,127 - - (1,368) 772
Common stock issued to employee benefit plan - 182 - - 37 219
Amounts received pursuant to Directors' stock option plan - 112 - - - 112
Purchases of treasury stock - - - - (13,850) (13,850)
Cancellation of treasury shares (16) (7,553) - - 7,569 -
Tax benefit from exercise of stock options - 564 - - - 564
Exercise of warrants 1 741 - - - 742
Net income - - 46,687 - - 46,687
Comprehensive loss - - - (144) - (144)
------ --------- -------- --------- -------- ---------
Balance at October 1, 2000 307 94,296 40,575 (44) (28,285) 106,849
Common stock issued for acquisition of joint venture - 8,583 - - 6,484 15,067
Common stock issued under stock option plans 20 9,042 - - (8,779) 283
Common stock issued to employee benefit plan - 1,663 - - 696 2,359
Common stock issued under stock purchase plan - 54 - - - 54
Amounts received pursuant to Directors' stock option plan - 90 - - - 90
Purchases of treasury stock - - - - (9,641) (9,641)
Tax benefit from exercise of stock options - 170 - - - 170
Exercises of warrants - 6 - - - 6
Net loss - - (51,835) - - (51,835)
Comprehensive income - - - 44 - 44
------ --------- -------- --------- -------- ---------
Balance at September 30, 2001 $ 327 $ 113,904 $(11,260) $ - $(39,525) $ 63,446
====== ========= ======== ========= ======== =========
See notes to consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Years Ended
------------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ----------- --------------
OPERATING ACTIVITIES:
Net (loss) income $ (51,835) $ 46,687 $ 5,520
Deduct income from and (loss) gain on disposition of
discontinued operations (667) (59,228) (9,013)
----------- ----------- -----------
Loss from continuing operations (52,502) (12,541) (3,493)
Adjustments to reconcile net (loss) income to net cash (used in )
provided by operating activities:
Depreciation and other amortization 13,975 5,482 930
Deferred tax expense 13,315 7,221 2,392
Amortization of debt issuance costs 53 2 -
Write-down of goodwill 9,816 - -
Loss on assets to be disposed of 1,389 1,116 -
Purchased in-process research and development 250 6,590 -
Provision for uncollectible note receivable - 5,387 -
Write-down of technology license - 4,000 -
Gain on sale of preferred stock investment - (2,905) (898)
Minority interest in net losses of consolidated joint venture (8,246) (7,918) (2,191)
Other 169 701 109
Changes in assets and liabilities:
Increase in trade accounts receivable (91) (586) (11)
Increase in inventories (4,324) (2,549) (325)
Increase in prepaid expenses and other assets (6,362) (1,589) (1,643)
Increase in trade accounts payable 6,665 3,191 360
(Decrease) increase in accrued expenses (221) 5,382 328
Increase in other liabilities 1,318 1,153 1,279
----------- ----------- -----------
Net cash (used in) provided by continuing operations (24,796) 12,137 (3,163)
Net cash (used in) provided by discontinued operations (170) (42,870) 24,975
----------- ----------- -----------
Net cash (used in) provided by operating activities (24,966) (30,733) 21,812
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (26,086) (25,836) (10,445)
Investment purchases of available-for-sale securities (13,015) (50,115) -
Investment purchases of held-to-maturity securities (6,002) (17,434) -
Proceeds from sales of available-for-sale securities 16,994 46,150 -
Proceeds from held-to-maturity securities 23,477 - -
Business acquisitions, net of cash acquired (2,750) 613 (732)
Purchase of investment - (2,640) -
Proceeds from sale of preferred stock - 8,125 4,822
Purchase of preferred stock - - (9,144)
Proceeds from sale of discontinued operations - 208,976 -
Proceeds from sale of division - - 1,567
----------- ----------- -----------
Net cash (used in) provided by investing activities (7,382) 167,839 (13,932)
----------- ----------- -----------
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
Fiscal Years Ended
-----------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ----------- -------------
FINANCING ACTIVITIES:
Repayment of term loans (6,313) (91,704) (10,173)
Proceeds from term loans 5,095 - 2,582
Net increase (decrease) in revolving loan balances 5,948 (13,162) 3,086
Proceeds from termination of interest rate swaps - 950 -
Minority interest capital contributions 2,382 11,628 5,725
Stock options exercised 283 772 353
Purchases of warrants - - (292)
Exercise of warrants 6 742 -
Purchases of treasury stock (9,641) (13,850) (9,114)
----------- ----------- -----------
Net cash used in financing activities (2,240) (104,624) (7,833)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (34,588) 32,482 47
Cash and cash equivalents at beginning of year 36,623 4,141 4,094
----------- ----------- -----------
Cash and cash equivalents at end of year $ 2,035 $ 36,623 $ 4,141
=========== =========== ===========
Supplemental Disclosures:
Payments for income taxes and interest were as follows (in thousands):
Fiscal Years Ended
-----------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ------------ -------------
Income tax payments - continuing operations $ 375 $ 6,344 $ 677
Income tax payments - discontinued operations 2,201 341 432
Interest payments (net of capitalized interest) -
continuing operations 1,484 2,113 685
Interest payments (net of capitalized interest) -
discontinued operations 32 4,715 6,884
Non-cash investing activities were as follows (in thousands):
Fiscal Years Ended
----------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ----------- -------------
Business acquisitions purchased with Company common
stock $ 15,067 $ 40,614 $ 1,373
Business acquisitions purchased with notes payable - - 3,033
The purchases of property, plant and equipment and the proceeds from term loans
for the fiscal years ended September 30, 2001, October 1, 2000 and September 26,
1999 do not include $3,500,000, $3,211,000 and $20,372,000, respectively,
related to property held under capitalized leases (Note 15).
During the fiscal years ended September 30, 2001, October 1, 2000 and September
26, 1999, the Company made matching contributions to its 401(k) Savings Plan of
$124,000, $219,000 and $199,000, respectively, through the re-issuance of
19,933, 17,206 and 39,344 shares of its common stock from treasury,
respectively, related to both continuing and discontinued operations.
During the fiscal year ended September 30, 2001, the Company made special
discretionary contributions to its 401(k) Savings Plan for the plan years ended
December 31, 2000 and December 31, 1999. These special contributions were valued
at approximately $2,235,000 and were funded through the re-issuance of 298,612
shares of common stock from treasury. The estimated liability and related
compensation expense for the special discretionary contributions accrued at
October 1, 2000 approximated $1,192,000 for continuing operations and $965,000
for discontinued operations.
See notes to consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended September 30, 2001,
October 1, 2000 and September 26, 1999
1. THE COMPANY
The accompanying consolidated financial statements relate to Uniroyal
Technology Corporation, its wholly-owned subsidiaries, Uniroyal HPP
Holdings, Inc., Uniroyal Compound Semiconductors, Inc. (formerly
Uniroyal Optoelectronics, Inc.), BayPlas3, Inc., BayPlas7, Inc.,
UnitechOH, Inc. and UnitechNJ, Inc., and its majority-owned subsidiary,
Uniroyal Liability Management Company (collectively, the "Company").
Uniroyal HPP Holdings, Inc. includes its wholly-owned subsidiary, High
Performance Plastics, Inc. ("HPPI"). BayPlas7, Inc. includes its 98%
owned subsidiary, Uniroyal Engineered Products, LLC, which includes its
operating divisions, Uniroyal Engineered Products ("UEP") and Uniroyal
Adhesives and Sealants ("UAS"). The remaining ownership in Uniroyal
Engineered Products, LLC is split between Uniroyal Technology
Corporation and Uniroyal Compound Semiconductors, Inc. Uniroyal
Compound Semiconductors, Inc. includes its wholly-owned subsidiaries,
NorLux Corp., Sterling Semiconductor, Inc., Uniroyal Optoelectronics,
LLC and Uniroyal Optoelectronics Service Corporation. Uniroyal
Liability Management Company includes its wholly-owned subsidiary
BayPlas2, Inc. See Note 6 for information regarding the sale of UAS.
See Note 8 regarding the purchase of the minority interest in the
Uniroyal Optoelectronics, LLC joint venture. See Note 12 for
information concerning the sale of HPPI's business. See Note 25 for
information concerning the proposed sale of UEP.
Uniroyal Liability Management Company, Inc. ("ULMC") is a special
purpose subsidiary created in the fiscal year ended September 26, 1999
to administer the Company's employee and retiree medical benefit
programs. The Company owns a controlling interest (69%) in ULMC;
therefore, the accompanying consolidated financial statements include
the results of operations of ULMC and its subsidiary, BayPlas2, Inc.,
which is a special purpose subsidiary created in the fiscal year ended
October 1, 2000 to hold certain assets of ULMC.
NorLux Corp. is a development stage company which will engage in the
design, development and manufacture of optoelectronic devices and
optoelectronic solutions. Uniroyal Optoelectronics Service Corporation
was established during the fiscal year ended September 30, 2001 and
leases employees to Uniroyal Optoelectronics, LLC and ULMC. UnitechNJ,
Inc. is a special purpose subsidiary created during the fiscal year
ended September 26, 1999 to hold the Company's plant in Stirling, New
Jersey. UnitechOH, Inc. and BayPlas3, Inc. are special purpose
subsidiaries created during the fiscal year ended October 1, 2000 to
hold certain assets of the Company. BayPlas7, Inc. is a special purpose
subsidiary created during the fiscal year ended September 30, 2001 to
hold certain assets of the Company.
The Company is principally engaged in the development, manufacture and
sale of a broad range of materials employing compound semiconductor
technologies and specialty chemicals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going Concern
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business;
and, as a consequence the consolidated financial statements do not
include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and
classifications of liabilities that might be necessary should the
Company be unable to continue as a going concern. See further
discussion at Notes 3 and 25.
Consolidation
The consolidated financial statements include the accounts of Uniroyal
Technology Corporation, its wholly-owned subsidiaries and its
majority-owned subsidiary. All significant intercompany transactions
and balances have been eliminated. Minority interest represents the
minority shareholders' proportionate share of the equity of the
Company's majority-owned subsidiary.
Fiscal Year End
The Company's fiscal year ends on the Sunday following the last Friday
in September. The dates on which the fiscal year ended for the past
three fiscal years were September 30, 2001 ("Fiscal 2001"), October 1,
2000 ("Fiscal 2000") and September 26, 1999 ("Fiscal 1999"). Fiscal
2000 encompassed a 53-week period as compared to Fiscal 2001 and Fiscal
1999 which encompassed 52-week periods. The additional week in Fiscal
2000 occurred in the first quarter ended January 2, 2000.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments
purchased with an original maturity of three months or less.
Investments and Investment in Preferred Stock
All investments with an original maturity greater than three months are
accounted for under Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities. This statement requires certain securities to be classified
into three categories:
(1) Securities Held-to-Maturity: Debt securities the entity has the
ability and intent to hold to maturity are reported at amortized
cost.
(2) Trading Securities: Debt and equity securities bought and held
principally for the purpose of sale in the near term are reported
at fair value, with unrealized gains and losses included in
earnings.
(3) Securities Available-For-Sale: Debt and equity securities not
classified as either held-to-maturity or trading are reported at
fair value with unrealized gains and losses reported as a
separate component of stockholders' equity.
Management determines the appropriate classification of securities at
the time of purchase and re-evaluates such designation as of each
balance sheet date. The fair value of each equity security is
determined by the most recently traded price of the underlying common
stock at the balance sheet date. The fair value of debt securities is
determined by broker quotes at the balance sheet date.
Financial Instruments
Interest rate swap agreements have been used to manage interest rate
exposures. The interest rate differentials to be paid or received under
such swaps were recognized over the life of the agreements as
adjustments to interest expense.
The estimated fair value of amounts reported in the consolidated
financial statements have been determined using available market
information and valuation methodologies, as applicable. The carrying
value of all current assets and liabilities approximates the fair value
because of their short-term nature. The fair values of non-current
assets and liabilities approximate their carrying value unless
otherwise indicated.
Trade Accounts Receivable
The Company grants credit to its customers generally in the form of
short-term trade accounts receivable. The creditworthiness of customers
is evaluated prior to the sale of inventory. There are no significant
concentrations of credit risk to the Company associated with trade
accounts receivable.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using a monthly average basis or standard costs (which
approximates actual average costs) for raw materials and supplies and
the first-in, first-out ("FIFO") basis of accounting or standard costs
(which approximates actual FIFO costs) for work in process and finished
goods.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The cost of property,
plant and equipment held under capital leases is equal to the lower of
the net present value of the minimum lease payments or the fair value
of the leased asset at the inception of the lease. Depreciation is
computed under the straight-line method based on the cost and estimated
useful lives of the related assets including assets held under capital
leases. Interest costs applicable to the construction of major plant
and expansion projects have been capitalized to the cost of the related
assets. Interest capitalized during Fiscal 2001, Fiscal 2000 and Fiscal
1999 approximated $810,000, $287,000 and $791,000, respectively.
