Item 1. Business
General
Uniroyal Technology Corporation (the "Company") is a leader in the development, manufacture and sale of a broad range of materials employing plastics and specialty chemicals technologies used in the production of consumer, commercial and industrial products. Its products, many of which are based on proprietary technology, include thermoplastic sheet for use in the manufacture of seating, interior paneling and other applications in the transportation, recreational, agricultural and industrial vehicle and computer manufacturing industries; acrylic sheet for use in the manufacture of aircraft canopies, cabin windows and windshields, tanning shields and bullet resistant barriers; acrylic rods and tubes used in the manufacture of orthopedic devices and hard contact lenses; a wide selection of plastic vinyl coated fabrics for use in automobile and furniture manufacturing; and liquid adhesives and sealants for use in the commercial roofing industry and in the manufacture of furniture, truck trailers and recreational vehicles. The Company's technologies allow it to incorporate into its specialized materials, such as thermoplastic and acrylic sheets, performance characteristics, such as fire retardancy, static dissipation, weatherability, optical clarity, high strength to weight ratio, light filtration capability and others required in the specialty markets on which it focuses. The Company is a leading supplier in such markets due to its ability to provide materials with such performance characteristics, to customize such materials and to provide technical and customer support in connection with the use of its products in manufacturing. The Company has also constructed a plant in Tampa, Florida for the production of wafers and dies for high brightness light emitting diodes (LEDs) for use in the lighting industry. The Company anticipates commercial production at the Tampa plant during the second quarter of Fiscal 2000.
The manufacturing operations of the Company are conducted at thirteen sites located in Arizona, Florida, Indiana, Iowa, Connecticut, New Jersey, California, Georgia, and Wisconsin, through four business segments: High Performance Plastics, Coated Fabrics, Specialty Adhesives and Optoelectronics. The High Performance Plastics Segment of the Company's business consists of the Company's wholly-owned subsidiary High Performance Plastics, Inc. ("HPPI"). High Performance Plastics manufactures specialty and general purpose thermoplastic sheet, injection molding resins, color concentrates, extruded profiles and fabricates acrylic sheet for the aerospace, marine, specialty and general purpose markets as well as acrylic rods and tubes. The Company's wholly-owned subsidiary, Uniroyal Engineered Products, Inc. ("UEPI"), operates two business segments, the Coated Fabrics Segment and the Specialty Adhesives Segment. The Coated Fabrics Segment manufactures the Company's line of vinyl coated fabrics. The Specialty Adhesives Segment (formerly, the Specialty Foams and Adhesives Segment), manufactures liquid adhesives and sealants. The Optoelectronics Segment will manufacture epitaxial wafers, dies and package-ready dies used in high brightness LEDs. See "Corporate Developments Completion of the Uniroyal Optoelectronics, LLC Plant.
The Company's Fiscal 1999 net sales were approximately $201.4 million. Approximate net sales for each of the Company's four business segments during such period were as follows: High Performance Plastics - $130.2 million, Coated Fabrics - $42.3 million, and Specialty Adhesives - $28.4 million, and Optoelectronics - $0.5 million. For certain financial information with respect to the Company's business segments, see "Note 19 to Consolidated Financial Statements."
Corporate Developments
The following are certain corporate developments which occurred in Fiscal 1999. The descriptions of such developments should be read in conjunction with the other parts of this Form 10-K and with the Consolidated Financial Statements and Notes to Consolidated Financial Statements and other financial information which form a part hereof.
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 Corporation ("Emcore") for approximately $9.0 million ($14.00 per share). The shares were offered pursuant to a private placement by Emcore.
Dividends on the Preferred Stock are cumulative and are 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 are 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. On September 24, 1999, the closing sales price of Emcore's common stock on the Nasdaq National Market was $14.4375.
The Preferred Stock is redeemable, in whole or in part, at the option of Emcore at any time Emcore's common stock has 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 is required to provide not less than 30 days and not more than 60 days notice of the redemption. The shares of Preferred Stock are subject to mandatory redemption by Emcore on November 17, 2003.
On November 30, 1998, Emcore also made a capital contribution to Uniroyal Optoelectronics, LLC of $5.0 million. The Company will fund its equivalent capital contribution to the joint venture of approximately $5.2 million as cash is required by the joint venture.
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 $4.8 million 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.
Subsequent to September 26, 1999, the Company converted 230,657 shares of the Preferred Stock and sold the underlying Emcore common stock in the open market for an aggregate of $4.3 million. The Company will recognize a gain on the sale of approximately $1.1 million, net of certain transaction costs, in Fiscal 2000.
Acquisition of Happel Marine, Inc.
On June 14, 1999, the Company acquired 100% of the common stock of Happel Marine, Inc., an acrylic sheet fabricator for the marine industry, for $5,193,500. The purchase price was comprised of $909,252 in cash, unsecured promissory notes aggregating $2,911,007 and 145,078 shares of common stock of the Company valued at $1,373,241, which approximated the market value of such shares on the acquisition date. The promissory notes consist of a $2,400,000 note payable in four equal annual installments beginning January 15, 2000, plus accrued interest and a $511,007 note payable in two equal annual installments beginning January 15, 2000 plus accrued interest. The purchase price was subsequently increased for changes in working capital between April 30, 1999 and June 13, 1999 by $122,137. The increase was incorporated into the note payable balances. The note balances increased to $2,500,030 and $533,114, respectively. Effective September 1, 1999, Happel Marine, Inc. was merged into a subsidiary of the Company and became a division of HPPI.
Uniroyal Engineered Products, Inc.
On April 1, 1999, the Company transferred all of the net assets of the Coated Fabrics Segment and all of the net assets of the Specialty Adhesives Segment to a newly created wholly-owned subsidiary, Uniroyal Engineered Products, Inc. On that same day, Uniroyal Engineered Products, Inc. assumed the obligations of the Company under the revolving credit agreement with the CIT Group/Business Credit, Inc. ("CIT").
Completion of the Uniroyal Optoelectronics, LLC Plant
The build-out of the Uniroyal Optoelectronics, LLC plant in Tampa, Florida was substantially completed during Fiscal 1999 at a cost of approximately $11 million. Additional machinery and equipment of approximately $10 million was purchased during Fiscal 1999. The plant will ultimately manufacture epitaxial wafers, dies and package-ready devices for use in high brightness LEDs. The Company anticipates commercial production at the Tampa plant in the second quarter of Fiscal 2000. During Fiscal 1999, the Company incurred approximately $4.6 million of start-up costs that are included in selling and general administrative expenses.
Completion of the Disposition of the Automotive Operations
On October 17, 1997, the Company agreed to sell certain assets of the automotive operations of the Coated Fabrics Segment located at the Company's Port Clinton, Ohio facility for approximately $5.3 million plus the value of purchased inventories and plus or minus adjustments contingent upon the transfer of certain automobile programs. The Company received $4.9 million in July 1998 and received approximately $1.5 million during Fiscal 1999. During the fiscal year ended September 26, 1999, the Company recognized approximately $617,000 of income relating to the sale of the automotive operations. The Company ceased production and closed the Port Clinton facility in November 1998. The Port Clinton real property and certain machinery and equipment not purchased by the buyer are listed as held for sale at September 26, 1999.
Business Segments
High Performance Plastics Segment
The High Performance Plastics Segment of the Company's business accounted for approximately $130.2 million (approximately 65 percent (65%)) of the Company's net sales in Fiscal 1999. It consists of two product groups: Royalite, which manufactures thermoplastic products and Polycast, which manufactures acrylic products. The products of this Segment include:
o thermoplastic sheet produced by Royalite for use in the manufacture of seating, interior paneling and other applications in the transportation, recreational, agricultural and industrial vehicle and computer manufacturing industries,
o acrylic sheet produced by Polycast for use in the manufacture of aircraft canopies, cabin windows and windshields, tanning bed shields, bullet resistant barriers and other commercial applications,
o acrylic rods and tubes produced by Polycast and used in the manufacture of displays, orthopedic devices and hard contact lenses, and
o acrylic and thermoplastic parts and fittings for the marine industry.
Royalite - Thermoplastic Products
General
Royalite is a leading manufacturer of custom thermoplastic products. Royalite manufactures thermoplastic sheet from a variety of polymers, such as acrylonitrile butadiene styrene (ABS) and polyvinyl chloride (PVC), made from the polymerization of monomers, which can be reshaped after they have been formed by the application of heat and are used in the manufacture of a wide assortment of commercial and consumer products. Royalite's products include thermoplastic sheet, injection molding resins, color concentrates and extruded profiles.
Royalite thermoplastic sheet is constructed of:
o solid plastic,
a core of cost effective plastic covered with a thin o layer of high- quality thermoplastic, or
a base or subtrate of plastic foam surrounded by solid o thermoplastic.
Royalite manufactures two general types of thermoplastic sheet:
o specialized sheet, made by varying the polymer and chemical components of the sheet in order to achieve particular performance characteristics, and
o general purpose sheet, which Royalite's customers use in a variety of products that do not require such particular performance characteristics.
Royalite sells its thermoplastic sheet to:
o equipment manufacturers, who incorporate the sheet into their products,
o custom fabricators, thermoformers and injection molders, who cut, form and process the material for specific applications and supply finished components to original equipment manufacturers (OEMs), and
o distributors, who resell raw sheet to equipment manufacturers or custom fabricators.