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of, establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used
and for long-lived assets and certain identifiable intangibles to be
disposed of. SFAS No. 121 requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate
that the book value of the asset may not be recoverable. The Company
evaluates at each balance sheet date whether events and circumstances
have occurred that indicate possible impairment. In accordance with
SFAS No. 121, the Company uses an estimate of the future undiscounted
net cash flows of the related assets over the remaining life in
measuring whether the assets are recoverable.
During Fiscal 2001, the Company made a decision to terminate its lease
for a new facility in Sterling, Virginia for the operations of Sterling
Semiconductor, Inc. The decision was made as a result of construction
delays and breaches of contract. As a result of the lease termination,
the Company recorded a write-off of approximately $686,000 for the
impairment of assets at that facility. This amount is included in the
statement of operations within loss on assets to be disposed of. The
Company is currently involved in litigation regarding the lease
termination (Note 15).
Property, Plant and Equipment Held for Sale
The Company has classified its Port Clinton, Ohio ("Port Clinton")
facility and its Stirling, New Jersey ("Stirling") facility as held for
sale.
In November of 1998, the Company ceased operations at its Port Clinton
facility in connection with its sale of the automotive operations of
the Coated Fabrics segment (Note 20). The Company expects to dispose of
the remaining Port Clinton assets, including real property, during the
second quarter of the fiscal year ending September 29, 2002 ("Fiscal
2002") and is carrying the property at fair value less cost to sell
based upon an executed asset purchase agreement for the property. The
fair value less cost to sell of the property approximates $756,000 at
September 30, 2001. The Company had previously recorded an impairment
loss for the Port Clinton assets in Fiscal 1996 based upon a decision
to sell the plant. The Company recorded additional impairment losses of
$544,000 in Fiscal 2001 and $1,116,000 in Fiscal 2000, related to
real property at Port Clinton.
During Fiscal 1998, the Company decided to sell its Stirling facility.
In accordance with SFAS No. 121, the Company had previously recorded a
write-down of the facility in Fiscal 1998. In Fiscal 2001, the Company
recorded an additional write-down of the facility of approximately
$159,000. The Company expects the disposition of the Stirling facility
to be completed in Fiscal 2002. The Company is carrying the facility at
fair value less cost to sell based upon recent purchase offers. The
fair value less cost to sell approximates $841,000 at September 30,
2001. The Stirling operations (excluding the facility) were sold to
Spartech Corporation in Fiscal 2000. See Note 12.
Amortization
Debt issuance costs are included in other assets and are amortized
using the interest method over the life of the related debt. Trademarks
are included in other assets and are amortized using the straight-line
method over periods ranging from 14 to 20 years. Goodwill is amortized
on a straight-line basis over five years for the high technology
business and 15 years for all others. Goodwill is reported net of
accumulated amortization of $7,579,000 and $1,896,000 at September 30,
2001 and October 1, 2000, respectively.
Research and Development Expenses
Research and development expenditures are expensed as incurred.
Research and development expenditures from continuing operations were
$3,720,000 and $573,000 in Fiscal 2001 and Fiscal 2000, respectively.
There was no research and development expense from continuing
operations in Fiscal 1999. The increase in research and development
expenditures is due to start-up operations of the Compound
Semiconductor and Optoelectronics segment.
Research and development expenditures from discontinued operations were
$1,127,000, $1,491,000 and $2,201,000 in Fiscal 2001, Fiscal 2000 and
Fiscal 1999, respectively.
Employee Compensation
The cost of post-retirement benefits is recognized in the consolidated
financial statements over an employee's term of service with the
Company.
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred income
taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying
amounts and the tax basis of existing assets and liabilities. The
effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
At September 30, 2001, the Company established a deferred tax asset
valuation allowance of approximately $17,870,000 because management
could not conclude that it is more likely than not that the deferred
tax asset could be realized.
Stock-Based Compensation
The Company accounts for employee stock option grants using the
intrinsic-value method in accordance with Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees. Under
APB Opinion No. 25, compensation costs for each stock option granted is
computed as the amount by which the quoted market price of the
Company's common stock on the date of grant exceeds the amount the
employee must pay to acquire the common stock. The amount of
compensation cost, if any, is charged to income over the vesting
period.
In Fiscal 1997, the Company adopted only the disclosure provisions of
SFAS No. 123, Accounting for Stock-Based Compensation. Pro forma
information regarding net income and earnings per share, as calculated
under the provisions of SFAS No. 123, are disclosed in Note 16.
Comprehensive (Loss) Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income,
during Fiscal 1999. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components.
Comprehensive income is defined as the change in equity of a business
during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and
distributions to owners. SFAS No. 130 requires that the Company's
change in unrealized gains and losses on equity securities available
for sale be included in comprehensive (loss) income. The net unrealized
gain on securities available for sale is shown net of tax (expense)
benefit of ($34,000), $28,000 and ($63,000) for the years ended
September 30, 2001, October 1, 2000, September 26, 1999, respectively.
Income Per Common Share
Earnings per share are computed in accordance with SFAS No. 128,
Earnings Per Share. Basic earnings per share is based on the weighted
average number of common shares outstanding for the period. Diluted
earnings per share is based on the sum of weighted average number of
shares outstanding for the period and the weighted average number of
potential common shares outstanding. Potential common shares consist of
outstanding options under the Company's stock option plans and
outstanding warrants to purchase the Company's common stock.
Stock Split
On March 10, 2000, the Company declared a two-for-one stock split in
the form of a 100% stock dividend to its common stockholders of record
on March 20, 2000. The consolidated financial statements and
accompanying notes have been retroactively adjusted to reflect the
effect of the split.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative
(that is, gains and losses) depends upon the intended use of the
derivative and resulting designation. In July 1999, FASB issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133, which postponed the
effective date of SFAS No. 133 for one year. In June 2000, FASB issued
SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an Amendment to SFAS No. 133. The Company adopted
SFAS No. 133 (as amended by SFAS No. 138) as of October 2, 2000. The
adoption of this statement had no impact on the Company's financial
position or results of operations.
In June 2001, the FASB issued SFAS No. 141, Business Combinations,
which requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 and that more of
the pooling-of-interest method is no longer allowed. The Company has
adopted this standard for business combinations after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 requires that upon adoption,
amortization of goodwill will cease and instead, the carrying value of
goodwill will be evaluated for impairment on an annual basis.
Identifiable intangible assets will continue to be amortized over their
useful lives and reviewed for impairment in accordance with SFAS No.
121. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. The Company is evaluating the impact of the adoption
of SFAS No. 142 and has not yet determined the effect of adoption on
its financial position and results of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which replaces SFAS No.
121. The accounting model for long-lived assets to be disposed of by
sale applies to all long-lived assets, including discontinued
operations, and replaces the provisions of APB Opinion No. 30,
Reporting Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of segments of a
business. SFAS No. 144 requires that those long-lived assets be
measured at the lower of the carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be
measured at net realizable value or include amounts for operating
losses that have not yet occurred. SFAS No. 144 also broadens the
reporting of discontinued operations to include all components of an
entity with operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The provisions of SFAS No. 144 are
effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally are to be applied prospectively.
The Company has not yet evaluated the impact the adoption of SFAS No.
144 will have on its financial statements.
Reclassifications
Certain prior years' amounts have been reclassified to conform with the
current year's presentation.
3. LIQUIDITY
The Company has experienced losses from continuing operations in each
of the three years ended September 30, 2001 and has an accumulated
deficit of $11,260,000 as of September 30, 2001. Cash used in
operations for the years ended September 30, 2001 and October 1, 2000
was $24,966,000 and $30,733,000, respectively, and it is likely that
cash flow from operations will be negative throughout Fiscal 2002. The
Company had working capital at September 30, 2001 of $5,836,000
compared to working capital of $58,682,000 as of October 1, 2000. At
September 30, 2001, the Company's principal source of liquidity is
$2,035,000 of cash and cash equivalents and $1,087,000 of availability
under a revolving credit facility. Such conditions raise substantial
doubt that the Company will be able to continue as a going concern for
a reasonable period of time without receiving additional funding.
The operating results for Fiscal 2001 and Fiscal 2000 have occurred
while the Company has been repositioning its operations away from the
mature, industrial-based activities and into the high-growth compound
semiconductor technology industry. The transition to this business
segment has required significant investment spending related to
start-up costs and capital expenditures. Many of the markets in this
business segment are characterized by long lead times for new products
requiring significant working capital investments and extensive
testing, qualification and approval by the Company's customers and end
users of products. This business segment is marked by intense
competition requiring the Company to introduce new products in a timely
and cost-effective manner. This business segment started operations in
the second quarter of Fiscal 2000 and has a limited operating history.
The segment faces risks and difficulties as an early stage business in
a high-growth and rapidly evolving industry. These factors have placed
a significant strain on the financial resources of the Company.
Management has sought to generate additional financial resources by
reducing operating costs and selling certain assets and by seeking
additional sources of financing, including bank and other lender
financing as well as private placements. The ultimate success of the
Company depends on its ability to obtain additional financing, to
continue reducing operating costs and, ultimately to generate higher
sales levels to attain profitability.
On November 9, 2001, the Company sold certain net assets of UAS, which
comprised its Specialty Adhesives segment (Note 6). Net cash proceeds
at closing approximated $8,000,000 after the repayment of the Emcore
Corporation note and the pay-down of a portion of the revolving line of
credit related to UAS assets (Note 11).
4. INVESTMENTS
At September 30, 2001, the Company had no investments. During Fiscal
2001, the Company's remaining investments matured or were liquidated.
At October 1, 2000, the Company's investment portfolio consisted of
marketable debt securities classified as held-to-maturity and
available-for-sale as well as marketable equity securities classified
as available-for-sale. The carrying amount of the investment portfolio
by investment type and classification as of October 1, 2000, was as
follows (in thousands):
Held-to-Maturity Available-for-Sale Total
---------------- ------------------ -----------
Short-term:
Corporate debt securities $ 12,425 $ - $ 12,425
----------- ---------- -----------
Long-term:
Corporate debt securities 5,009 1,000 6,009
State debt security - 2,750 2,750
Common stock - 143 143
----------- ---------- -----------
Total long-term securities 5,009 3,893 8,902
----------- ---------- -----------
Total investments $ 17,434 $ 3,893 $ 21,327
=========== ========== ===========
Held-to-maturity debt securities were carried at amortized cost. During
Fiscal 2001, the Company liquidated its remaining held-to-maturity
securities portfolio, some prior to their scheduled maturity date, and
recognized a loss of approximately $22,000 upon disposal. The fair
value of the held-to-maturity debt securities approximated $17,372,000
at October 1, 2000, based upon broker quotes. The gross unrecognized
holding loss approximated $62,000 at October 1, 2000.
Available-for-sale debt securities were carried at fair market value
with the unrealized gains and losses, net of tax, reported in
stockholders' equity until realized. Gains and losses on securities
sold were based upon the specific identification method. At October 1,
2000, the cost of available-for-sale debt securities was equal to fair
value (based upon broker quotes); accordingly, there were no unrealized
gains or losses. There have been no realized gains or losses for Fiscal
2001 or Fiscal 2000.
Available-for-sale equity securities were carried at fair market value
with the unrealized gains and losses, net of tax, reported in
stockholders' equity until realized. Gains and losses on equity
securities sold were based upon the specific identification method.
During Fiscal 2001, the realized gain on the sale of available-for-sale
equity securities approximated $15,000. At October 1, 2000, the fair
value of the equity securities (based upon broker quotes) was less than
the cost. The net unrealized loss included in stockholders' equity was
$44,000 (net of tax of $28,000). During Fiscal 2000, there were no
realized gains or losses on the sale of available-for-sale equity
securities other than those discussed in Note 18.
There were no investments at September 26, 1999, other than the
investment in Emcore Corporation preferred stock discussed in Note 18.
5. INVENTORIES
Inventories consisted of the following (in thousands):
September 30, October 1,
2001 2000
------------- ----------
Raw materials, work in process and supplies $ 5,191 $ 2,278
Finished goods 1,413 2
---------- ----------
Total $ 6,604 $ 2,280
========== ==========
6. DISCONTINUED OPERATIONS OF UAS
On June 26, 2001 (the measurement date), the Company entered into a
letter of intent to sell certain net assets of UAS, which comprises its
Specialty Adhesives segment. Then, on August 24, 2001, the Company
entered into an asset purchase agreement for the sale of UAS. The
transaction closed on November 9, 2001 for a purchase price of
$21,620,000. Proceeds consisted of approximately $14,620,000, in cash,
$3,500,000 in subordinated promissory notes of the purchaser,
$1,500,000 in preferred stock of the purchaser's parent and $2,000,000
of payments contingent on the future earnings achievement of the UAS
business sold. The Company will record a gain of approximately
$2,500,000 on the sale in the first quarter of Fiscal 2002 after the
settlement of certain purchase price adjustments and the calculation of
transaction costs (see Note 25).