Royalite maintains highly knowledgeable technical representatives who work directly with customers seeking to ensure that the materials used in the manufacture of a customer's product conform to the customer's specifications and work efficiently with the customer's manufacturing processes. When a customer is in the initial stages of developing a product requiring a thermoplastic component, Royalite uses its technological capabilities and scientific expertise to design and produce customized thermoplastic sheet, which the customer then generally "thermoforms" through the application of heat into particular applications to be incorporated into its final product. "Thermoforming" is used in connection with the manufacture of thermoplastic components not required in large volume manufacturing runs.
When a customer's unit volume of a product attains levels at which it becomes economical for the customer to manufacture the thermoplastic application by injection molding, a process that requires greater up-front capital expenditures, but yields lower costs per additional unit, relative to thermoforming, Royalite can continue to supply the customer with the polymer resins and color thermoforming. The Company believes that such product lines will enhance the division's specialty sheet lines by assuring customers that Royalite will be able to meet their specialized thermoplastic needs throughout every stage of a product's life cycle.
Specialty Thermoplastic Sheet
Royalite sells specialty thermoplastic sheet into a number of niche markets, depending upon the performance characteristics of the sheet. The following table sets forth the particular performance characteristics and the related principal uses of the specialized sheet:
Performance Characteristics Principal Uses --------------------------- ----------------------- Flame and smoke retardancy Mass transportation vehicle seating and interior panels, aircraft interior parts and computer and other electronic equipment component housings
Static dissipation and conductivity Computer chip carriers, hard disc drive housings and electronic tote boxes
Weatherability/temperature resistance Marine and recreational vehicle instrument panels, interior parts for agricultural and other off road vehicles and exterior boat parts
Buoyant, hydrodynamic and/or Canoes, kayaks, other high strength-to-weight-ratio watersport crafts, amusement park vehicles and large exterior equipment housings
The Company believes that Royalite has a substantial share of the markets in which it competes for specialty thermoplastic sheet due to Royalite's ability to manufacture sheet with the wide variety of performance characteristics outlined above. In many cases, Royalite customizes a product to meet its customers' exact specifications. Net sales of specialty thermoplastic sheet accounted for approximately 67 percent (67%) of total net sales by Royalite during Fiscal 1999.
General Purpose Thermoplastic Sheet
By contrast to specialty thermoplastic sheet, general purpose thermoplastic sheet is used in the manufacture of numerous consumer and industrial products, such as luggage, musical instrument and equipment cases, tote boxes and vehicle mud flaps, which do not require that the thermoplastic material used in their manufacture possess any of the performance characteristics that distinguish specialty sheet. The market for general purpose thermoplastic sheet is significantly broader than the market for specialty thermoplastic sheet due to the almost limitless uses to which one can put such sheet in the manufacture of products. Such market is generally characterized by intense competition, high volume and low margins. Royalite does not have a significant share of this market. Sales of general purpose sheet during Fiscal 1999 accounted for approximately 30 percent (30%) of total net sales by Royalite.
Injection Molding Resins, Color Concentrates and Extruded Profile Products
In addition to its extensive list of sheet products, Royalite also produces injection molding resins, some of which use the same proprietary formulations as the sheet products, and extruded profile products.
Royalite introduced injection molding resin products as part of the "life cycle sourcing" strategy that Royalite implemented to satisfy each customer's needs for thermoplastic material for any particular product from that product's development stage through maturity. When an existing customer is ready to switch from thermoforming to injection molding, the customer can avoid any disruption in its production that may result from having to qualify a thermoplastic material from another manufacturer by using its injection molding resins and color concentrates, which have already been customized to meet the customer's particular specifications.
The Company believes that there are significant opportunities for growth in this market and that such product lines will enhance the division's specialty sheet lines by assuring customers that Royalite will be able to meet their specialized thermoplastic needs throughout every stage of a product's life cycle. In addition to supporting specialty sheet customers, the focus of the injection resin program has widened to the injection resin market in total, not just sheet conversions.
Royalite also produces extruded profile products, including both proprietary and general purpose materials. The products are used for applications requiring flexibility and resilience, such as boat dock bumpers and gaskets that Polycast uses in the production of acrylic sheet. This product line was implemented to utilize fully Royalite's available production capacity at its Warsaw, Indiana facility. Even though sales of extruded profile products constitute less than three percent of net sales of Royalite for Fiscal 1999, the Company believes that there are significant opportunities for growth in this market. Extruded profile products sales are also enhanced by sales of sheet, as many applications require thermoplastic material in sheet, profile and injection resin forms.
Competition
The market for thermoplastic sheet in the United States is highly competitive, with companies competing primarily on the basis of product specifications, price, customer service and technical support. Royalite competes in this market principally by maintaining or increasing its market share in the specialty thermoplastic niche markets described above. See "- Royalite - Thermoplastic Products-General." Royalite competes effectively in this market by providing:
o custom product development,
o state-of-the-art color technology,
o strong customer service through technical support, and
o competitive prices.
Royalite has polymer expertise and capabilities to customize the performance characteristics and color of its thermoplastic products, unlike many of its competitors. Royalite's technological capabilities have also permitted it to develop successful new products which enhance its competitiveness in this Segment. For example, Royalite recently introduced low smoke, low heat, fire retardant material for aircraft and mass transit interiors and graffiti-resistance seating material, developed for the mass transportation market. In addition, Royalite maintains highly knowledgeable technical representatives who work directly with customers to ensure that the division's materials used in the manufacture of a customer's product conform to the customer's specifications and work efficiently with the customer's manufacturing processes.
Royalite is also able to compete effectively with respect to price due in part to its low production costs, its ability to produce its own color concentrates and savings resulting from its use of recycled material in the manufacture of thermoplastic sheet. See "-Royalite - Thermoplastic Products - Raw Materials." The Company believes that Royalite's ability to produce internally and to laminate a thin layer of high quality colored thermoplastic film over a less costly substrate allows Royalite to compete favorably with most other specialty thermoplastic sheet manufacturers which use a single layer of relatively expensive colored plastic sheet to produce the desired end product.
Royalite's principal thermoplastics competitors, and the markets in which Royalite competes, are set forth in the table below:
Market Principal Competitors ----------------------- ------------------------------ o Flame and smoke retardancy Empire Plastics Kleerdex Company Spartech Corporation
o Static dissipation and conductivity B. F. Goodrich Performance Materials H.M.S.
o Weatherability/temperature resistance Spartech Corporation
o Buoyant, hydrodynamic and/or high strength-to-weight ratio Manufacturers of wood and fiberglass products
o General purpose Primex Plastics Corp. Spartech Corporation
Royalite's competitors have in the past increased their market shares in the thermoplastic industry generally through acquisitions.
Marketing
Royalite's thermoplastic sheet products are marketed under the ROYALITE(R) and SPECTRUM(R) brand names. Thermoplastic sheet with specialized characteristics is also marketed under individual brand names, such as ROYALSTAT(R) (thermoplastic sheet designed to dissipate or conduct static electric charges), ROYALEX(R) (multilayer thermoplastic sheet with a foam core and highly weather-resistant layer on one or both sides, resulting in a high strength-to-weight ratio, designed for recreational, marine and sporting applications), and ROYALTHOTIC(R) (thermoplastic sheet designed to be thermoformed at low temperatures to permit orthopedic medical practitioners to form individual patient orthopedic devices).
Royalite markets its thermoplastic products primarily through a national sales force of 14 sales representatives, who are its employees, and through wholesale distributors to whom Royalite supplies its products for resale to fabricators and manufacturers. Representative customers and end users of Royalite's thermoplastic products include:
o American Seating Company,
o Bombardier, Inc.,
o Commercial Plastics and Supplies Corp.,
o Curbell Plastics, a division of Curbell, Inc.,
o Hewlett-Packard Company,
o Laird Plastics, Inc.,
o The Boeing Company,
o National Railroad Passenger Corp. (Amtrak), and
o Seagate Technology, Inc.
Royalite has a broad customer base for its thermoplastic products and does not believe that it is dependent upon any single customer or group of customers for sale of its thermoplastic products. Pricing and terms offered to customers are generally consistent with those found in the industry.
Manufacturing Facilities
Royalite manufactures its thermoplastic products at three wholly-owned facilities, the largest of which is located in Warsaw, Indiana. The Company's other thermoplastic sheet manufacturing facilities are located in Rome, Georgia and Redlands, California. See "Item 2.
Item 2. Properties
The following table sets forth the location, size, general character and nature of the Company's facilities:
All of the properties owned by the High Performance Plastics Segment are subject to the liens of mortgages securing HPPI's credit agreement with Fleet National Bank. See "Note 10 to Consolidated Financial Statements."
In conjunction with plant consolidations at the Polycast division, see "Note 2 to Consolidated Financial Statements," and in order to address concerns of the Federal Trade Commission, see "Item 3.