The consolidated financial statements presented herein have been
restated to reflect the discontinued operations of UAS in accordance
with APB Opinion No. 30.
The net assets of the discontinued operations of UAS have been
segregated on the September 30, 2001 and October 1, 2000 consolidated
balance sheets, the components of which are as follows (in thousands):
Net Assets of Discontinued Operations of UAS
September 30, October 1,
2001 2000
------------- ------------
Assets:
Cash $ 2 $ 2
Trade accounts receivable 1,469 1,277
Inventories 2,786 2,144
Prepaids and other assets 96 82
Property, plant and equipment - net 10,305 10,564
Goodwill - net 3,792 1,253
Other assets - net 879 1,024
----------- -----------
Total assets 19,329 16,346
----------- -----------
Liabilities:
Current portion of long-term debt - 1
Trade accounts payable 3,159 3,302
Compensation and benefits 376 591
Taxes, other than income 226 236
Other accrued expenses 1,357 1,249
Other liabilities 108 135
----------- -----------
Total liabilities 5,226 5,514
----------- -----------
Net assets of discontinued operations of UAS $ 14,103 $ 10,832
=========== ===========
The results of operations for all periods presented have been restated
for discontinued operations. The operating results of the discontinued
operations of UAS are as follows (in thousands):
Fiscal Years Ended
---------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ----------- -------------
Net sales $ 31,372 $ 31,579 $ 28,388
Cost of goods sold 24,325 24,363 21,987
Selling and administrative 2,693 3,610 2,842
Depreciation and other amortization 1,154 944 873
----------- ----------- -----------
Income before interest expense and income taxes 3,200 2,662 2,686
Interest income - net 19 23 18
----------- ----------- -----------
Income before taxes 3,219 2,685 2,704
Income tax expense (898) (694) (694)
----------- ----------- -----------
Net income from discontinued operations of UAS $ 2,321 $ 1,991 $ 2,010
=========== =========== ===========
The following note relates to the business of the Specialty Adhesives
segment.
Acquisition
On December 18, 2000, the Company completed the acquisition of the net
assets of the solvent-based industrial adhesives business of Henkel
Corporation for $2,750,000 in cash, which became part of the operations
of UAS.
The business combination was accounted for by the purchase method in
accordance with APB Opinion No. 16, Business Combinations. The results
of operations of the above named business is included in the
consolidated financial statements from the date of acquisition forward
as part of the discontinued operations of UAS.
The fair market value of purchased assets was determined to be zero;
therefore, the entire purchase price has been allocated to goodwill on
the date of acquisition. The acquired goodwill was to be amortized over
its estimated useful life of 15 years.
The pro forma effect of this acquisition on the Company's net sales,
income (loss) from continuing operations, net income (loss) and
earnings (loss) per share, had the acquisition occurred on September
28, 1998, is not considered material, either quantitatively or
qualitatively.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in
thousands):
Estimated September 30, October 1,
Useful Lives 2001 2000
------------ ------------- -----------
Land and improvements - $ 46 $ 46
Buildings and improvements 5-20 years 10,473 5,990
Machinery, equipment and office
furnishings 3-20 years 47,859 30,614
Construction in progress - 12,965 6,453
--------- ---------
71,343 43,103
Accumulated depreciation (11,755) (4,878)
--------- ---------
Total $ 59,588 $ 38,225
========= =========
Depreciation expense was $6,984,000, $3,163,000 and $912,000 for
Fiscal 2001, Fiscal 2000 and Fiscal 1999, respectively.
8. ACQUISITION OF MINORITY INTEREST
As of September 29, 1997, the Company entered into a technology
agreement with Emcore Corporation ("Emcore") to acquire certain
technology for the manufacture of epitaxial wafers used in high
brightness LEDs for lamps and display devices for $5,000,000. See Note
10 regarding the Fiscal 2000 write-down of the technology license. On
September 29, 1997, Thomas J. Russell, the Chairman of the Board of
Directors of Emcore, was a director and major stockholder of the
Company and Howard R. Curd, the Chairman of the Board of Directors and
Chief Executive Officer of the Company, was a director and stockholder
of Emcore. Subsequent to the transaction, Mr. Russell resigned from the
Board of Directors of the Company and Mr. Curd resigned from the Board
of Directors of Emcore.
Uniroyal Optoelectronics, Inc. (now known as Uniroyal Compound
Semiconductors, Inc.), a wholly-owned subsidiary of Uniroyal Technology
Corporation, entered into a joint venture (Uniroyal Optoelectronics,
LLC ("UOE")) with Emcore which Uniroyal Optoelectronics, Inc. managed
and owned a 51% interest through June 2001 and a 64.3% interest
thereafter until August 2, 2001. Emcore was the 49% owner through June
2001 and 35.7% owner until August 2, 2001. In July 1998, both owners
capitalized the joint venture through cash contributions of $510,000 by
the Company and $490,000 by Emcore. During Fiscal 2001, Fiscal 2000 and
Fiscal 1999, Emcore made additional capital contributions to the joint
venture of $2,382,000, $11,628,000 and $5,500,000, respectively. During
Fiscal 2001 and Fiscal 2000, the Company made additional capital
contributions to the joint venture of approximately $17,700,000 and
$17,827,000, respectively. The Company did not make any capital
contributions to the joint venture in Fiscal 1999.
On August 2, 2001, the Company purchased Emcore's remaining 35.7%
interest in UOE. The primary reason for the purchase was the Company's
desire to have full control of the venture. The purchase was
consummated through the issuance of 1,965,924 shares of the Company's
common stock valued at approximately $15,067,000 (net of approximately
$67,000 of stock registration costs). The Company common stock issued
was valued based upon the average market value of such shares over the
2-day period before and after the terms of the acquisition were agreed
to and announced. The Company is required to register these shares of
the Company's common stock issued to Emcore and anticipates that the
registration statement will be filed shortly after the filing of the
Company's Annual Report on Form 10-K.
The acquisition of the Emcore minority interest was accounted for by
the purchase method in accordance with SFAS No. 141, Business
Combinations.
The results of 100% of the UOE operations are included in the
consolidated financial statements for the period August 2, 2001 through
September 30, 2001. Emcore's share of the losses prior to August 2,
2001 are shown as minority interest in the consolidated statements of
operations. The purchase price was allocated to assets purchased and
liabilities assumed based upon the percentage of interest purchased
(35.7%) applied to the difference between fair market value and net
book value of the assets and liabilities on the date of acquisition.
The fair market values were based upon an independent appraisal and
management estimates at the date of acquisition. The purchase price was
allocated as follows (in thousands):
Property, plant and equipment $ 352
Intangible assets 928
Goodwill 12,408
Minority interest 1,446
-----------
Total assets acquired 15,134
Current liabilities (67)
-----------
Net assets acquired $ 15,067
===========
Of the $928,000 of acquired intangible assets, $678,000 was assigned to
core technology with a weighted average useful life of 5 years and
$250,000 was assigned to in-process research and development assets
("IPR&D") that were written off at the date of acquisition in
accordance with SFAS No. 2, Accounting for Research and Development
Costs, as clarified by FASB Interpretation No. 4, Applicability of FASB
Statement No. 2 to Business Combinations Accounted for the Purchase
Method. The write-off of the IPR&D was charged to expense and was
determined through established valuation techniques. This amount was
expensed at acquisition because technological feasibility had not been
established and no future alternate uses existed. The $12,408,000 of
goodwill was assigned to the Compound Semiconductor and Optoelectronics
segment, is expected to be deductible for tax purposes, and, in
accordance with SFAS No. 141, is not amortizable.
Included in selling and general administrative expenses of the Company
for Fiscal 2001, Fiscal 2000 and Fiscal 1999 are $14,672,000,
$12,667,000 and $4,345,000, respectively, of UOE start-up costs.
In July 1998, UOE entered into a supply agreement with Emcore whereby
Emcore agreed to supply epitaxial wafers, dies and package-ready
devices to UOE until UOE was ready to produce its own products. During
Fiscal 2000 and Fiscal 1999, UOE sales of approximately $1,643,000 and
$479,000, respectively, were attributable to product supplied by
Emcore. No sales were attributable to product supplied by Emcore in
Fiscal 2001. The supply agreement was terminated in connection with the
acquisition of Emcore's minority interest on August 2, 2001.
In July 1998, UOE entered into a lease agreement for a facility in
Tampa, Florida and completed construction of leasehold improvements in
Fiscal 1999. Significant start-up costs have been incurred during
Fiscal 2001 and Fiscal 2000 for training and research and development.
UOE reached commercial production levels in the first quarter of Fiscal
2002 and accordingly emerged from the development stage on October 1,
2001.
9. ACQUISITION OF STERLING SEMICONDUCTOR, INC.
On May 31, 2000, the Company completed a merger with Sterling
Semiconductor, Inc. ("Sterling") whereby Sterling became a wholly-owned
subsidiary of the Company. Sterling is a developer and manufacturer of
silicon carbide ("SiC") semiconductor wafer substrates and substrates
with epitaxial thin film coatings.
Under the terms of the merger agreement, the Company exchanged 1.1965
shares of its common stock for each share of Sterling's issued and
outstanding preferred and common stocks and exchanged Company employee
stock options for 1.1965 shares of the Company's common stock for each
share of Sterling common stock covered by an outstanding Sterling
employee stock option (the majority of which were vested). This
resulted in an issuance of 1,531,656 shares of the Company's common
stock valued at approximately $31,655,000, the issuance of 508,219 of
Company employee stock options valued at approximately $8,959,000, and
the payment of approximately $2,000 for fractional shares. The total
purchase price, including acquisition costs, approximated $41,333,000.
The Company common stock issued was valued based upon the average
market value of such shares on the dates surrounding the final purchase
price adjustment, which occurred on April 30, 2000. The Company
employee stock options issued were recorded at fair value calculated
using the Black-Scholes option-pricing model.
The Sterling merger was accounted for by the purchase method in
accordance with the APB Opinion No. 16, Business Combinations. The
results of operations of Sterling are included in the consolidated
financial statements for the period June 1, 2000 through September 30,
2001. The purchase price was allocated to the estimated fair value of
assets purchased, liabilities assumed and IPR&D based on an independent
appraisal and management estimates at the date of acquisition as
follows (in thousands):
Working capital (excluding cash) $ (521)
Cash 613
Property, plant and equipment 1,840
Deferred tax asset 2,656
Intangible assets 6,102
Other assets 81
Goodwill 28,415
Notes payable (1,051)
Other liabilities (3,392)
-------------
Net value of purchased assets 34,743
Purchased in-process research and development 6,590
Value of common stock and employee
stock options issued (40,614)
Cash paid for fractional shares (2)
Accrued acquisition costs (717)
-------------
Cash due at closing $ -
=============
Included in other liabilities as of the acquisition date is
approximately $2,640,000 related to the Company's investment in
Sterling prior to the merger. Subsequent to the merger, this amount was
converted to a capital contribution.
The excess of the purchase price over the fair value of the net
identifiable assets, totaling $28,415,000 was allocated to goodwill and
is being amortized on a straight-line basis over 5 years. In the fourth
quarter of Fiscal 2001, the Company recorded a write-down of Sterling
goodwill of approximately $9,816,000. The write-down was in accordance
with SFAS No. 121. Goodwill was determined to be impaired after revised
undiscounted future cash flows were determined to be less than the
carrying amount of goodwill. The amount of the write-off was then
calculated as the excess of goodwill over the fair value of Sterling.
The estimated fair value of the Company was determined through
discounted cash flow models. Factors in the fourth quarter that led to
impairment include the buyout of Emcore's minority interest on August
2, 2001 (Note 8) and the re-evaluation of the Compound Semiconductor
and Optoelectronics segment which included revised strategies and
projections.
Approximately $6,102,000 of the purchase price was allocated to
identifiable intangible assets including existing product line, core
technology and trained workforce. These intangible assets are being
amortized over a 5-year period.
Approximately $6,590,000 of the purchase price was allocated to IPR&D
for research and development projects of Sterling that were in various
stages of development, had not reached technological feasibility and
for which there was no alternative future use. In accordance with SFAS
No. 2, as clarified by FASB Interpretation No. 4, amounts assigned to
IPR&D that have not reached technological feasibility and for which
there is no alternative use must be charged to expense as part of the
allocation of the purchase price. The IPR&D was charged to expense in
the fourth quarter of Fiscal 2000 and had no tax benefit.
The identifiable intangible assets and IPR&D were valued on the
acquisition date using an income approach and, in the case of the
trained workforce intangible asset, a cost to replicate approach. In
the income approach, a cash flow was developed associated with the
respective asset after charges for the use of existing assets (as
applicable) and consideration of the economic life of the asset
(reflected by the obsolescence factor). The income stream was
discounted to its present value based upon the estimated discount rate.
The discount rate was based upon our required rate of return, useful
life of the technology and risks associated with the timely completion
of the product lines. In the case of IPR&D, the "exclusionary rule" was
applied by which the indicated value was multiplied by the estimate of
the percentage of the total technology that was complete as of the
valuation date. Percentage of completion was determined based upon the
relative number of critical issues solved to the total number of
critical issues identified. Significant appraisal assumptions include
revenue projections, margins and expense levels and the risk adjusted
discount rate applied to the project's expected cash flows.
As of the acquisition date, Sterling had developed a commercial
production capability for 2-inch 4H and 6H poly type SiC wafers.
Sterling was also engaged in concurrent efforts to develop potential
product lines for large diameter (3-inch and 4-inch 4H and 6H) wafers,
semi-insulating wafers, epitaxial coatings and device designs that
would produce an economical device die for discrete semiconductor
devices.
The purchased IPR&D is summarized as follows (in thousands):
Expected Date for
Discount Economic Percent Full Commercial
IPR&D Technology Description Rate Life Complete Fair Value Viability
----------------------------- ----------- --------- -------- ---------- -----------------
3" and 4" large diameter:
SiC wafers 32.7% 11 years 70% $ 858 2004
Semi-insulating wafers 32.7% 11 years 75% 456 2004
Epitaxy coatings 32.7% 11 years 40% 723 2005
Devices 32.7% 11 years 40% 4,553 2005
--------
Total IPR&D $ 6,590
========
The cost to complete all projects approximated $13,200,000 in May of
2000 and $10,900,000 at September 30, 2001. Progress has been made on
purchased IPR&D projects during Fiscal 2001. The expected dates for
full commercial viability remain the same. The nature of the efforts
required to develop the acquired IPR&D into technologically feasible
and commercially viable products principally relate to the completion
of all planning, design and testing activities necessary to establish a
product that can be produced to meet its design requirements including
functions, features and technical performance requirements. The Company
currently expects the acquired IPR&D will be successfully developed but
there can be no assurance the technological feasibility or commercial
viability of these products will be achieved. If none of these products
are successfully developed, the Company's sales and profitability may
be adversely affected in future periods.
The following pro forma data (in thousands) summarize the results of
operations for the periods indicated as if the Sterling acquisition had
been completed as of the beginning of the periods presented. The pro
forma data give effect to actual operating results prior to the
acquisition, adjusted to include the pro forma effect of interest
expense, amortization of intangibles and income taxes. The pro forma
results do not include an adjustment for IPR&D. These pro forma results
are not necessarily indicative of the results that would have actually
been obtained if the acquisition occurred as of the beginning of the
periods presented or that may be obtained in the future.
Fiscal Year Ended
-------------------------------
October 1, September 26,
2000 1999
----------- -------------
Pro forma net sales $ 5,187 $ 2,433
Pro forma net income (loss) $ 39,447 $ (3,669)
Pro forma earnings (loss) per share:
Basic $ 1.58 $ (0.15)
Diluted $ 1.58 $ (0.15)
The acquisition costs for Sterling primarily include approximately
$428,000 paid to an investment banking firm of which one of the
Company's directors is a principal and approximately $137,000 paid to a
law firm of which one of the Company's directors is a senior partner.
10. OTHER ASSETS
Other assets consisted of the following (in thousands):
September 30, October 1,
2001 2000
------------- ------------
Intangible assets $ 6,183 $ 5,695
Trademarks 163 181
Technology license - 1,000
Deposits 113 136
Other 3,119 2,853
---------- ----------
Total $ 9,578 $ 9,865
========== ==========
Intangible assets were acquired in connection with the Sterling
acquisition (Note 9), in connection with the acquisition of Emcore's
minority interest (Note 8), and as a result of certain miscellaneous
licensing arrangements. Intangible assets are reported net of
accumulated amortization of $1,697,000 at September 30, 2001 and
$407,000 at October 1, 2000. Trademarks are reported net of accumulated
amortization of $88,000 and $70,000 at September 30, 2001 and
October 1, 2000, respectively.
During Fiscal 1999 and Fiscal 1998, the Company paid a total of
$5,000,000 to Emcore in connection with a technology license dated
September 29, 1997, for certain technology relating to the manufacture
of epitaxial wafers used in high brightness light emitting diodes
("LEDs") for lamps and display devices (Note 8). During the fourth
quarter of Fiscal 2000, the Company wrote down the value of its
technology license in the amount of $4,000,000 based on its decision to
pursue its own research and development efforts. In conjunction with
the purchase of Emcore's minority interest (Note 8), the technology
license agreement was terminated and the remaining value of the
technology license was reclassified to intangible assets and will be
amortized over the estimated life of the technology of five years.
11. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
September 30, October 1,
2001 2000
------------- ----------
Revolving credit agreement $ 7,214 $ 1,266
Secured promissory note 5,000 -
Unsecured promissory notes 1,304 2,558
Capital lease obligations 16,652 17,828
---------- ----------
30,170 21,652
Less current portion (17,974) (6,558)
---------- ----------
Long-term debt, net
of current portion $ 12,196 $ 15,094
========== ==========
Debt amounts become due during subsequent fiscal years ending in
September as follows (in thousands):
2002 $ 17,974
2003 6,401
2004 4,696
2005 1,028
2006 71
----------
Total debt $ 30,170
==========
Tyco Capital Revolving Credit Agreement
On April 14, 1998, the Company entered into an Amendment and Consent
Agreement with Tyco Capital (formerly The CIT Business/Credit Group,
Inc.) ("Tyco") whereby the Company's existing revolving credit
arrangement was amended to permit the Company to borrow the lesser of
$10,000,000 or the sum of 85% of Eligible Receivables plus 55% of
Eligible Inventories as defined in the agreement. On April 1, 1999, in
connection with the creation of Uniroyal Engineered Products, Inc., the
Tyco revolving credit agreement was assumed by Uniroyal Engineered
Products, Inc. (now known as Uniroyal Engineered Products, LLC). The
collateral securing the credit line includes only the assets of
Uniroyal Engineered Products, LLC. Interest on the Tyco revolving
credit agreement is payable monthly at Prime plus .5% per annum or at
the LIBOR rate plus 2.75% per annum if the Company elects to borrow
funds under a LIBOR loan as defined in the agreement. The loan matured
on June 5, 2001 and is subject to automatic one year renewals unless
the agreement is terminated by either party with a 90 day notice and is
therefore included as a short-term obligation at September 30, 2001.
All of Uniroyal Engineered Products, LLC's trade accounts receivables
and inventories are pledged as collateral for this loan. The agreement
restricts the creation of certain additional indebtedness. The Company
was in compliance with the covenants under this agreement at September
30, 2001. At September 30, 2001, the Company had approximately
$7,214,000 of outstanding borrowings under the revolving credit
agreement and $1,087,000 of availability. The Company had $1,266,000 of
outstanding borrowings under this agreement at October 1, 2000. The
weighted average interest rate on the Tyco revolving credit agreement
was 9.1% during Fiscal 2001 and Fiscal 2000.
Secured Promissory Note
In connection with the August 2, 2001 acquisition of Emcore's minority
interest in UOE (Note 8), the Company received a $5,000,000 loan, at
prime rate(6.0% at September 30, 2001), from Emcore. The Company
incurred additional interest of 433 shares of the Company's common
stock per day from September 28, 2001 until the note was repaid on
November 9, 2001.
The loan was evidenced by a convertible note, the principal and accrued
interest of which was convertible into the Company's common stock on
the earlier of September 20, 2001 and the completion of the sale of
UAS. The conversion price for the note was based upon the trading price
of the Company's common stock, but would be no more than $8.39 or less
than $6.87 per share and was subject to customary antidilution
adjustments. The weighted average interest rate of this obligation was
7.0% in Fiscal 2001. The maturity date of the loan was the earlier of
the completion of the sale of UAS (Note 6) or August 2, 2003.
Unsecured Promissory Notes
On May 31, 2000, in connection with the acquisition of Sterling, the
Company assumed an unsecured promissory note payable with a balance of
approximately $833,000. The note was payable in two equal installments
of approximately $416,500 on September 1, 2000 and September 1, 2001,
plus accrued interest at the stated rate of 10.50%. At September 30,
2001, the balance of this note payable is zero.
On June 14, 1999, in connection with the purchase of Happel Marine,
Inc., the Company issued unsecured promissory notes for $2,400,000 and
$511,007. The $2,400,000 note is payable in four equal annual
installments beginning January 15, 2000, plus accrued interest at the
stated rate of 7.75% per annum. The $511,007 note was payable in two
equal annual installments beginning January 15, 2000, plus accrued
interest at the stated rate of 7.75%. The notes were adjusted to
$2,500,030 and $533,114, respectively, in connection with a subsequent
purchase price adjustment in September, 1999. At September 30, 2001,
the balance of these notes approximates $1,250,000.
Capital Lease Obligations
The Company leases certain machinery and equipment under non-cancelable
capital leases which extend for varying periods up to 5 years. Capital
lease obligations entered into during Fiscal 2001 and Fiscal 2000 were
primarily related to the Company's Compound Semiconductor and
Optoelectronics segment. The Company is a guarantor of the majority of
the lease obligations. The weighted average interest rate on these
obligations was 9.5% in Fiscal 2001 and 8.9% in Fiscal 2000.
The approximate minimum future lease obligations on long-term
non-cancelable capital lease obligations included in long-term debt
during subsequent fiscal years ending in September are as follows (in
thousands):
Fiscal Year
-----------
2002 $ 6,380
2003 6,616
2004 4,996
2005 1,076
2006 71
---------
19,139
Less imputed interest (2,487)
---------
Total $ 16,652
=========
Interest is imputed using the rate that would equate the present value
of the minimum lease payments to the fair value of the leased
equipment.
12. DISCONTINUED OPERATIONS OF HPPI
On December 24, 1999, the Company entered into a definitive agreement
to sell certain net assets of HPPI, which comprises its High
Performance Plastics segment, for $217,500,000 in cash to Spartech
Corporation ("Spartech"). The transaction closed on February 28, 2000,
and resulted in cash proceeds of $208,976,000 net of certain
transaction costs and preliminary purchase price adjustments (the
"Spartech Sale"). In Fiscal 2000, the ultimate purchase price
adjustments had not been agreed to by both parties. The Company
estimated, and had provided for, an ultimate reduction in purchase
price of approximately $5,100,000, which would have resulted in a loss
of the $5,000,000 holdback as well as an additional payment from the
Company to Spartech of approximately $100,000. In addition to what the
Company had provided for, Spartech was seeking an additional purchase
price reduction up to approximately $4,237,000. After consideration of
the estimated purchase price adjustments of $5,100,000 during Fiscal
2000, the Company recorded a gain on the sale of approximately
$55,821,000 (net of taxes of approximately $38,146,000).
On August 27, 2001, the Company and Spartech agreed to the final
purchase price adjustment. The settlement resulted in the loss of the
$5,000,000 holdback as well as an additional $1,000,000 payment to be
made by the Company to Spartech. The $1,000,000 payment is evidenced by
an unsecured promissory note at prime rate. The note is repayable in
four increments of $250,000. The first increment was due November 1,
2001 and has been paid. The remaining payments are due February 1,
2002, May 1, 2002 and August 1, 2002. As a result of the settlement,
the Company recorded a loss of approximately $522,000 (net of taxes of
approximately $306,000) in Fiscal 2001.
The accompanying consolidated financial statements reflect HPPI as
discontinued operations in accordance with APB Opinion No. 30.
Net liabilities of the discontinued operations of HPPI have been
segregated on the September 30, 2001 and October 1, 2000 balance
sheets, the components of which are as follows (in thousands):
Net Liabilities of Discontinued Operations of HPPI
September 30, October 1,
2001 2000
------------- -----------
Assets:
Cash $ 109 $ 100
Trade accounts receivable - 21
Deferred income tax - 186
Prepaids and other 194 466
----------- -----------
Total assets 303 773
----------- -----------
Liabilities:
Current portion of long-term debt 1,000 158
Trade accounts payable 45 432
Other accrued expenses 1,168 4,815
----------- -----------
Total liabilities 2,213 5,405
----------- -----------
Net liabilities of discontinued
operations of HPPI $ 1,910 $ 4,632
=========== ===========
The results of operations for all periods presented have been restated
for the HPPI discontinued operations. The operating results of the HPPI
discontinued operations are as follows (in thousands):
Fiscal Years Ended
--------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------ ----------- -------------
Net sales $ - $ 55,001 $ 130,219
Cost of goods sold - 44,434 93,367
Selling and administrative 221 3,933 15,538
Depreciation and other amortization - 2,511 5,652
Loss on assets to be disposed of - - 144
Loss (gain) on sale of segment 828 (96,027) -
----------- ----------- -----------
(Loss) income before interest expense and
income taxes (1,049) 100,150 15,518
Interest expense - net - (3,620) (8,574)
----------- ----------- -----------
(Loss) income before taxes (1,049) 96,530 6,944
Income tax expense (224) (39,184) (2,675)
----------- ----------- -----------
Net (loss) income and gain on disposition of
discontinued operations of HPPI $ (1,273) $ 57,346 $ 4,269
=========== =========== ===========
The following information relates to the business of HPPI.