Item 3. Legal Proceedings
By letter dated January 30, 1998, the Denver Regional Office of the U.S. Federal Trade Commission ("FTC") notified the Company that it was conducting a non-public investigation into the Company's acquisition of the Townsend Plastics Division of Townsend Industries in September 1997. The purpose of the investigation was to determine whether the transaction violated Section 7 of the Clayton Act, 15 U.S.C. Section 18, Section 5 of the Federal Trade Commission Act, 15 U.S.C. Section 45, or any other law enforced by the FTC. The Company has been cooperating with the FTC in its investigation. The Company has been in discussions with the staff of the FTC seeking to meet the concerns of both the Company and the FTC. Management does not expect the cost of compliance with the FTC requests to have a material adverse effect upon the Company's results of operations, cash flows or financial position. The Company is currently seeking to sell certain assets to another entity that could compete with Townsend/Glasflex in order to increase competition in the markets served by Townsend/Glasflex.
The Company is involved in certain proceedings in the ordinary course of its business which, if determined adversely to the Company would, in the opinion of management, not have a material adverse effect on the Company or its operations.
In connection with its reorganization, the Company entered into a number of settlement agreements, including certain agreements relating to environmental matters. See "Item 1. Business - History of the Company - Predecessor Companies."
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of Fiscal 1999 to a vote of security holders, through the solicitation of proxies or otherwise.
Part II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Prior to the effective date of the Plan of Reorganization, none of the Company's common stock, par value $.01 per share (the "Common Stock"), was issued, and consequently there was no public market for the Common Stock. The Common Stock was admitted to trading on the NASDAQ National Market System ("NASDAQ") on September 28, 1992 and trades under the symbol "UTCI." At the close of trading on November 30, 1999, the price per share of Common Stock was $16.50.
As of November 30, 1999, there were 1,048 holders of record of shares of Common Stock.
The following table sets forth the high and low sales price per share of the Company's Common Stock as reported by NASDAQ for the indicated dates:
The 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 such dividends and is not otherwise contractually restricted from making payment thereof. The Company has not paid any cash dividends on the common stock in the last three fiscal years. The Company's ability to pay cash dividends on Common Stock was previously restricted by the indenture in connection with the Company's Senior Secured Notes. See "Note 10 to Consolidated Financial Statements."
Item 6.
Item 6. Selected Financial Data
The following historical financial data as of September 26, 1999 and September 27, 1998 and for each of the three years in the period ended September 26, 1999 have been derived from consolidated financial statements of the Company audited by Deloitte & Touche LLP and contained elsewhere in this Form 10-K. The selected historical financial data presented below as of September 28, 1997, September 29, 1996 and October 1, 1995 and for the fiscal years ended September 26, 1996 and October 1, 1995 have been derived from audited financial statements of the Company. All of the financial data set forth below should be read in conjunction with the Consolidated Financial Statements and related notes and other financial information contained in this Form 10-K.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis by the Company's management should be read in conjunction with "Item 6. Selected Financial Data" and "Item 8. Consolidated Financial Statements and Supplementary Data" appearing elsewhere in this Form 10-K.
Results Of Operations
Comparison of Fiscal 1999 with Fiscal 1998
Net Sales. The Company's net sales decreased approximately 9% in Fiscal 1999 to $201.4 million from $220.6 million in Fiscal 1998. The decrease is primarily attributable to the sale of the automotive operations of the Coated Fabrics Segment in Fiscal 1998 and the gradual phase-out of those operations. Excluding automotive operations from both periods, sales increased approximately 5% in Fiscal 1999 compared to Fiscal 1998.
Net sales in the High Performance Plastics Segment increased in Fiscal 1999 by approximately 1% to $130.2 million from $128.6 million in Fiscal 1998. Declines in unit volume of Royalite thermoplastic products and Polycast acrylic sheet were more than offset by incremental sales resulting from the acquisition of ViPlex Corporation in the third quarter of Fiscal 1998 and the acquisition of Happel Marine, Inc. in the third quarter of Fiscal 1999.
The Coated Fabrics Segment's net sales decreased approximately 38% in Fiscal 1999 to $42.3 million from $67.9 million in Fiscal 1998. The decrease resulted primarily from a decline in automotive sales due to the gradual phase-out of its automotive operations. See "Item 1. Business - Corporate Developments - Completion of the Disposition of the Automotive Operations." Automotive sales approximated $13.1 million during Fiscal 1999 compared to approximately $40.4 million in Fiscal 1998. Excluding automotive sales from both periods, sales of Naugahyde(R) vinyl coated fabrics increased approximately 6% in Fiscal 1999 as compared to Fiscal 1998 as a result of an increase in unit volume and selling prices.
Net sales in the Specialty Adhesives Segment increased in Fiscal 1999 by approximately 18% to $28.4 million from $24.1 million in Fiscal 1998. This increase in sales is primarily attributable a strong demand for roofing adhesives and sealants and increased sales as a result of a tolling agreement with a major adhesives company.
Net sales in the Optoelectronics Segment were $485,000 during Fiscal 1999. The Segment is in the developmental stage. Inventory was provided to the Segment under a supply agreement with the Segment's joint venture partner. The Tampa, Florida production facility is expected to begin production for commercial applications in the second quarter of Fiscal 2000. The Segment did not have sales during Fiscal 1998.
Income Before Interest, Income Taxes, Minority Interest and Extraordinary Item. In Fiscal 1999, the Company had income before interest, income taxes, minority interest and extraordinary item of $12.8 million as compared to income before interest, income taxes, minority interest and extraordinary item of $22.8 million for Fiscal 1998. The decrease is primarily due to a loss of revenues associated with the gradual phase-out of the automotive operations of the Coated Fabrics Segment, temporary production inefficiencies as a result of a major plant consolidation at the High Performance Plastics Segment and start-up costs for the Optoelectronics Segment.
Income before interest, income taxes, minority interest and extraordinary item for the High Performance Plastics Segment decreased in Fiscal 1999 by approximately 4% to $15.5 million from $16.1 million in Fiscal 1998. The decrease is due to temporary production inefficiencies as a result of a major plant consolidation at the Polycast acrylic division as well as reduced sales volume for both Royalite thermoplastic products and Polycast acrylic products.
The Coated Fabrics Segment's income before interest, income taxes, minority interest and extraordinary item in Fiscal 1999 was approximately $4.2 million compared to income before interest, income taxes, minority interest and extraordinary item of $8.9 million in Fiscal 1998. The decrease of $4.7 million was principally due to the loss of revenues from the gradual phase-out of its automotive operations, as well as certain incremental costs related to the closure of the Port Clinton, Ohio facility used to produce automotive products.
Income before interest, income taxes, minority interest and extraordinary item for the Specialty Adhesives Segment increased approximately 42% to $2.7 million in Fiscal 1999 from $1.9 million in Fiscal 1998. The increase is primarily a result of increased sales volume.
Loss before interest, income taxes, minority interest and extraordinary item for the Optoelectronics Segment was $5.1 million in Fiscal 1999 compared to a loss of $398,000 in Fiscal 1998. The loss is attributable to start-up expenses incurred by the Optoelectronics Segment.
Amortization of reorganization value in excess of amounts allocable to identifiable assets in Fiscal 1999 was zero compared to $377,000 in Fiscal 1998. The decrease resulted from the write-off of the remaining reorganization value in excess of amounts allocable to identifiable assets in the third quarter of Fiscal 1998. The write-off was in conjunction with the reduction of the deferred tax valuation allowance relating to the acquired tax loss carryforward benefits.
Approximately $4.5 million of miscellaneous expense in Fiscal 1999 was not allocated to any segment of the Company's business compared to $3.3 million in Fiscal 1998.
Interest Expense. Interest expense in Fiscal 1999 and Fiscal 1998 approximated $9.4 million. Overall, the effect of the increase in debt was offset by a decrease in overall interest rates obtained through the Fiscal 1998 refinancing. See "Note 10 to Consolidated Financial Statements."
Income Tax Expense. Income tax expense in Fiscal 1999 was approximately $155,000 compared to $5.6 million in Fiscal 1998. The provisions for income tax benefit were calculated by the Company through use of the effective income tax rates based upon its actual income. The Fiscal 1999 tax expense was reduced approximately $2.3 million due to a tax benefit recognized through the carryback effect of a Fiscal 1999 capital loss.
Extraordinary Loss on the Extinguishment of Debt. The extraordinary loss on the extinguishment of debt during Fiscal 1998 was $5.6 million. This amount represents the loss recognized when the Company early retired the remaining $72.3 million of its 11.75% Senior Secured Notes, including a call premium payment of 4.41% and write-off of applicable debt issuance cost and unamortized debt discount, net of income tax benefit of approximately $2.8 million. See "Note 10 to Consolidated Financial Statements."
Comparison of Fiscal 1998 with Fiscal 1997
Net Sales. The Company's net sales increased approximately 6% in Fiscal 1998 to $220.6 million from $208.5 million in Fiscal 1997.
Net sales in the High Performance Plastics Segment increased in Fiscal 1998 by approximately 8% to $128.6 million from $118.8 million in Fiscal 1997. The increase is due to the net effect of an increase in unit volume at Royalite which was slightly offset by a small decline in overall average unit selling prices combined with the net effect of a slight decline in unit volume at Polycast which was more than offset by an increase in average unit selling prices. The High Performance Plastics Segment also benefited from the acquisitions of the Lucite(R) S-A-R business and Townsend Plastics which were acquired during the fourth quarter of Fiscal 1997, and the acquisition of ViPlex Corporation, which was acquired on May 22, 1998.