HPPI Credit Agreement
On April 14, 1998, the Company transferred all of the assets of its
High Performance Plastics segment to a newly created wholly-owned
subsidiary, HPPI. On that same day HPPI, as borrower, entered into a
credit agreement with Uniroyal HPP Holdings, Inc. (the parent of HPPI
and a wholly-owned subsidiary of the Company), the Company, the banks,
financial institutions and other institutional lenders named therein,
Fleet National Bank (as Initial Issuing Bank, Swing Line Bank and
Administrative Agent) ("Fleet") and DLJ Capital Funding, Inc. as
Documentation Agent (the "Credit Agreement"), providing among other
things, for the borrowing by HPPI of an aggregate principal amount of
up to $110,000,000 (the "Fleet Financing"). The $110,000,000 line under
the Credit Agreement was composed of a $30,000,000 Term A Advance, for
which the weighted average interest rate was 8.0% in Fiscal 2000 and
7.36% in Fiscal 1999, a $60,000,000 Term B Advance for which the
weighted average interest rate was 8.3% in Fiscal 2000 and 7.57% in
Fiscal 1999, and a $20,000,000 Revolving Credit Advance for which the
weighted average interest rate was 8.8% in Fiscal 2000 and 8.31% in
Fiscal 1999. The Fleet Financing was repaid on February 28, 2000, in
connection with the Spartech Sale.
Under the terms of the Credit Agreement, HPPI was required to obtain
and keep in effect one or more interest rate Bank Hedge Agreements (as
defined in the Credit Agreement) covering at least 50% of the Term A
and Term B Advances. The interest rate swap agreements were terminated
on February 28, 2000 in connection with the repayment of the Fleet
Financing. HPPI received $950,000 upon termination and recorded this
amount as a gain on interest rate swap termination. The gain on
interest rate swap termination is included in selling and
administrative expenses of discontinued operations.
13. OTHER LIABILITIES
Other liabilities consisted of the following (in thousands):
September 30, October 1,
2001 2000
------------- -----------
Accrued retirement benefits $ 23,357 $ 22,058
Taxes, other than income - 2
Other 805 784
----------- -----------
Total $ 24,162 $ 22,844
=========== ===========
14. INCOME TAXES
The effective tax rate differs from the statutory federal income tax
rate for the following reasons (in thousands):
Fiscal Years Ended
-------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ----------- -------------
Income tax benefit calculated at the
statutory rate applied to loss before
income taxes and discontinued
operations $ (16,086) $ (13,876) $ (2,981)
Increase (decrease) resulting from:
Capital loss from medical benefits
subsidiary - - (15,980)
Valuation allowance 17,870 (13,702) 13,702
Goodwill 6,074 3,159 (199)
State income tax (1,657) (1,903) (186)
Research and development credit - (894) -
Other 348 30 378
--------- --------- ---------
Income tax expense (benefit) $ 6,549 $ (27,186) $ (5,266)
========= ========= =========
Income tax expense (benefit) consisted of the following components (in
thousands):
Fiscal Years Ended
--------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ------------ -------------
Current:
Federal $ (6,560) $ (31,718) $ (6,936)
State (206) (2,689) (722)
----------- ----------- ----------
Total $ (6,766) $ (34,407) $ (7,658)
=========== =========== ==========
Net deferred tax expense:
Federal $ 12,220 $ 6,433 $ 1,834
State 1,095 788 558
----------- ----------- ----------
Total $ 13,315 $ 7,221 $ 2,392
=========== =========== ==========
Total:
Federal $ 5,660 $ (25,285) $ (5,102)
State 889 (1,901) (164)
----------- ----------- ----------
Total $ 6,549 $ (27,186) $ (5,266)
=========== =========== ==========
The components of the deferred tax assets and liabilities were as
follows (in thousands):
September 30, 2001
-------------------------------------------------
Assets Liabilities Total
----------- ----------- -----------
Current
-------
Accrued expenses deductible in future
Periods $ 1,415 $ - $ 1,415
Valuation allowance (1,415) - (1,415)
----------- ----------- -----------
Total - - -
=========== =========== ===========
Non-Current
-----------
Tax loss carryforward benefits $ 5,269 $ - $ 5,269
Acquired tax loss carryforward benefits 4,741 - 4,741
Tax credit carryforward benefits 2,109 - 2,109
Book basis in excess of tax basis of assets - (6,257) (6,257)
Long-term accrual of expenses deductible
in future periods 10,593 - 10,593
Valuation allowance (16,455) - (16,455)
----------- ----------- -----------
Total $ 6,257 $ (6,257) $ -
=========== =========== ===========
October 1, 2000
-------------------------------------------------
Assets Liabilities Total
----------- ------------ -----------
Current
-------
Accrued expenses deductible in future
Periods $ 5,460 $ - $ 5,460
=========== =========== ===========
Non-Current
-----------
Acquired tax loss carryforward benefits $ 4,976 $ - $ 4,976
Book basis in excess of tax basis of assets - (4,214) (4,214)
Long-term accrual of expenses deductible
in future periods 7,066 - 7,066
----------- ----------- -----------
Total $ 12,042 $ (4,214) $ 7,828
=========== =========== ===========
The Company has established a valuation allowance as it has not
determined that it is more likely than not that the deferred tax asset
is realizable, based upon the Company's projected future taxable
income.
As of September 30, 2001, the Company has net operating loss
carryforwards for tax purposes of approximately $10,000,000 that expire
in the year 2021 as well as research and development tax credit
carryforwards of approximately $1,200,000 expiring in years beginning
in 2007.
The acquired tax loss carryforward benefits expire in various years
starting in the year 2007 through 2020. These acquired tax loss
benefits consist of tax net operating loss carryforwards from
acquisitions of subsidiaries and are subject to an annual limitation.
The annual limitation on utilization of the acquired net operating
losses is approximately $4,000,000 per year.
In Fiscal 1999, the Company established a subsidiary to administer the
Company's employee medical benefits program. The Company realized a
one-time federal capital loss tax benefit of approximately $15,980,000
arising from the sale of a portion of the stock of this subsidiary.
However, due to the uncertainty regarding the Company's ability to
utilize this capital loss in the future, only $2,278,000 of this
benefit was recognized in Fiscal 1999 as an offset against current and
previous capital gains. In Fiscal 2000, the Company realized an
additional state tax benefit of $936,000 and the $13,702,000 previous
federal balance of this benefit was recognized as an offset to a
portion of the capital gain realized upon the sale of HPPI.
15. COMMITMENTS AND CONTINGENCIES
Litigation
On February 23, 2001, the Company and its wholly owned subsidiary,
Sterling, were served with a complaint by AFG-NVC, LLC in the Loudoun
County, Virginia Circuit Court. The complaint 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.
See Note 25 for subsequent disposition on February 11, 2002.
The Company is also engaged in litigation arising from the ordinary
course of business. Management believes the ultimate outcome of such
litigation will not have a material adverse effect upon the Company's
results of operations, cash flows or financial position.
Environmental Factors
The Company is subject to a wide range of federal, state and local laws
and regulations designed to protect the environment and worker health
and safety. The Company's management emphasizes compliance with these
laws and regulations. The Company has instituted programs to provide
guidance and training and to audit compliance with environmental laws
and regulations at Company owned or leased facilities. The Company's
policy is to accrue environmental and clean-up related costs of a
non-capital nature when it is probable both that a liability has been
incurred and that the amount can be reasonably estimated.
In connection with the July 1996 acquisition of a manufacturing
facility in South Bend, Indiana, the Company assumed costs of
remediation of soil and ground water contamination which the Company
estimates will cost not more than $1,000,000 over a five-to-seven year
period. The Company had placed $1,000,000 in an escrow account to be
used for such clean-up in accordance with the terms of the agreement
for the purchase of the facility. As of September 30, 2001, the Company
had incurred approximately $746,000 of related remediation costs. In
connection with the sale of UAS in November 2001 (Note 6), we placed an
additional $300,000 in escrow.
In connection with the Spartech Sale, the Company conducted
environmental assessments on two of the plants of HPPI in compliance
with the laws of the states of Connecticut and New Jersey relating to
transfers of industrial real property. The asset purchase agreement
provided that Spartech could defer taking title to certain parcels of
real property until the Company provides evidence that environmental
contamination had been remediated to the satisfaction of Spartech. The
environmental assessment of the Connecticut property indicated that a
separate parcel purchased by the Company in 1995 was contaminated with
total petroleum hydrocarbons, DDT and other pesticide chemicals. The
Company had removed approximately 60% of the soil on the property in
Fiscal 2000 at a cost of approximately $1,600,000. Fiscal 2001
expenditures approximated $50,000. The Company has retained
environmental consultants to review its options with regard to the
remaining soil on the premises and expects to complete remediation
under a program approved by the Connecticut Department of Environmental
Protection in December 2001. The environmental assessment of the
Hackensack, New Jersey facility is still underway. At September 30,
2001, the Company has estimated the clean-up costs for both facilities
to approximate $1,000,000. At September 30, 2001, the estimates for
environmental clean-up costs are included in the Net Liabilities of
Discontinued Operations of HPPI. Spartech has agreed to lease the
parcels for a nominal amount until after remediation is complete.
Based on information available as of September 30, 2001, the Company
believes that the costs of known environmental matters either have been
adequately provided for or are unlikely to have a material adverse
effect on the Company's operations, cash flows or financial position.
Leases
The Company is a party to non-cancelable lease agreements involving
equipment. The leases extend for varying periods up to 5 years and
generally provide for the payment of taxes, insurance and maintenance
by the lessee. Generally these leases have options to purchase at
varying dates.
The Company's property held under capital leases, included in property,
plant and equipment (Note 7) consisted of the following (in thousands):
September 30, October 1,
2001 2000
------------ ----------
Buildings and improvements $ 5,429 $ 5,429
Machinery, equipment and office
furnishings 20,279 18,202
Construction in progress 1,845 -
---------- ----------
27,553 23,631
Less accumulated amortization (5,458) (2,117)
---------- ----------
Total $ 22,095 $ 21,514
========== ==========
Amortization of assets recorded under capital leases is included with
depreciation expense.
The Company leases equipment, vehicles and warehouse and office space
and contracts for various services under various lease agreements,
certain of which are subject to escalations based upon increases in
specified operating expenses or increases in the Consumer Price Index.
The approximate future minimum rentals under non-cancelable operating
leases and service agreements during subsequent fiscal years ending in
September are as follows (in thousands):
Fiscal Year
-----------
2002 $ 1,923
2003 1,875
2004 1,721
2005 943
2006 769
Subsequent years 2,061
--------
Total $ 9,292
========
Rent expense was approximately $1,385,000, $896,000 and $437,000 for
Fiscal 2001, Fiscal 2000 and Fiscal 1999, respectively.
Officers' Compensation
On August 1, 1995, the Company implemented a Deferred Compensation Plan
providing certain key employees the opportunity to participate in an
unfunded deferred compensation program. Under the program, participants
may defer a portion of their base compensation and bonuses earned each
year. Amounts deferred earned interest at 12% per annum until March 10,
2000, at which time the plan was amended to reduce the interest rate to
7.84%. The program is not qualified under Section 401 of the Internal
Revenue Code. At September 30, 2001 and October 1, 2000, participant
deferrals, which are included in other liabilities, were $1,145,000 and
$938,000, respectively. The expense during Fiscal 2001, Fiscal 2000 and
Fiscal 1999 was $207,000, $212,000 and $208,000, respectively.
Also during the fiscal year ended October 1, 1995, split dollar life
insurance contracts were purchased on the lives of all five executive
officers of the Company. Annual insurance premiums of $186,000 were
paid by the Company with respect to these policies. During Fiscal 2000,
the Company deposited approximately $1,190,000 into a Premium Deposit
Fund which will be used to fund the remaining annual insurance premiums
under the split dollar life insurance contracts. As of September 30,
2001 and October 1, 2000, $2,135,000 has been capitalized to reflect
the cash surrender value of these contracts due the Company. See Note
25.
As of September 30, 2001, the Company had employment contracts with
four officers of the Company, providing for total annual payments of
approximately $1,631,000 plus bonuses through September 1, 2002.
Effective October 16, 2001, the compensation of the four officers was
reduced by amounts ranging from 15% to 25% for an undetermined length
of time.
16. STOCKHOLDERS' EQUITY
The Company's certificate of incorporation provides that the authorized
capital stock of the Company consists of 100,000,000 shares of common
stock and 1,000 shares of preferred stock, each having a par value of
$0.01 per share. At September 30, 2001, 32,662,611 shares of common
stock were issued or to be issued.
On December 18, 1996, the Board designated a new series of preferred
stock of the Company termed Series C Junior Participating Preferred
Stock, $.01 par value ("Series C Preferred") and reserved 450 shares of
the Series C Preferred for issuance. At the same time, the Board
declared a dividend of a right to acquire 1/100,000 of a share of
Series C Preferred to the holder of each share of common stock (the
"Rights") under a Shareholder Rights Plan. The Rights will trade with
the common stock and be detachable from the common stock and
exercisable only in the event of an acquisition of or grant of the
right to acquire 15% or more of the common stock by one party or common
group or a tender offer to acquire 15% or more of the common stock.
Common Stock
The holders of record of shares of common stock are entitled to receive
dividends when and as declared by the Board of Directors of the
Company, provided that the Company has funds legally available for the
payment of dividends and is not otherwise contractually restricted from
the payment of dividends. The Company declared no such dividends during
Fiscal 2001, Fiscal 2000 and Fiscal 1999.
Treasury Stock Transactions
During Fiscal 2001 and Fiscal 2000, the Company received 1,116,185 and
109,149 shares of its common stock, respectively, in lieu of cash for
the exercise of stock options from officers and employees of the
Company. These shares were valued at approximately $9,154,000 in Fiscal
2001 and $1,368,000 in Fiscal 2000 (which were calculated based on the
closing market value of the stock on the day prior to the exercise
dates) and are included as treasury shares as of September 30, 2001 and
October 1, 2000.
During Fiscal 2001 and Fiscal 2000, the Company repurchased 1,304,700
and 1,008,496 shares, respectively, of its common stock in the open
market for approximately $9,641,000 and $13,547,000, respectively.
During Fiscal 2001, the Company issued 2,132,040 shares of its common
stock (189,026 of which came from treasury) to directors, officers and
employees of the Company upon the exercise of stock options.
During Fiscal 2001 the Company received 6,420 shares of its common
stock from one of its benefit plans in settlement of a prior year
purchase issue. During Fiscal 2000, the Company repurchased 47,984 of
its common stock from its benefit plans for approximately $303,000.
Warrants
The Company has 366,395 warrants outstanding to purchase an aggregate
of 732,790 shares of its common stock at a price equal to $4.375 per
warrant, subject to adjustments under certain circumstances. All
outstanding warrants are exercisable at any time on or prior to June 1,
2003, at which time they will terminate and become void. The Company
originally issued 800,000 warrants to purchase an aggregate of
1,600,000 shares of its common stock in connection with the issuance of
its Senior Secured Notes in Fiscal 1993. The warrants were detachable
from the Senior Secured Notes and, therefore, were allocated a portion
of the proceeds in the amount of approximately $1,566,000, which was
their market value at the time they were issued. This amount was added
to additional paid-in capital. During Fiscal 2001, 1,490 warrants were
exercised resulting in cash proceeds of approximately $6,500 and the
issuance of 2,980 shares of the Company's common stock. During Fiscal
2000, 169,650 warrants were exercised resulting in cash proceeds of
approximately $742,000 and the issuance of 339,300 shares of the
Company's common stock.
Stock Compensation Plans
At September 30, 2001, the Company has seven stock-based compensation
plans, which are described below. The Company applies APB Opinion No.
25 and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for these plans
except as indicated below. Had compensation cost been determined based
on the fair value at the grant dates for awards under those plans
consistent with the method of SFAS No. 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands, except earnings per share information):
Fiscal Years Ended
---------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ------------ -------------
Net (loss) income:
As reported $ (51,835) $ 46,687 $ 5,520
Pro forma $ (61,109) $ 43,090 $ 4,778
(Loss) earnings per share - basic and diluted:
As reported $ (1.97) $ 1.87 $ 0.23
Pro forma $ (2.32) $ 1.73 $ 0.20
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants for the fiscal years ended
September 30, 2001, October 1, 2000 and September 26, 1999,
respectively: expected volatility of 72.84%, 58.65% and 44.16%,
dividend yield of 0% for all years, risk-free interest rates of 4.68%,
6.23% and 6.014% and expected lives of 2 to 10 years.
The Company has reserved 2,727,272 shares of common stock to be issued
and sold pursuant to the 1992 Stock Option Plan that was adopted by the
Company on September 27, 1992. Generally, of the options granted under
this plan, 60% vested on May 1, 1994 and the remainder vested on
November 1, 1995. Vesting provisions for any additional options will be
determined by the Board of Directors of the Company at the time of the
grant of such options. The stock options are exercisable over a period
determined by the Board of Directors or its Compensation Committee, but
no longer than ten years after the date granted.
During the fiscal year ended September 26, 1993, the Company adopted
the 1992 Non-Qualified Stock Option Plan available for non-officer
directors. This plan provides that directors who are not officers of
the Company are entitled to forego up to 100% of their annual retainers
in exchange for options to purchase the Company's common stock at an
option price of 50% of the market price of the underlying common stock
at the date of grant. The options are exercisable for a period of 10
years from the date of the grant of each option. Compensation expense
related to these options was approximately $95,000, $118,000 and
$109,000 during Fiscal 2001, Fiscal 2000 and Fiscal 1999, respectively.
During the fiscal year ended October 2, 1994, the Company adopted the
1994 Stock Option Plan available for certain key employees of the
Company. Up to 5,304,000 shares of common stock may be granted and
outstanding under this plan, provided that the aggregate number of
options that may be granted under the 1994 Stock Option Plan and all
other stock option plans of the Company for employees may not at any
time exceed in the aggregate 15% of the then currently authorized
common stock outstanding, on a fully diluted basis. Stock options
granted under this plan are exercisable until not later than January 1,
2004. After Fiscal 2001, no more options are to be granted under this
plan.
During the fiscal year ended September 29, 1996, the Company adopted
the 1995 Non-Qualified Stock Option Plan available for directors. Each
director is granted an option to purchase 20,000 shares of the
Company's common stock in the case of the initial grant and 35,000
shares for any subsequent grant. The initial grant occurred upon the
adoption of this plan or, in the case of new directors, 30 days after
becoming an eligible director of the Company. Options granted under
this plan have a term of three years and may be exercised nine months
after the date of the grant. This plan terminates on February 14, 2006.
No director who is not an officer of the Company may receive options to
purchase more than an aggregate of 60,000 shares of Common Stock in any
calendar year under all of the Company's Stock Option Plans. The plan
was amended by the Stockholders in 1999 to increase the annual amount
from 20,000 to 35,000 shares of the Company's common stock.
During Fiscal 2000, the Company adopted the 2000 Stock Plan available
for directors, officers and employees of the Company. The maximum
number of shares reserved for award is 250,000 shares of the Company's
common stock. Under the 2000 Stock Plan, restricted shares of common
stock are awarded to participating employees of the Company who meet or
exceed an annual spending goal of 10% of the employee's base salary
plus bonus potential on the purchase of the Company's common stock. If
the employee meets the goal, the Company will issue restricted common
stock to the employee with a value representing 25% of the dollar
amount paid for the purchased common shares. Each non-officer director
of the Company may participate in the plan by spending at least $25,000
to purchase stock during a calendar year. If that goal is met, the
Company will issue restricted common stock representing 25% of the
dollar amount paid for the purchased common shares for purchases up to
$37,500. The number of shares of restricted common stock to be awarded
is calculated based upon the closing market price of the Company's
common stock on the last trading day of the calendar year. The
restrictions on the common stock lapse ratably on an annual basis over
a 3-year period. During Fiscal 2001, the Company issued 8,641
restricted shares of its common stock and recorded compensation expense
of approximately $54,000 under the 2000 Stock Plan. No restricted stock
was issued or compensation expense recorded under the 2000 Stock Plan
in Fiscal 2000.
During Fiscal 2001, the Company adopted the 2001 Stock Option Plan for
certain key employees. Up to 5,000,000 shares of common stock of the
Company may be granted under this plan. The stock options are
exercisable over a period determined by the Board of Directors or its
Compensation Committee, but no longer than ten years after the date
granted. Unless the grant certificate states otherwise, stock options
under this plan will vest 20% each year over a five-year period.
During Fiscal 2001, the Company adopted the 2001 Non-Executive Stock
Option Plan for employees of the Company who are not officers or
directors of the Company. Up to 3,000,000 shares of common stock of the
Company may be granted under this plan. The stock options are
exercisable over a period determined by the Board of Directors or its
Compensation Committee, but no longer than ten years from the date
granted. Unless the grant certificate states otherwise, the vesting
period for stock options under this plan will vest 20% each year over a
five year period.
The following table summarizes all stock option transactions for the
fiscal years ended September 30, 2001, October 1, 2000 and September
26, 1999:
Fiscal Years Ended
---------------------------------------------------------------------------------
September 30, 2001 October 1, 2000 September 26, 1999
------------------------ ------------------------ -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Price Price Price
----------- ------------ ---------- --------- ---------- ----------
Outstanding at
Beginning of Year 5,936,619 $ 7.87 3,695,060 $ 2.87 4,352,786 $ 2.53
Grants 2,307,328 $ 8.17 3,382,079 $ 11.37 374,200 $ 3.88
Exercised (2,132,040) $ 4.43 (1,125,520) $ 1.91 (996,926) $ 1.71
Forfeited (44,688) $ 10.12 (15,000) $ 13.59 (35,000) $ 3.92
---------- ---------- ----------
Outstanding at End
of Year 6,067,219 $ 9.17 5,936,619 $ 7.87 3,695,060 $ 2.87
========== ========== ==========
Exercisable at End
of Year 2,397,025 2,676,093 2,059,210
========== ========== ==========
Weighted-average
fair value of
options granted
during the year $ 4.83 $ 8.30 $ 1.85
The following table summarizes information about stock options at
September 30, 2001:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------- -------------------------------
Number Weighted-Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 9/30/01 Contractual Life Exercise Price At 9/30/01 Exercise Price
--------------- ------------- ------------------ -------------- ------------- --------------
$ 0.00 - $ 2.99 1,216,730 2.92 Years $ 1.62 1,216,730 $ 1.62
$ 3.00 - $ 5.99 687,002 4.97 Years $ 4.44 534,178 $ 4.41
$ 6.00 - $ 8.99 1,696,589 9.01 Years $ 7.91 73,869 $ 7.19
$ 9.00 - $ 11.99 808,500 4.07 Years $ 9.47 219,700 $ 10.56
$ 12.00 - $ 14.99 155,148 7.59 Years $ 13.12 65,548 $ 12.74
$ 15.00 - $ 17.99 1,212,500 8.55 Years $ 17.18 5,600 $ 16.21
$ 18.00 - $ 20.99 2,750 8.68 Years $ 19.45 150 $ 18.00
$ 21.00 - $ 23.99 285,000 1.68 Years $ 23.03 280,650 $ 23.06
$ 29.25 3,000 8.50 Years $ 29.25 600 $ 29.25
--------- ---------
6,067,219 6.20 Years $ 9.17 2,397,025 $ 6.09
========= =========
17. NOTE RECEIVABLE
On June 10, 1996, the Company sold substantially all the assets net of
certain liabilities of its Ensolite closed cell foam division to
Rubatex Corporation ("Rubatex") for $25,000,000. Proceeds consisted of
cash of $20,000,000 and an unsecured promissory note receivable (the
"Note") in the amount of $5,000,000 of RBX Group, Inc. ("RBX"), the
parent of Rubatex. Interest on the Note was payable semi-annually at
11.75% per annum. The Note was to mature on May 1, 2006.
In January 1998, the Company brought suit to compel RBX to honor a
mandatory early redemption obligation under the terms of the $5,000,000
Note. In March 1998, Rubatex filed a counterclaim asserting that the
Ensolite machinery purchased was in breach of the Company's warranties
when Rubatex purchased it in June 1996. RBX did not make the
semi-annual interest payment on the Note of $293,750 on May 1, 1998.
The Company stopped accruing interest on the Note as of June 29, 1998.
As of September 26, 1999, the Company had accrued interest receivable
related to the Note of approximately $387,000. In March of 2000, the
Company fully reserved its note receivable and related accrued interest
from RBX in the amount of $5,387,000. This was a result of a
determination that based on recent events at RBX, which included the
effects of a prolonged strike at its major facility, the financial
condition of RBX had deteriorated such that collectibility of the note
receivable and related accrued interest was in doubt. On June 22, 2000,
the Company settled all outstanding claims and counterclaims with RBX
for a cash payment from RBX of $250,000. The settlement is included in
selling and administrative costs for the year ended October 1, 2000 and
was substantially offset by legal costs incurred.
18. INVESTMENT IN PREFERRED STOCK
On November 30, 1998, the Company purchased 642,857 shares of the
Series I Redeemable Convertible Preferred Stock ("Preferred Stock") of
Emcore for approximately $9,000,000 ($14.00 per share). The shares were
offered pursuant to a private placement by Emcore.
Dividends on the Preferred Stock were cumulative and were payable at
Emcore's option, in cash or additional shares of Preferred Stock on
March 31, June 30, September 30 and December 31, commencing December
31, 1998 at the annual rate of 2% per share of Preferred Stock on the
liquidation preference thereof (equivalent to $0.28 per annum per share
of Preferred Stock).
Shares of the Preferred Stock were convertible at any time, at the
option of the holders thereof, into shares of common stock of Emcore on
a one-for-one basis, subject to adjustment for certain events.