The Coated Fabrics Segment's net sales decreased approximately 1% in Fiscal 1998 to $67.9 million from $68.8 million in Fiscal 1997. The decrease resulted primarily from a decline in automotive sales due to the gradual phase-out of its automotive operations. The decline was partially offset by an increase in selling prices for the Segment's Naugahyde(R) vinyl coated fabrics.
Net sales in the Specialty Adhesives Segment increased in Fiscal 1998 by approximately 15% to $24.1 million from $20.9 million in Fiscal 1997. This increase in sales is primarily attributable to the acquisition of C. Gunther Company on March 31, 1997, increased sales of Hydra Fast-En(R) products, increased sales of Silaprene(R) primarily in the truck body and trailer markets and increased sales as a result of a tolling agreement with a major adhesives company.
Income Before Interest, Income Taxes, Minority Interest and Extraordinary Item. In Fiscal 1998, the Company had income before interest, income taxes, minority interest and extraordinary item of $22.8 million as compared to income before interest, income taxes, minority interest and extraordinary item of $10.6 million for Fiscal 1997. All of the Company's major business segments recorded significant increases in Fiscal 1998.
Income before interest, income taxes, minority interest and extraordinary item for the High Performance Plastics Segment increased in Fiscal 1998 by approximately 54% to $16.1 million from $10.5 million in Fiscal 1997. The increase was a result of a more favorable sales mix leading to higher margins for both the Royalite and Polycast divisions, incremental earnings from prior year and current year acquisitions and a change in methodology for the allocation of corporate overhead expenses.
The Coated Fabrics Segment's income before interest, income taxes, minority interest and extraordinary item in Fiscal 1998 was approximately $8.9 million compared to income before interest, income taxes, minority interest and extraordinary item of $2.1 million in Fiscal 1997. The increase of $6.8 million was principally due to the net result of lower manufacturing costs for the Segment's automotive operations as a result of the gradual phase-out, the reversal of rebate accruals applicable to such business and a change in the methodology for the allocation of corporate overhead expenses. Also, increased production costs were incurred in Fiscal 1997 as a result of a raw materials supplier's decision to exit its business. As a result, the Segment incurred additional costs in Fiscal 1997 to qualify its products using comparable raw materials available from other supply sources.
Income before interest, income taxes, minority interest and extraordinary item for the Specialty Adhesives Segment was $1.9 million in Fiscal 1998 as compared to a loss before interest, income taxes, minority interest and extraordinary item of $346,000 in Fiscal 1997. The income before interest, income taxes, minority interest and extraordinary item in Fiscal 1998 was due to significantly increased sales, the incremental earnings from the acquisition of C. Gunther Company, operating efficiencies as a result of the relocation to the new South Bend facility and a change in methodology for the allocation of corporate overhead expenses.
Loss before interest, income taxes, minority interest and extraordinary item for the Optoelectronics Segment was $398,000 in Fiscal 1998. The loss is attributable to start-up expenses incurred by the Optoelectronics Segment. Planned principal operations have not yet commenced. The Segment was not in existence during Fiscal 1997.
Amortization of reorganization value in excess of amounts allocable to identifiable assets in Fiscal 1998 decreased to $377,000 from $754,000 in Fiscal 1997. The decrease resulted from the write-off of the remaining reorganization value in excess of amounts allocable to identifiable assets in the third quarter of Fiscal 1998. The write-off was in conjunction with the reduction of the deferred tax valuation allowance relating to the acquired tax loss carryforward benefits.
Approximately $3.3 million of miscellaneous expense in Fiscal 1998 was not allocated to any segment of the Company's business compared to $958,000 in Fiscal 1997. During Fiscal 1998 the Company changed its methodology for the allocation of corporate overhead expenses from an allocation of 100% of certain corporate costs to an allocation of costs based upon 3.0% - 3.5% of segment sales. Prior fiscal year amounts were not restated.
Interest Expense. Interest expense in Fiscal 1998 and Fiscal 1997 approximated $9.4 million. Overall, the effect of the increase in debt was offset by a decrease in overall interest rates obtained through the Fiscal 1998 refinancing. See "Note 10 to Consolidated Financial Statements."
Income Tax Benefit. Income tax expense in Fiscal 1998 was approximately $5.6 million as compared to an expense of $831,000 in Fiscal 1997. The provisions for income tax benefit were calculated by the Company through use of the effective income tax rates based upon its actual income.
Extraordinary Loss on the Extinguishment of Debt. The extraordinary loss on the extinguishment of debt during Fiscal 1998 was $5.6 million. This amount represents the loss recognized when the Company early retired the remaining $72.3 million of its 11.75% Senior Secured Notes, including a call premium payment of 4.41% and write-off of applicable debt issuance cost and unamortized debt discount, net of income tax benefit of approximately $2.8 million. See "Note 10 to Consolidated Financial Statements."
Liquidity and Capital Resources
For Fiscal 1999, the Company's operations provided approximately $20.4 million of cash as compared to approximately $12.4 million of cash provided during Fiscal 1998. The increase in cash provided by operating activities is primarily due to an increase in net income and trade accounts payable.
Net cash used in investing activities of the Company in Fiscal 1999 was approximately $13.9 million as compared to approximately $3.8 million used during Fiscal 1998. The primary use of cash during Fiscal 1999 and Fiscal 1998 was to purchase property, plant and equipment. The Fiscal 1999 capital spending is primarily related to the modernization of the Polycast acrylics' facility in Stamford, Connecticut. The Company also spent approximately $20 million on the new Optoelectronics Segment facility in Tampa, Florida; however, the majority of the capital expenditures for the Tampa facility were financed through capitalized leases. Fiscal 1999 investing activities also included the purchase of preferred stock of Emcore Corporation (partially offset by a sale of a portion of the preferred stock) and the receipt of cash related to the sale of the automotive operations of the Coated Fabrics Segment. The Company also used $732,000 in Fiscal 1999 and $1.8 million in Fiscal 1998 for business acquisitions.
Net cash used in financing activities was $7.8 million during Fiscal 1999 as compared to $3.3 million used during Fiscal 1998. Cash used in financing activities for Fiscal 1999 was primarily to repay long-term debt as well as to repurchase Company stock for treasury. Cash was provided in Fiscal 1999 through capital contributions by minority interests in consolidated subsidiaries.
The Company at September 26, 1999, had approximately $4.2 million in cash and cash equivalents as compared to approximately $5.6 million at September 27, 1998. Working capital at September 26, 1999 was approximately $20.3 million compared to approximately $36.1 million at September 27, 1998. At September 26, 1999, the Company had borrowings of approximately $7.6 million under its $20 million revolving credit agreement with Fleet National Bank (subject to a borrowing base limitation of approximately $20 million at September 26, 1999) and $6.9 under its $10.0 million revolving credit agreement with CIT (subject to a borrowing base limitation of $8.2 million at September 26, 1999). See "Note 10 to Consolidated Financial Statements."
During Fiscal 2000, the Company plans to spend an additional $10.0 - $15.0 million related to capital expenditures for the Optoelectronics Segment and $1.5 - $2.0 million to finish the modernization of its Stamford, Connecticut facility. The Company is also required to fund a capital contribution of approximately $5,700,000 as cash is required by the Optoelectronics Segment. The Company plans to fund the expenditures with cash from operations as well as its ability to borrow under its revolving credit agreements.
The Company believes that cash from its operations and its ability to borrow under the revolving credit facilities mentioned above provide it sufficient liquidity to finance its existing level of operations and meet its debt service obligations. However, there can be no assurance that the Company's operations together with amounts available under its revolving credit facilities will continue to be sufficient to finance its existing level of operations and meet its debt service obligations. The Company's ability to meet its debt service and other obligations depends on its future performance, which in turn, is subject to general economic conditions and to financial, business and other factors, including factors beyond the Company's control. If the Company is unable to generate sufficient cash flow from operations, it may be required to refinance all or a portion of its existing debt or obtain additional financing. There can be no assurance that the Company will be able to obtain such refinancing or additional financing.
Effects of Inflation
The markets in which the Company sells products are competitive. In particular, the Company has encountered effective resistance to price increases in connection with its sales of acrylics to the aerospace industry. Thus, in an inflationary environment the Company might not in all instances be able to pass through to consumers general price increases, in which event the Company's operations may be materially impacted if such conditions were to occur. The Company has not in the past been adversely impacted by general price inflation.
Year 2000
Many software applications and operational programs written in the past were not designed to recognize calendar dates beginning in the Year 2000. The failure of such applications or systems to properly recognize the dates beginning in the Year 2000 could result in miscalculations or system failures which could result in an adverse impact on the Company's operations.
The Company has instituted a Year 2000 task force that reports to the Audit Committee of the Board of Directors. The Company has also initiated a comprehensive project, overseen by the task force, to prepare its computer systems, communication systems and manufacturing/testing equipment for the Year 2000. The project primarily includes three phases which are: 1) identification and assessment of all software, hardware and equipment that could potentially be affected by the Year 2000 issue, 2) remedial action necessary to bring such systems into compliance and 3) further testing, if necessary. The Company has completed all phases of its Year 2000 project related to facilities, manufacturing processes and communications. Central system modifications have been largely complete since June of 1999 with final completion of all Year 2000 remedies scheduled by December 31, 1999. The Company has primarily used internal resources in its Year 2000 project thus far and has incurred costs of less than $800,000.