The Preferred Stock was redeemable, in whole or in part, at the option
of Emcore at any time Emcore's common stock traded at or above $28.00
per share for 30 consecutive trading days, at a price of $14.00 per
share plus accrued and unpaid dividends, if any, to the redemption
date. Emcore was required to provide not less than 30 days and not more
than 60 days notice of the redemption. The shares of Preferred Stock
were subject to mandatory redemption by Emcore on November 17, 2003 at
a price of $14.00 per share plus accrued and unpaid dividends.
In June of 1999, the Company converted 270,000 shares of the Preferred
Stock into 270,000 shares of Emcore common stock. The Company then sold
its 270,000 shares of Emcore common stock for $4,822,200 in conjunction
with a public stock offering by Emcore. The Company recognized a gain
on the sale of approximately $898,000, net of certain transaction
costs.
On September 26, 1999, the closing sales price of Emcore's common stock
on the Nasdaq National Market was $14.4375. This resulted in an
unrealized gain of $100,000 (net of taxes of $63,000) as of September
26, 1999.
During the first quarter of Fiscal 2000, the Company converted the
remaining 372,857 shares of its Emcore preferred stock into 372,857
shares of Emcore common stock. The common stock was then sold in the
open market for approximately $8,125,000. This resulted in a gain of
approximately $2,905,000, net of certain transaction costs.
19. EMPLOYEE COMPENSATION
Post-retirement Healthcare and Life Insurance Benefits
Certain retired employees are currently provided with specified
healthcare and life insurance benefits. Generally, the plan provides
for reimbursement of approved medical and prescription drug costs not
fully covered by Medicare. The plan also provides for certain
deductibles and co-payments. The life insurance benefits provide for
amounts based upon the retirees' compensation at the time of their
retirement. Eligibility requirements for such benefits vary by
division, but generally provide that benefits are available to
employees who retire after a certain age with specified years of
service or a combined total of age and years of service. The Company
has the right to modify or terminate certain of these benefits. The
Company's policy is to pay the actual expenses incurred by the
retirees; the Company does not intend to fund any amounts in excess of
those obligations. The Company is also obligated to provide benefits to
certain salaried retirees of Uniroyal Plastics Company, Inc. ("UPC"),
which is currently in liquidation proceedings under Chapter 7 of the
U.S. Bankruptcy Code and is an affiliate of predecessor companies, and
Uniroyal, Inc. ("Uniroyal") (not affiliated with the Company) who are
class members under a federal district court order. The Company and
Uniroyal, through Uniroyal Holdings, Inc., agreed to share on a 35%-65%
basis, respectively, the costs of providing medical, prescription drug
and life insurance benefits to these retirees. The Company is further
obligated to make payments to a Voluntary Employee Benefits Association
("VEBA") established to provide benefits to certain retirees of the
Predecessor Companies and UPC. The Company's post-retirement benefit
plans are not funded.
The Company adopted SFAS No. 106, Employer's Accounting for
Post-retirement Benefits Other than Pensions, as of September 27, 1992,
which requires that the cost of the foregoing benefits be recognized in
the Company's consolidated financial statements over an employee's
service period with the Company. The Company determined that the
accumulated post-retirement benefit obligation ("Transition
Obligation") of these plans upon adoption of SFAS No. 106 was
$28,085,000. The Company elected to defer the recognition of the
Transition Obligation and amortize it over the greater of the average
remaining service period or life expectancy period of the participants,
which were both expected to be approximately 16 years. In connection
with the Spartech Sale, the Company recognized approximately $6,341,000
of the transition obligation as a reduction of the gain on sale.
The components of net periodic benefit costs are as follows (in
thousands):
September 30, October 1, September 26,
2001 2000 1999
------------- ----------- -------------
Service cost $ 106 $ 132 $ 61
Interest cost 2,523 2,184 1,864
Amortization of prior service credit (14) (14) (14)
Amortization of transition obligation 375 683 1,114
Recognized actuarial loss 420 310 151
--------- --------- ---------
Net periodic benefit cost $ 3,410 $ 3,295 $ 3,176
========= ========= =========
A reconciliation of the beginning and ending balances of benefit
obligations and the funded status of the plans are as follows (in
thousands):
September 30, October 1,
2001 2000
------------ ----------
Change in benefit obligations:
Benefit obligation at beginning of year $ 31,669 $ 28,651
Service cost before expenses 106 132
Interest cost 2,523 2,184
Benefit payments (2,710) (2,827)
Actuarial (gain)/loss 4,212 3,529
--------- ---------
Benefit obligation at end of year $ 35,800 $ 31,669
========= =========
Reconciliation of funded status:
Benefit obligation at end of year $ 35,800 $ 31,669
Unrecognized actuarial loss (9,772) (5,980)
Unrecognized prior service credit 218 232
Unrecognized transition obligation (2,624) (2,999)
--------- ---------
Net amount recognized at year-end $ 23,622 $ 22,922
========= =========
The weighted average discount rate assumptions were 7.25% at September
30, 2001, 7.5% at October 1, 2000 and 6.75% at September 26, 1999.
The assumed healthcare cost trend rate used in measuring the healthcare
benefits for Fiscal 2001 through Fiscal 2005 was a 7.5% average annual
rate of increase in the per capita cost healthcare benefits. This rate
is assumed to change over the years as follows: 7.0% for the fiscal
years beginning 2006, 6.5% for the fiscal years beginning 2011, 6.0%
for the fiscal years beginning 2016, and 5.5% for the fiscal years
beginning 2021 and later.
Assumed healthcare cost trend rates have a significant effect on the
amounts reported for the healthcare plan. A one-percentage-point change
in assumed cost trend would have the following effects for Fiscal
2001(in thousands):
1% Point Increase 1% Point Decrease
----------------- -----------------
Effect on total of service and interest
cost components for 2001 $ 313 $ (261)
Effect on year-end 2001 post-retirement
benefit obligation 3,878 (3,258)
Post-retirement Benefit Plan
Effective October 1, 1998, the Company established an unfunded
post-retirement defined benefit plan for officers and certain key
employees of the Company (see Note 25).
The components of net periodic benefit costs are as follows (in
thousands):
September 30, October 1, September 26,
2001 2000 1999
------------- ----------- -------------
Service cost $ 488 $ 487 $ 525
Interest cost 72 35 -
---------- ---------- ----------
Net periodic benefit cost $ 560 $ 522 $ 525
========== ========== ==========
The following table provides a reconciliation of the changes in the
plan's benefit obligations and a reconciliation of the funded status
for Fiscal 2001 and Fiscal 2000 (in thousands):
September 30, October 1,
2001 2000
------------- ----------
Accrued benefit obligation at beginning of year $ 962 $ 525
Service cost 488 487
Interest cost 72 35
Benefits paid or transferred - (85)
---------- ----------
Accrued benefit obligation at end of year $ 1,522 $ 962
========== ==========
Projected benefit obligation $ 1,566 $ 903
Unrecognized (loss) gain (44) 59
---------- ----------
Accrued benefit obligation at end of year $ 1,522 $ 962
========== ==========
The discount rate used as of September 30, 2001 and October 1, 2000 was
7.25% and 8.0%, respectively.
In connection with the post-retirement defined benefit plan, the
Company purchased life insurance contracts on the lives of officers and
certain key employees of the Company during Fiscal 1999. Life insurance
premiums of approximately $454,000 and $482,000 were paid by the
Company in Fiscal 2001 and Fiscal 2000, respectively, for these
policies. As of September 30, 2001 and October 1, 2000, approximately
$981,000 and $660,000, respectively, have been capitalized to reflect
the cash surrender value of the contracts.
During Fiscal 2000, the post-retirement defined benefit plan was
amended for the officers of the Company. The amendment provided for
extended plan benefits. The extended benefits were immediately vested
and fully funded through life insurance products. The Company funded
and recognized an expense of approximately $2,300,000 in Fiscal 2000 in
connection with the plan amendment. This amount is included in selling
and administrative costs in Fiscal 2000.
Other Benefit Plans
The Company provided additional retirement benefits to the union wage
employees of the UEP division through a defined contribution savings
plan through December 2000. The plan provided for employee
contributions and employer matching contributions to employee savings.
Employer contributions were at rates per hour ranging generally from
$.05 to $.66 based on years of service. The expenses pertaining to this
plan amounted to approximately $13,000, $32,000 and $54,000 for Fiscal
2001, Fiscal 2000 and Fiscal 1999, respectively. See Note 25.
In addition, the Company provides a savings plan under Section 401(k)
of the Internal Revenue Code. The savings plan covers all eligible
salaried and non-union wage employees of the Company. The savings plan
allows all eligible employees to defer up to 15% of their income on a
pre-tax basis through contributions to the savings plan. For every
dollar an employee contributes, the Company may contribute an amount
equal to 25% of each participant's before-tax obligation up to 6% of
the participant's compensation. Such employer contribution may be made
in cash or in Company common stock. The expenses pertaining to this
savings plan for continuing operations were approximately $164,000,
$84,000 and $40,000 for Fiscal 2001, Fiscal 2000 and Fiscal 1999,
respectively. During Fiscal 2001, Fiscal 2000 and Fiscal 1999, the
Company contributed 19,993, 17,206 and 39,344 shares of its common
stock with a market value of approximately $124,000, $219,000 and
$199,000, respectively, to the savings plan. These contributions
included contributions to employees of discontinued operations for UAS
and UEP in Fiscal 2001 and UAS, UEP and HPPI in Fiscal 2000 and Fiscal
1999.
On August 4, 2000, the Board of Directors of the Company approved a
special contribution of Company common stock to the Company's 401(k)
savings plan for the plan years ended December 31, 2000 and December
31, 1999. The contribution was made to eligible plan participants
employed by the Company and certain of the Company's subsidiaries
during Fiscal 2001. The amount of the contribution was approximately
$2,235,000 and was made through a re-issuance of 298,612 shares of the
Company's common stock from treasury. As of September 30, 2000,
approximately $1,192,000 had been accrued and charged to selling and
administrative expenses of continuing operations and approximately
$965,000 had been accrued and charged to discontinued operations. Of
the remaining expense recognized in Fiscal Year 2001, $49,000 was
charged to selling and administrative of continuing operations and
$29,000 was charged to discontinued operations.
20. SALE OF THE AUTOMOTIVE DIVISION OF THE COATED FABRICS SEGMENT
In Fiscal 1999, the Company finalized its sale of the automotive
operations of the Coated Fabrics segment in Port Clinton, Ohio to
Canadian General-Tower, Limited. The original sale agreement was signed
on October 17, 1997 and the closings occurred in stages between October
1997 and July 1999. In connection with the finalization of the sale,
the Company recognized a gain of $667,000 in Fiscal 1999. The gain is
included in the discontinued operations of the Coated Fabrics segment.
See Note 25.
21. INCOME (LOSS) PER COMMON SHARE
For the years ended September 30, 2001, October 1, 2000 and September
26, 1999, the weighted average number of common shares outstanding for
the calculation of basic and diluted earnings per share was 26,286,148,
24,937,364 and 24,315,992, respectively. Inclusion of stock options to
purchase 6,067,219, 5,936,619 and 3,695,060, respectively, shares of
common stock at various prices and warrants to purchase 732,790,
735,770 and 1,075,070, respectively, shares of common stock at $2.1875
per share in the calculation of diluted earnings per share would have
been antidilutive.
22. RELATED PARTY TRANSACTIONS
The Company had an agreement with an investment banking firm, in which
one of the Company's directors is a principal, that expired on December
31, 2000. The investment banking firm has provided financial advisory
services to the Company for fees of approximately $2,452,000 and
$157,000 during Fiscal 2000 and Fiscal 1999, respectively. Of the
$2,452,000 incurred in Fiscal 2000, approximately $1,959,000 was paid
in connection with the Spartech Sale and $428,000 was paid in
connection with the acquisition of Sterling. No fees were paid to this
investment banking firm in Fiscal 2001.
During the fiscal years ended September 30, 2001, October 1, 2000 and
September 26, 1999, the Company incurred legal fees of approximately
$117,000, $448,000 and $299,000, respectively, with a law firm of which
one of the Company's directors is a senior partner. Approximately
$164,000 of legal fees incurred in Fiscal 2000 were paid in connection
with the acquisition of Sterling and the related common stock
registration.
During Fiscal 2001, the Company incurred legal fees of approximately
$530,000 to two other law firms of which two of the Company's directors
are partners. During Fiscal 2000, the Company incurred approximately
$117,000 of legal fees to one of these firms. No legal fees were paid
to either of these firms during Fiscal 1999.
During Fiscal 2000, the Company paid approximately $17,000 to a
relative of one of the Company's executive officers for consulting
services. No fees were paid to this relative in Fiscal 2001 or Fiscal
1999.