The Company has also contacted critical suppliers of products and services and customers to determine the extent to which the Company might be vulnerable to such parties' failure to resolve their own Year 2000 issues. The Company does not have a concentration of dependence on these parties. The effect, if any, on the Company's results of operations from the failure of such parties to be Year 2000 ready is not reasonably estimable.
The Company has formulated contingency plans with respect to its reasonably likely worst case scenario which is the unavailability of critical raw materials. The contingency plans for critical raw materials include alternate materials or sources and advance inventory purchases of certain materials.
Forward Looking Information
The information provided herein may contain forward-looking statements relating to future events that involve risks and uncertainties. Among the important factors which could cause actual results to differ materially from those in the forward-looking statements are cancellations, rescheduling or delays in product shipments; manufacturing capacity constraints; lengthy sales and qualification cycles; difficulties in the production process; the effectiveness of the Company's capital expenditure programs; the future financial performance of the Company; delays in developing and commercializing new products; increased competition; the variability of future operating results of the Company, changes in the industries in which the Company competes or plans to compete, especially the high performance plastics and high brightness, light emitting diode industries, including overall growth of the industries and the continued acceptance of the Company's products.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to various market risks, including changes in interest rates. The Company's earnings and cash flows are subject to fluctuations due to changes in interest rates on its floating rate long-term debt and revolving credit advances. The Company's risk management policy includes the use of derivative financial instruments (interest rate swaps) to manage its interest rate exposure. The counter parties are major financial institutions. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes.
The Company's interest rate swaps involve the exchange of fixed and variable interest rate payments without exchanging the notional principal amount. Payments or receipts on the agreements are recorded as adjustments to interest expense. At September 26, 1999, the Company had outstanding swap agreements, maturing at various dates through 2003, with an aggregate notional amount of $80.0 million. Under these agreements the Company receives a floating rate based on USD-LIBOR-BBA and pays a fixed weighted average interest rate of 5.80%. These swaps effectively change the Company's payment of interest on $80.0 million of its $99.5 million variable rate debt at September 26, 1999 to fixed rate debt.
The fair value of these interest rate swap agreements represents the estimated receipts or payments that would be made to terminate the agreements. At September 26, 1999, the Company would have received approximately $195,000 to terminate the agreements. A decrease of 100 basis points in the yield curve would result in a payment by the Company of approximately $1.3 million to terminate the agreement. The fair value is based on dealer quotes, considering current interest rates.
At September 26, 1999, approximately $19.5 million of the Company's floating rate long-term debt and revolving credit advances was not covered under an interest swap agreement. For floating rate debt, interest changes generally do not affect the fair market value but do impact future earnings and cash flows assuming other factors are held constant. Based upon this balance, a change of one percent in the interest rate would cause a change in interest expense of approximately $195,000 on an annual basis.
Item 8.
Item 8. Consolidated Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements on Page.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Part III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the directors and executive officers of the Company is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which statement will be filed not later than 120 days after the end of the fiscal year covered by this Report.
Item 11.
Item 11. Executive Compensation
Information with respect to executive compensation is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which statement will be filed not later than 120 days after the end of the fiscal year covered by this Report.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to the security ownership of directors and executive officers and substantial stockholders of the Company is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which statement will be filed not later than 120 days after the end of the fiscal year covered by this Report.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and transactions between directors, executive officers and substantial stockholders of the Company with the Company is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which statement will be filed not later than 120 days after the end of the fiscal year covered by this Report.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) Consolidated Financial Statements as of September 26, 1999 and September 27, 1998 and for the Years Ended September 26, 1999, September 27, 1998 and September 28, 1997:
Independent Auditors' Report
Consolidated Balance Sheets as of September 26, 1999 and September 27, 1998
Consolidated Statements of Operations for the Years Ended September 26, 1999, September 27, 1998 and September 28, 1997
Consolidated Statements of Comprehensive Income for the Years Ended September 26, 1999, September 27, 1998 and September 28, 1997
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended September 26, 1999, September 27, 1998 and September 28, 1997
Consolidated Statements of Cash Flows for the Years Ended September 26, 1999, September 27, 1998 and September 28, 1997
Notes to Consolidated Financial Statements
(b) Consolidated Financial Statement Schedule:
Independent Auditors' Report S-1
Schedule II - Valuation and Qualifying Accounts S-2
(c) Exhibits:
2.1 Certificate of Ownership and Merger, dated June 7, 1993, of Polycast Technology Corporation, Uniroyal Engineered Products, Inc., Uniroyal Adhesives and Sealants, Inc. and Ensolite, Inc. with the Company. (2)
3.1 Amended and Restated Certificate of Incorporation of the Company as corrected by a Certificate of Correction of the Amended and Restated Certificate of Incorporation of the Company. (1)
3.2 By-Laws of the Company, as amended to March 28, 1997. (9)
4.2 Warrant Agreement, dated as of June 1, 1993, between the Company and The Bank of New York, as warrant agent. (2)
10.7 Amended and Restated Employment Agreement, dated as of April 25, 1995, between Howard R. Curd and the Company. (3)
10.8 Amended and Restated Employment Agreement, dated as of April 25, 1995, between Oliver J. Janney and the Company. (3)
10.9 Amended and Restated Employment Agreement, dated as of April 25, 1995, between Robert L. Soran and the Company. (3)
10.10 Amended and Restated Employment Agreement, dated as of April 25, 1995, between George J. Zulanas, Jr. and the Company. (3)
10.16 Amended and Restated Uniroyal Technology Corporation 1992 Stock Option Plan. (12)
10.28 Amended and Restated Uniroyal Technology Corporation 1992 Non-Qualified Stock Option Plan. (12)
10.34 Uniroyal Technology Corporation Deferred Compensation Plan Effective as of August 1, 1995. (4)
10.35 Split-Dollar Insurance Agreement dated as of August 15, 1995 by and between Uniroyal Technology Corporation and Howard R. Curd. (5)
10.39 Financing Agreement dated as of June 5, 1996 by and between The CIT Group/Business Credit, Inc. and Uniroyal Technology Corporation. (6)
10.40 Amended and Restated Uniroyal Technology Corporation 1994 Stock Option Plan. (12)
10.41 Amended and Restated Uniroyal Technology Corporation 1995 Non-Qualified Stock Option Plan. (12)
10.44 Shareholder Rights Agreement, dated as of December 18, 1996, between Uniroyal Technology Corporation and The Bank of New York, as rights agent. (7)
10.45 First Amendment to Financing Agreement dated September 5, 1997 by and between The CIT Group/Business Credit, Inc. and Uniroyal Technology Corporation. (10)
10.46 Credit Agreement between High Performance Plastics, Inc., as Borrower, Uniroyal Technology Corporation, Uniroyal HPP Holdings, Inc., the banks, financial institutions and other institutional lenders named therein, Fleet National Bank (as Initial Issuing Bank, Swing Line Bank and Administrative Agent) and DLJ Capital Funding, Inc., as Document Agent dated April 14, 1998. (11)
10.47 Amendment and Consent Agreement dated April 14, 1998 by and between the CIT Group/Business Credit, Inc. and Uniroyal Technology Corporation. (11)
10.48 Consent Agreement dated April 1, 1999 by and between The CIT Group/Business Credit, Inc. and Uniroyal Technology Corporation. (12)
10.49 Assumption Agreement dated April 1, 1999 by and between The CIT Group/Business Credit, Inc., Uniroyal Technology Corporation and Uniroyal Engineered Products, Inc. (12)
10.50 Guaranty dated April 1, 1999 between The CIT Group/Business Credit, Inc. and Uniroyal Technology Corporation. (12)
11.1 Statement Regarding Computation of Per Share Earnings
21.1 Subsidiaries of Uniroyal Technology Corporation
23.1 Independent Auditors' Consent (12)
27.1 Financial Data Schedule (Filed for EDGAR only)
(1) Incorporated by reference to Amendment No. 2 to the Company's Registration Statement on Form 10, dated September 25, 1992.
(2) Incorporated by reference to the Company's Form 8-K, dated June 9, 1993.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended April 2, 1995 filed on May 12, 1995.
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended July 2, 1995 filed on August 14, 1995.
(5) Incorporated by reference to the Company's Form 10-Q for the quarterly period ended July 2, 1995 filed August 14, 1995. Virtually identical agreements were entered into between the Company and each of Robert L. Soran, George J. Zulanas, Jr., Oliver J. Janney and Martin J. Gutfreund.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996 filed August 13, 1996.
(7) Incorporated by reference to the Company's Registration Statement on Form 8-A, dated December 20, 1996.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended September 29, 1996 filed on December 27, 1996.
(9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 30, 1997 filed May 9, 1997.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended September 28, 1997 filed on December 22, 1997.
(11) Incorporated by reference to the Company's Annual Report on Form 8-K/A dated April 22, 1998.
(12) Filed with this report.
(d) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of Fiscal 1999.
Item 8. Consolidated Financial Statements and Supplementary Data.
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 26, 1999 and September 27, 1998, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended September 26, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 26, 1999 and September 27, 1998 and the results of its operations and its cash flows for each of the three years in the period ended September 26, 1999, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP Certified Public Accountants
Tampa, Florida December 20, 1999
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Supplemental Disclosures:
Payments for income taxes and interest were as follows (in thousands):
The proceeds from term loans for the fiscal year ended September 27, 1998 does not include a $2,450,000 note payable issued for the purchase of 300,000 shares of treasury stock (Notes 10 and 12).
The purchases of property, plant and equipment and the proceeds from term loans for the fiscal years ended September 26, 1999 and September 28, 1997 do not include $20,372,000 and $77,000, respectively, related to property held under capitalized leases (Note 14). The Company did not enter into any capital lease agreements during the fiscal year ended September 27, 1998.
Net cash used in financing activities for the fiscal year ended September 28, 1997 does not include the dividends declared on the Series B Preferred Stock since they were paid with the issuance of 73,448 shares of the Company's common stock. No dividends were paid during the fiscal years ended September 26, 1999 or September 27, 1998.
During the fiscal years ended September 26, 1999 and September 27, 1998, the Company made matching contributions to its 401(k) Savings Plan of $199,000 and $191,000, respectively, through the re-issuance of 19,672 shares and 30,260 shares of its common stock from treasury, respectively. No such contribution was made during the fiscal year ended September 28, 1997.
See notes to consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Fiscal Years Ended September 26, 1999, September 27, 1998 and September 28, 1997
1. THE COMPANY
The accompanying consolidated financial statements relate to Uniroyal Technology Corporation, its wholly-owned subsidiaries, Uniroyal HPP Holdings, Inc., Uniroyal Engineered Products, Inc., Uniroyal Optoelectronics, Inc. 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"), and HPPI's operating divisions, Royalite Thermoplastics ("Royalite"), Polycast Technology ("Polycast"), Townsend/Glasflex and ViPlex/Happel. Uniroyal Engineered Products, Inc. includes its operating divisions, Uniroyal Engineered Products ("UEP") and Uniroyal Adhesives and Sealants ("UAS"). Uniroyal Optoelectronics, Inc. includes its majority-owned joint venture, Uniroyal Optoelectronics, LLC.
On April 1, 1999 the Company transferred all of the net assets of its Coated Fabrics Segment and Specialty Adhesives Segment to a newly created wholly-owned subsidiary, Uniroyal Engineered Products, Inc.
Uniroyal Liability Management Company, Inc. ("ULMC") is a special purpose subsidiary created in the fiscal year ended September 26, 1999 to administer the Company's employee and retiree medical benefit programs. The Company owns a controlling interest (69%) in the subsidiary; therefore, the accompanying consolidated financial statements include the subsidiary's results of operations.
UnitechNJ, Inc. is a special purpose subsidiary created in the fiscal year ended September 26, 1999 to hold the Company's plant in Stirling, New Jersey.
The Company is principally engaged in the manufacture and sale of high performance plastics, coated fabrics and specialty adhesives. In addition, the Company has a majority ownership of a joint venture in the development stage that will ultimately manufacture and sell epitaxial wafers, dies and package-ready devices for use in optoelectronics applications.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Uniroyal Technology Corporation, its subsidiaries, its majority-owned subsidiary and its majority-owned joint venture. All significant intercompany transactions and balances have been eliminated. Minority interest represents the minority shareholders' proportionate share of the equity of the Company's majority-owned entities.
Fiscal Year End
The Company's fiscal year ends on the Sunday following the last Friday in September. The dates on which the fiscal year ended for the past three fiscal years were September 26, 1999 ("Fiscal 1999"), September 27, 1998 ("Fiscal 1998") and September 28, 1997 ("Fiscal 1997").
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents includes all highly liquid investments purchased with an original maturity of three months or less.
Financial Instruments
Interest rate swap agreements are used to manage interest rate exposures. The interest rate differentials to be paid or received under such swaps are recognized over the life of the agreements as adjustments to interest expense.
The estimated fair value of amounts reported in the consolidated financial statements have been determined using available market information and valuation methodologies, as applicable. The carrying value of all current assets and liabilities approximates the fair value because of their short-term nature. The fair values of non-current assets and liabilities approximate their carrying value.
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 1999 and Fiscal 1998 approximated $995,000 and $64,000, respectively.
Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, 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 renewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. In accordance with SFAS No. 121, the Company uses an estimate of the future undiscounted net cash flows of the related assets over the remaining life in measuring whether the assets are recoverable.
Property, Plant and Equipment Held for Sale
The Company has classified certain property, plant and equipment related to its Port Clinton, Ohio ("Port Clinton") facility and its Stirling, New Jersey ("Stirling") facility as held for sale.
In November of 1998, the Company ceased operations at its Port Clinton facility in connection with its sale of the automotive operations of the Coated Fabrics Segment (Note 15). The Company expects to dispose of the remaining Port Clinton assets, including real property, during the fiscal year ending October 1, 2000 ("Fiscal 2000") and is carrying the property at fair value less cost to sell based upon an appraisal and a current offer for the property. The fair value less cost to sell of the property approximates $3,217,000 at September 26, 1999.
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 Port Clinton facility incurred operating (losses) income of ($74,000), $3,263,000 and ($2,490,000) in Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively.
During Fiscal 1998, in conjunction with plant consolidations at the Polycast division and in order to address concerns of the Federal Trade Commission ("FTC") (Note 14, "Townsend Acquisition"), the Company decided to sell its Stirling facility and certain assets used in the manufacture of acrylic rods and tubes. In accordance with SFAS No. 121, the Company recorded a write-down of the related assets totaling approximately $144,000 and $633,000, in Fiscal 1999 and Fiscal 1998, respectively, related to this decision. The Company expects the disposition of the Stirling facility and certain assets to be completed in Fiscal 2000. The Company is carrying the related assets at fair value less cost to sell based upon an appraisal and a current sales offer. The fair value less cost to sell approximates $1,250,000 at September 26, 1999. The Stirling facility incurred operating (losses) income of ($261,000) and $196,000 in Fiscal 1998 and Fiscal 1997, respectively. Separate operating results were not maintained in Fiscal 1999.
Investment in Preferred Stock
The Company accounts for the investment in preferred stock in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Management has classified this investment as available for sale and, in accordance with SFAS No. 115, carries the investment at fair value with the unrealized gains and losses, net of income taxes, reported as a separate component of stockholders' equity. The fair value is determined by the most recently traded price of the underlying common stock at the balance sheet date.
Amortization
Debt issuance costs are amortized using the interest method over the life of the related debt. Debt discount for the Senior Secured Notes was amortized using the interest method over the life of the related debt until the debt was repaid in Fiscal 1998 (Note 10). Patents and trademarks are amortized using the straight-line method over periods ranging from 7 to 20 years. Reorganization value in excess of amounts allocable to identifiable assets was amortized on a straight-line basis over 15 years until Fiscal 1998 when the remaining reorganization value was reduced to zero in connection with the reduction of the deferred tax valuation allowance related to acquired tax loss carryforward benefits (Note 11). Goodwill is amortized on a straight-line basis over 25 years. Goodwill is reported net of accumulated amortization of $784,000 and $372,000 at September 26, 1999 and September 27, 1998, respectively.
Research and Development Expenses
Research and development expenditures are expensed as incurred. Research and development expenditures were $2,201,000, $2,657,000 and $3,674,000 in Fiscal 1999, Fiscal 1998 and Fiscal 1997, 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.
The Company has recorded a deferred tax asset of approximately $27,539,000. A valuation allowance of $13,702,000 has been established due to uncertainty regarding the ability to utilize the capital loss carryforward against capital gains which may or may not be generated in the future. Realization of the remaining asset is dependent on generating sufficient taxable income prior to expiration of loss carryforwards available to the Company. Although realization is not assured, management believes it is more likely than not that all of the remaining deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
Stock-Based Compensation
In Fiscal 1997, the Company adopted only the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation. As permitted under this standard, the Company has elected to follow Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its stock options. Proforma information regarding net income and earnings per share, as calculated under the provisions of SFAS 123, are disclosed in Note 12.
Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," during Fiscal 1999. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. SFAS No. 130 requires that the Company's change in unrealized gains and losses on equity securities available for sale be included in comprehensive income. The net unrealized gain on securities available for sale is shown net of tax expense of $63,000 for the year ended September 26, 1999. The adoption of SFAS No. 130 had no impact on the Company's net income or stockholders' equity in Fiscal 1998 and Fiscal 1997.
Income Per Common Share
The Company has adopted and retroactively applied the requirements of SFAS No. 128, Earnings Per Share, to all periods presented. This change did not have a material impact on the computation of the earnings per share data (Note 17).
New Accounting Pronouncements
In June 1998, 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. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company has not evaluated the effect, if any, that the adoption of SFAS 133 will have on the Company's consolidated financial statements.
Reclassifications
Certain prior years' amounts have been reclassified to conform with the current year's presentation.
3. INVENTORIES
Inventories consisted of the following (in thousands):
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
Depreciation expense was $8,395,000, $8,047,000 and $7,906,000 for Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively.
5. 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 Corporation ("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 are cumulative and are 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 are 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. On September 24, 1999, the closing sales price of Emcore's common stock on the Nasdaq National Market was $14.4375.
The Preferred Stock is redeemable, in whole or in part, at the option of Emcore at any time Emcore's common stock has 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 is required to provide not less than 30 days and not more than 60 days notice of the redemption. The shares of Preferred Stock are 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.