23. SEGMENT INFORMATION
The Company adopted SFAS No. 131, Disclosures About Segments of
Enterprise and Related Information, which establishes standards for
reporting information about a Company's operating segments, in the
fourth quarter of Fiscal 1999. Operating segments are defined as
components of an enterprise for which separate financial information is
available that is evaluated on a regular basis by the chief operating
decision maker, or decision making group, in deciding how to allocate
resources to an individual segment and in assessing performance of the
segment.
The Company's operations are classified as one reportable segment:
Compound Semiconductor and Optoelectronics. The Compound Semiconductor
and Optoelectronics segment manufactures wafers, epitaxial wafers, dies
and package-ready dies used in high brightness light-emitting diodes
(LEDs), power amplification and radio frequency applications.
The Compound Semiconductor and Optoelectronics segment includes
Uniroyal Compound Semiconductors, Inc. and its subsidiaries, Uniroyal
Optoelectronics, LLC, Sterling Semiconductor, Inc. and NorLux Corp. All
other subsidiaries are considered part of the corporate office.
The Company's assets and operations are located in the United States.
The principal markets for the Company's products are in the United
States and Asia. Export sales to foreign countries, based upon where
the products are shipped, were approximately $1,629,000, $1,885,000 and
$444,000 in Fiscal 2001, Fiscal 2000 and Fiscal 1999, respectively. In
Fiscal 2001, there were sales to three customers that represented
approximately 24.6%, 14.0% and 10.9%, respectively, of consolidated net
sales. In Fiscal 2000, sales to four customers represented 24.2%,
17.4%, 14.5% and 11.2%, respectively, of consolidated net sales. In
Fiscal 1999, sales to two customers represented 45.7% and 25.7%,
respectively, of consolidated net sales.
The accounting policies of the segment are the same as those described
in the summary of significant accounting policies. Management evaluates
a segment's performance based upon profit or loss from operations
before interest and income taxes.
Segment data for Fiscal 2001, Fiscal 2000 and Fiscal 1999 was as
follows (in thousands):
September 30, October 1, September 26,
2001 2000 1999
------------- ----------- -------------
Net Sales:
Compound Semiconductor and Optoelectronics $ 5,063 $ 3,023 $ 485
========== ========== ==========
Operating (loss) income:
Compound Semiconductor and Optoelectronics $ (45,505) $ (25,841) $ (5,080)
Corporate (8,560) (22,882) (5,102)
---------- ---------- ----------
Total $ (54,065) $ (48,723) $ (10,182)
========== ========== ==========
Identifiable assets:
Compound Semiconductor and Optoelectronics $ 98,251 $ 74,823 $ 22,474
Corporate 12,958 77,948 45,110
Discontinued operations 28,694 26,861 25,724
---------- ---------- ----------
Total $ 139,903 $ 179,632 $ 93,308
========== ========== ==========
Depreciation and other amortization:
Compound Semiconductor and Optoelectronics $ 13,566 $ 4,906 $ 210
Corporate 409 576 720
---------- ---------- ----------
Total $ 13,975 $ 5,482 $ 930
========== ========== ==========
Capital Expenditures:
Compound Semiconductor and Optoelectronics $ 28,660 $ 16,613 $ 21,353
Corporate - 147 787
Discontinued operations 926 12,287 8,677
---------- ---------- ----------
Total $ 29,586 $ 29,047 $ 30,817
========== ========== ==========
Included in the operating loss of the Compound Semiconductor and
Optoelectronics segment are the following corporate overhead
allocations for Fiscal 2001, Fiscal 2000 and Fiscal 1999, respectively:
$1,616,000, $1,207,000 and $875,000.
In Fiscal 2001, the amount of loss on assets to be disposed of included
in Corporate approximates $703,000. The amount of loss on assets to be
disposed of included in the Compound Semiconductors and Optoelectronics
segment approximates $686,000. The acquired IPR&D of $250,000 is
included in the Compound Semiconductor and Optoelectronics segment. The
write-down of goodwill of $9,816,000 is included in the Compound
Semiconductor and Optoelectronics segment.
In Fiscal 2000, the gain on the sale of the preferred stock investment,
the provision for uncollectible note receivable, the write-down of the
technology license and $1,116,000 of the loss on assets to be disposed
of (related to the real property) are included in Corporate. The
acquired IPR&D is included in the Compound Semiconductor and
Optoelectronics segment.
In Fiscal 1999, the gain on the sale of preferred stock is included in
Corporate.
24. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (in thousands):
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Fiscal 2001
-----------
Net sales $ 1,166 $ 1,004 $ 1,164 $ 1,729
Gross profit (loss) (3) (327) (844) (484)
Net loss $ (4,862) (5,901)(1) (6,130)(2) (34,942)(3)
Basic loss per share $ (0.19) $ (0.23) $ (0.23) $ (1.28)
Diluted loss per share $ (0.19) $ (0.23) $ (0.23) $ (1.28)
(1) Includes the following unusual adjustment:
o loss on assets to be disposed of totaling approximately
$492,000 (net of tax).
(2) Includes the following unusual adjustment:
o loss on assets to be disposed of totaling approximately
$316,000 (net of tax).
(3) Includes the following unusual adjustments:
o write-down of goodwill of approximately $9,816,000 for which
there is no tax effect;
o establishment of a deferred tax
asset valuation allowance of approximately $17,870,000;
o write-off of purchased in-process research and development of
approximately $157,000 (net of tax);
o loss on assets to be disposed of totaling approximately
$59,000 (net of tax); and
o loss of approximately $522,000 (net of taxes) resulting from
the finalization of the HPPI purchase price.
Fiscal 2000 First Quarter Second Quarter Third Quarter Fourth Quarter
----------- ------------- -------------- ------------- --------------
Net sales $ 614 $ 902 $ 304 $ 1,203
Gross profit (loss) 190 190 (7) (310)
Net income (loss) 2,420 60,225 (1) (1,827) (14,131) (2)
Basic earnings (loss) per
share $ 0.10 $ 2.44 $ (0.07) $ (0.54)
Diluted earnings (loss)
per share $ 0.09 $ 2.08 $ (0.07) $ (0.54)
(1) Includes the following unusual adjustments:
o gain of approximately $57,118,000 (net of tax) related to the
sale of HPPI;
o incentive payments and benefit costs to and for officers and
directors related to the achievement of certain strategic
initiatives of approximately $3,324,000 (net of tax);
o provision for an uncollectible note receivable of
approximately $3,286,000 (net of tax);
o loss on assets to be disposed of totaling approximately
$1,356,000 (net of tax); and
o tax benefit of approximately $13,702,000 related to the
utilization of a capital loss carryforward.
(2) Includes the following unusual adjustments:
o reduction in the selling price of HPPI of approximately
$1,297,000 (net of tax);
o write-off of purchased in-process research and development of
$6,590,000 for which there is no tax effect;
o write-off of approximately $2,440,000 (net of tax) related to
the technology license; and
o accrual of approximately $1,316,000 (net of tax) related to a
special contribution to the Company's 401(k) plan.
25. SUBSEQUENT EVENTS
Proposed Sale 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 by
April 2002, and should result in a gain.
The net assets of the discontinued operations of UEP have been
segregated on the September 30, 2001 and October 1, 2000 consolidated
balance sheets, the components of which are as follows (in thousands):
Net Assets of Discontinued Operations of UEP
September 30, October 1,
2001 2000
------------- -----------
Assets:
Cash $ 2 $ 2
Trade accounts receivable 3,010 3,327
Inventories 6,506 6,655
Prepaids and other assets 36 48
Property, plant and equipment - net 7,300 8,597
Other assets - net 2,096 2,286
----------- -----------
Total assets 18,950 20,915
----------- -----------
Liabilities:
Current portion of long-term debt 166 143
Trade accounts payable 2,341 1,956
Compensation and benefits 825 1,036
Taxes, other than income 52 46
Other accrued expenses 180 516
Long-term debt 269 368
Other liabilities 526 821
----------- -----------
Total liabilities 4,359 4,886
----------- -----------
Net assets of discontinued operations of UEP $ 14,591 $ 16,029
=========== ===========
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):
Fiscal Years Ended
------------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
-------------- ------------ -------------
Net sales $ 27,799 $ 33,651 $ 42,341
Cost of goods sold 22,488 26,181 31,655
Selling and administrative 3,765 4,867 4,837
Depreciation and other amortization 1,762 1,719 1,702
Loss on assets to be disposed of - 657 -
Gain on sale of division - - (667)
----------- ----------- ---------
(Loss) income before interest expense and income taxes (216) 227 4,814
Interest expense - net (22) (26) (28)
----------- ----------- ---------
(Loss) income before taxes (238) 201 4,786
Income tax expense (143) (310) (2,052)
----------- ----------- ---------
Net (loss) income from discontinued operations of UEP $ (381) $ (109) $ 2,734
=========== =========== =========
Liquidity
At December 30, 2001, the Company's principal source of liquidity is
$2,024,000 of cash and $711,000 of availability under a revolving
credit facility. In January 2002, the Company laid off 90 employees in
an effort to reduce operating costs and formalized its plans to sell
the Coated Fabrics segment in an effort to generate cash. The Company
has begun the due diligence process with a number of potential buyers
of the Company's Coated Fabrics segment. The Company continues to seek
additional sources of financing for its operations and is exploring the
sale of certain other assets as well.
To further reduce future benefit plan expenses and cash outflows, the
split dollar life insurance plan for executives and the defined benefit
retirement plan were terminated on December 28, 2001. This 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.
As of February 1, 2002, the Company has delayed certain promissory note
payments, capital lease payments and vendor payments due. The Company
continues to work with its debt holders and vendors on achievable
payment plans and has not been formally notified of any instance of
default. Under the terms of the capital lease agreements, acceleration
of the debt payments will not occur unless the Company has been
notified of an instance of default.
On February 1, 2002, the Company received, from a party
affiliated with the original purchaser of UAS, $1,326,000 for the sale
of a subordinated note, the preferred stock and warrants, the combined
face value of which totaled $4,000,000, and which were received in
connection with the sale of the Company's Specialty Adhesives
segment(see Note 6). In anticipation of the sale of the note, preferred
stock and warrants, the Company reduced the gain on the sale of the
discontinued operations of the Specialty Adhesives segment by
approximately $2,674,000 in the first quarter of Fiscal 2002.
On February 11, 2002, the Company reached a settlement with AFG-NVC,
LLC (Note 15) whereby the Company has agreed to pay 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.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Uniroyal Technology Corporation
We have audited the consolidated balance sheets of Uniroyal Technology
Corporation and subsidiaries (the "Company") as of September 30, 2001, and
October 1, 2000, and the related consolidated statements of operations,
comprehensive (loss) income, changes in stockholders' equity and cash flows for
the years ended September 30, 2001, October 1, 2000, and September 26, 1999, and
have issued our report thereon dated December 21, 2001 (February 11, 2002 as to
Note 25)(included in this Form 8-K), which report is unqualified and contains
an explanatory paragraph regarding the Company's ability to continue as a going
concern. Our audits also included the accompanying consolidated financial
statement schedule included in this Form 8-K. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Tampa, Florida
December 21, 2001
(February 11, 2002 as to Note 25)
SCHEDULE II
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------- ------------ --------- --------- ---------
CHARGED ADDITIONS
BALANCE AT (CREDITED)TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCTS. DEDUCTION PERIOD
------------------------------- --------- ----------- --------- --------- ----------
Allowance for Doubtful Accounts: (a) (b)
Year ended September 30, 2001 $ 5 $ - $ - $ - $ 5
========= ========== ========= ========= =========
Year ended October 1, 2000 $ - $ - $ 5 $ - $ 5
========= ========== ========= ========= =========
Year ended September 26, 1999 $ - $ - $ - $ - $ -
========= ========== ========= ========= =========
Allowance for Customer Claims:
Year ended September 30, 2001 $ - $ 43 $ - $ - $ 43
========= ========== ========= ========= =========
Year ended October 1, 2000 $ - $ - $ - $ - $ -
========= ========== ========= ========= =========
Year ended September 26, 1999 $ - $ - $ - $ - $ -
========= ========== ========= ========= =========
Inventory Reserves:
Year ended September 30, 2001 $ 80 $ 707 $ - $ (19) $ 768
========= ========== ========= ========= =========
Year ended October 1, 2000 $ 2 $ 30 $ 50 $ (2) $ 80
========= ========== ========= ========= =========
Year ended September 26, 1999 $ - $ 2 $ - $ - $ 2
========= ========== ========= ========= =========
Deferred Tax Valuation Allowance:
Year ended September 30, 2001 $ - $ 17,870 $ - $ - $ 17,870
========= ========== ========= ========= =========
Year ended October 1, 2000 $ 13,702 $ (13,702) $ - $ - $ -
========= ========== ========= ========= =========
Year ended September 26, 1999 $ - $ 13,702 $ - $ - $ 13,702
========= ========== ========= ========= =========
(a) Represents recovery of amounts previously written-off and reserves
established upon business acquisitions.
(b) Includes write-off of uncollectible accounts, customer returns and the
write-off of obsolete inventory.