The remaining Preferred Stock and the underlying common stock of Emcore have been registered under the Securities Act of 1933.
Subsequent to September 26, 1999 and as of December 10, 1999, the Company converted 230,657 shares of the Preferred Stock into 230,657 shares of Emcore common stock. The Company then sold its 230,657 shares of Emcore common stock in the open market for approximately $4,288,000, and will recognize a gain of approximately $1,059,000, net of certain transaction costs, in the first quarter of Fiscal 2000.
6. 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 is payable semi-annually at 11.75% per annum. The Note matures 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. The Company believes that the Rubatex counterclaim is wholly without merit. 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 and September 27, 1998, the Company has accrued interest receivable related to the Note of approximately $387,000. Accrued interest of approximately $739,000 has not been accrued by the Company. The Note represents a concentration of credit risk to the Company.
7. BUSINESS ACQUISITIONS
On June 14, 1999, the Company acquired 100% of the common stock of Happel Marine, Inc., a fabricator for the marine industry, for $5,193,500. The purchase price was comprised of $909,252 in cash, unsecured promissory notes aggregating $2,911,007 (Note 10), and 145,078 shares of common stock of the Company valued at $1,373,241 which approximated the market value of such shares on the acquisition date. The purchase price was adjusted for changes in working capital between April 30, 1999 and June 13, 1999. This resulted in an increase of the purchase price of $122,137, which was paid through an increase in the promissory notes. Happel Marine, Inc. was merged into Uniroyal HPP Holdings on September 1, 1999, which in turn contributed the net assets to HPPI.
On May 22, 1998, HPPI acquired 100% of the common stock of ViPlex Corporation, an acrylic sheet fabricator for the marine industry, for $2,700,000 consisting of $1,700,000 in cash and unsecured promissory notes aggregating $1,000,000 (Note 10). The purchase price was adjusted for changes in working capital between September 30, 1997 and May 22, 1998. This resulted in an increase in the purchase price of $114,000, which was paid in cash. ViPlex Corporation was merged into HPPI as of December 31, 1998.
The above business combinations were accounted for by the purchase method in accordance with APB Opinion No. 16. The results of operations of the above named businesses are included in the consolidated financial statements from their respective purchase dates in Fiscal 1999 and Fiscal 1998.
In Fiscal 1999 and Fiscal 1998, the Company acquired the following assets and liabilities (net of cash received of $177,000 and $46,000, respectively,) in the above transactions (in thousands):
The acquired goodwill will be amortized over its estimated useful life of 25 years.
The pro forma effect of these acquisitions on the Company's net sales, income before extraordinary item, net income and earnings per share, had the acquisitions occurred on September 28, 1998 and September 29, 1997, respectively, is not considered material - either quantitatively or qualitatively.
8. OTHER ASSETS
Other assets consisted of the following (in thousands):
Patents and trademarks are reported net of accumulated amortization of $3,191,000 and $2,841,000 at September 26, 1999 and September 27, 1998, respectively.
During the fiscal year ended September 27, 1998, the Company paid $4,500,000 to Emcore Corporation ("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 16). During the fiscal year ended September 26, 1999, the Company paid the final installment of $500,000 related to the technology license. The technology license will be amortized over the estimated life of the technology once sales from internal production have commenced.
During the fiscal year ended September 27, 1998, the Company capitalized approximately $3,545,000 of debt issuance costs incurred in connection with the Fleet Financing (Notes 10 and 18). Also, in connection with the Fleet Financing, the Company wrote off approximately $3,439,000 of debt issuance costs associated with its Senior Secured Notes which is included in the loss on the early extinguishment of debt during the fiscal year ended September 27, 1998 (Note 10). Debt issuance costs are shown net of accumulated amortization of $846,000 and $278,000 at September 26, 1999 and September 27, 1998, respectively.
At September 27, 1998, deposits include $1,797,000 paid to Emcore in Fiscal 1998 as a down payment for machinery ordered from Emcore by Uniroyal Optoelectronics, LLC. During Fiscal 1999, the deposit was reclassed to property, plant and equipment upon delivery of the machines from Emcore.
9. OTHER LIABILITIES
Other liabilities consisted of the following (in thousands):
10. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
Debt amounts become due during subsequent fiscal years ending in September as follows (in thousands):
Interest expense for Fiscal 1999, 1998 and 1997 was approximately $9,588,000, $9,927,000 and $10,061,000, respectively.
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 is composed of a $30,000,000 Term A Advance, a $60,000,000 Term B Advance and a $20,000,000 Revolving Credit Advance.
The Term A Advance is payable in equal quarterly installments of $1,500,000 beginning on December 31, 1998 and ending on September 30, 2003. Interest on the Term A Advance is initially payable monthly at the Prime Rate (as defined in the Credit Agreement) plus 1.25% for Prime Rate advances or not later than the end of each three-month period at the Eurodollar Rate (as defined in the Credit Agreement) plus 2.25% for Eurodollar Rate advances during the first six months of the Credit Agreement. After the first six months, the applicable margin for each Prime Rate advance and each Eurodollar Rate advance will be determined quarterly by reference to HPPI's ratio of Consolidated Debt to EBITDA (as defined in the Credit Agreement). The applicable margins on the Term A Advance range from 0.50% - 1.25% for the Prime Rate advances and 1.50% - 2.25% for Eurodollar Rate advances and were 1.25% and 2.25%, respectively, at September 26, 1999. The weighted average interest rate on the Term A Advance during Fiscal 1999 and Fiscal 1998 was 7.36% and 7.84%, respectively.
The Term B Advance is payable in quarterly installments of $150,000 beginning on December 31, 1998 through September 30, 2003, semiannual installments of $5,000,000 on March 31, 2004 and September 30, 2004 and a final payment of $47,000,000 on March 31, 2005. Interest on the Term B Advance is initially payable monthly at Prime Rate plus 1.50% for Prime Rate advances or not later than the end of each three-month period at the Eurodollar Rate plus 2.50% for Eurodollar Rate advances during the first six months of the Credit Agreement. After the first six months, the applicable margin for each Prime Rate advance and Eurodollar Rate advance will be determined quarterly by reference to HPPI's ratio of Consolidated Debt to EBITDA (as defined in the Credit Agreement). The applicable margins on Term B Advances range from 1.00% - 1.50% for Prime Rate advances and 2.00% - 2.50% for Eurodollar Rate advances and were 1.50% and 2.50%, respectively, at September 26, 1999. The weighted average interest rate on the Term B Advance during Fiscal 1999 and Fiscal 1998 was 7.57% and 8.09%, respectively.
Under the Revolving Credit Advance, HPPI may borrow the lesser of $20,000,000 or the sum of 85% of Eligible Receivables plus 50% of the value of Eligible Inventory as defined in the Credit Agreement. Interest is payable under the same terms as the Term A Advance. The Revolving Credit Advance matures on September 30, 2003. At September 26, 1999, the Company had approximately $7,550,000 of outstanding borrowings under the Revolving Credit Advance and approximately $12,450,000 of availability. The weighted average interest rate on the Revolving Credit Advance during Fiscal 1999 and Fiscal 1998 was 8.31% and 8.20%, respectively.
The advances under the Credit Agreement are collateralized by a lien on substantially all of the non-cash assets of HPPI. The Credit Agreement contains certain covenants which limit, among other things, HPPI's ability to incur additional debt, sell its assets, pay cash dividends, make certain other payments and redeem its capital stock. The Credit Agreement also contains covenants which require the maintenance of certain ratios. HPPI was in compliance with these covenants at September 26, 1999. The Credit Agreement also contains annual mandatory pre-payments of principal equal to 50% of HPPI's annual Excess Cash Flow (as defined in the Credit Agreement) beginning September 26, 1999. No such prepayment was due on September 26, 1999.
Under the terms of the Credit Agreement, HPPI is required to obtain and keep in effect one or more interest rate Bank Hedge Agreements (as defined in the Credit Agreement) covering at least 50% of the Term A and Term B Advances, for an aggregate period of not less than three years. On May 14, 1998, HPPI entered into three interest rate swap agreements with two banks. The first agreement is a fixed rate swap on $30,000,000 notional amount that expires on May 14, 2003. HPPI's fixed LIBOR rate of interest on this swap is 5.985%. HPPI pays or receives interest based upon the differential between HPPI's fixed LIBOR rate and the bank's floating LIBOR rate. The bank's floating LIBOR rate is adjusted monthly. The second agreement is a cancelable interest rate swap on $30,000,000 notional amount that expires on May 14, 2003. HPPI's fixed LIBOR rate of interest on this swap is 5.7375%. HPPI pays or receives interest based upon the differential between HPPI's fixed LIBOR rate and the bank's floating LIBOR rate. The bank's floating LIBOR rate is adjusted quarterly. The bank has the option to cancel this swap on May 14, 2001. The third agreement is a cancelable interest rate swap on $20,000,000 notional amount that expires on May 14, 2000. HPPI's fixed LIBOR rate of interest on this swap is 5.6725%. HPPI pays or receives interest based upon the rate differential between HPPI's fixed LIBOR rate and the bank's floating LIBOR rate. The bank's floating LIBOR rate is adjusted quarterly. The bank had the option to cancel this swap on May 14, 1999 which it did not exercise. The differential on interest rate swaps is accrued as interest rates change and is recognized as an adjustment to interest expense over the life of the agreements. The fair value of these interest rate swap agreements represents the estimated receipts or payments that would be made to terminate the agreements. At September 26, 1999, the Company would have received approximately $195,000 to terminate the agreements.
On April 14, 1998, HPPI paid $94,944,000 to the Company which in turn used such amount to defease the outstanding 11.75% Senior Secured Notes due June 1, 2003 ("Senior Secured Notes") including the call premium and interest accrued through the call date and to pay down its revolving line of credit and secured term loan with the CIT Group/Business Credit, Inc. ("CIT"). The redemption of the Senior Secured Notes was completed on June 1, 1998 at a call premium of 4.41% ($3,264,000). In connection with the June 1, 1998 redemption, the Company incurred an extraordinary loss on the extinguishment of debt of approximately $5,637,000 (net of applicable income taxes of approximately $2,787,000).
CIT Credit Agreement -------------------- On April 14, 1998 the Company entered into an Amendment and Consent Agreement with CIT whereby the Company's existing revolving credit arrangement was amended to permit the Company to borrow the lesser of $10,000,000 or the sum of 85% of Eligible Receivables plus 55% of Eligible Inventories as defined in the agreement. On April 1, 1999, in connection with the creation of Uniroyal Engineered Products, Inc., the CIT revolving credit agreement was assumed by Uniroyal Engineered Products, Inc. The collateral securing the credit line includes only the assets of Uniroyal Engineered Products, Inc. Interest on the CIT revolving credit agreement is payable monthly at Prime plus .5% per annum or at the LIBOR rate plus 2.75% per annum if the Company elects to borrow funds under a LIBOR loan as defined in the agreement. The loan matures on June 5, 2001. All of Uniroyal Engineered Products, Inc. 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 26, 1999. At September 26, 1999, the Company had approximately $6,878,000 of outstanding borrowings under the revolving credit agreement and $1,369,000 of availability. The Company had $4,000 of outstanding borrowings under this agreement at September 27, 1998. The weighted average interest rates on the CIT revolving credit agreement was 8.28% during Fiscal 1999 and 9.00% during Fiscal 1998.
Unsecured Promissory Notes
On June 14, 1999, in connection with the purchase of Happel Marine, Inc. (Note 7), the Company issued unsecured promissory notes for $2,400,000 and $511,007. The $2,400,000 note is payable in four equal annual installments beginning January 15, 2000, plus accrued interest at the stated rate of 7.75% per annum. The $511,007 note is payable in two equal annual installments beginning January 15, 2000, plus accrued interest at the stated rate of 7.75%. The notes were adjusted to $2,500,030 and $533,114, respectively, in connection with a subsequent purchase price adjustment in September, 1999.
The Company has entered into various unsecured promissory notes aggregating approximately $1,470,000 at September 26, 1999 in connection with prior year business acquisitions and a treasury stock purchase at stated rates ranging from 5.5% to 8.0%. To the extent the stated rates were below current market rates, the Company imputed interest at the market rate in effect on the date of the respective transaction.
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 1999 were primarily related to the Company's majority owned joint venture, Uniroyal Optoelectronics, LLC. The Company is a guarantor of the Uniroyal Optoelectrics, LLC capital lease obligations. The weighted average interest rate on these obligations was 8.8% (Note 14).
11. INCOME TAXES
The effective tax rate differs from the statutory federal income tax rate for the following reasons (in thousands):
Allocation of income tax expense is as follows (in thousands):
Income tax expense (benefit) consisted of the following components (in thousands):
The components of the deferred tax assets and liabilities were as follows (in thousands):
The net operating and acquired tax loss carryforward benefits expire in various years ending in 2010. The acquired tax loss carryforward benefits consist of tax net operating loss carryforwards and pension contribution deductions. The acquired net operating loss carryforwards are subject to an annual limitation arising from the September 27, 1992 bankruptcy reorganization of the Company's predecessors. The annual limitation on utilization of the acquired net operating loss carryforward for tax purposes is approximately $1,600,000 per year.
In Fiscal 1998, the Company reduced the deferred tax valuation allowance relating to acquired tax loss carryforward benefits. In accordance with SFAS No. 109, Accounting for Income Taxes, the reduction was applied to reduce reorganization value in excess of amounts allocable to identifiable assets which resulted in such asset being reduced to zero in Fiscal 1998.
In Fiscal 1999, the Company established a subsidiary to administer the Company's employee medical benefits program. The Company realized a one-time combined federal and state 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 $2.3 million of this benefit was recognized in Fiscal 1999 as an offset against current and previous capital gains.
12. STOCKHOLDERS' EQUITY
The Company's certificate of incorporation provides that the authorized capital stock of the Company consists of 35,000,000 shares of common stock and 1,000 shares of preferred stock, each having a par value of $0.01 per share. At September 26, 1999, approximately 14,681,419 shares of common stock were 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 1999, Fiscal 1998 and Fiscal 1997.
Treasury Stock Transactions
During Fiscal 1999 and Fiscal 1998, the Company received 130,382 and 92,285 shares of its common stock, respectively, in lieu of cash for the exercise of stock options from officers and employees of the Company. These shares were valued at approximately $1,345,000 in Fiscal 1999 and $894,000 in Fiscal 1998 (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 26, 1999 and September 27, 1998.
During Fiscal 1999 and Fiscal 1998, the Company repurchased 905,485 and 502,000 shares of its common stock, respectively, in the open market for approximately $8,451,000 and $4,479,000, respectively.
During Fiscal 1999, the Company received 253,290 shares of its common stock in connection with the final distributions of the bankruptcy proceedings, 18,271 of which were purchased at a cost of approximately $181,000. No such shares were received or purchased during Fiscal 1998.
During Fiscal 1999, the Company repurchased 47,712 shares of its common stock from the Uniroyal Technology Corporation Employee Stock Ownership Plan for approximately $482,000. No such shares were repurchased during Fiscal 1998.
During Fiscal 1998, the Company repurchased 500,000 shares of its common stock for $2,187,500 in connection with the sale by the Pension Benefit Guaranty Corporation ("PBGC") of all of its holdings of the Company's common stock. Also during Fiscal 1998, The Company repurchased 300,000 shares of its common stock, previously issued in connection with the Fiscal 1997 purchase of Townsend Plastics, for $250,000 cash and an unsecured promissory note for $2,450,000 (Note 10) and repurchased 50,000 shares of its common stock, previously issued in connection with the Fiscal 1997 acquisition of C. Gunther Company, for $431,250.
Subsequent to the fiscal year ended September 26, 1999 and as of December 10, 1999, the Company repurchased approximately 132,450 shares of its common stock in the open market for approximately $1,263,000.
Warrants
The Company has 537,535 warrants outstanding to purchase an aggregate of 537,535 shares of its common stock at a price equal to $4.375 per share, 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 800,000 shares of its common stock in connection with the issuance of its Senior Secured Notes. 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 1999 and Fiscal 1998, the Company repurchased 45,615 and 216,850, respectively, of its outstanding warrants for approximately $292,000 and $1,314,000, respectively. As of September 26, 1999, no warrants had been exercised.
Stock Compensation Plans
At September 26, 1999, the Company has four stock-based compensation plans, which are described below. The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for these plans except as indicated below. Had compensation cost been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 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):
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 26, 1999, September 27, 1998 and September 28, 1997, respectively: expected volatility of 44.16%, 45.46% and 45.89%, dividend yield of 0% for all years, risk-free interest rates of 6.014%, 4.523% and 6.042% and expected lives of 3 to 10 years.
The Company has reserved 1,363,636 shares of common stock to be issued and sold pursuant to the 1992 Stock Option Plan that was adopted by the Company on September 27, 1992. Generally, of the options granted under this plan, 60% vested on May 1, 1994 and the remainder vested on November 1, 1995. Vesting provisions for any additional options will be determined by the Board of Directors of the Company at the time of the grant of such options. The stock options are exercisable over a period determined by the Board of Directors or its Compensation Committee, but no longer than ten years after the date granted.
During the fiscal year ended September 26, 1993, the Company adopted the 1992 Non-Qualified Stock Option Plan available for non-officer directors. This plan provides that directors who are not officers of the Company are entitled to forego up to 100% of their annual retainer in exchange for options to purchase the Company's common stock at an option price of 50% of the market price of the underlying common stock at the date of grant. The options are exercisable for a period of 10 years from the date of the grant of each option. Compensation expense related to these options was $109,000, $64,000 and $28,000 during Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively.
During the fiscal year ended October 2, 1994, the Company adopted the 1994 Stock Option Plan available for certain key employees of the Company. The Company has reserved approximately 812,000 shares of common stock to be issued under this plan, provided that the aggregate number of options that may be granted under the 1994 Stock Option Plan and all other stock option plans of the Company for employees may not at any time exceed in the aggregate 15% of the then currently authorized common stock outstanding, on a fully diluted basis. Stock options granted under this plan are exercisable until not later than January 1, 2004.
During the fiscal year ended September 29, 1996, the Company adopted the 1995 Non-Qualified Stock Option Plan available for directors. Each director is granted an option to purchase 10,000 shares of the Company's common stock in the case of the initial grant and 5,000 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 30,000 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 10,000 to 17,500 shares of the Company's common stock.
The following table summarizes all stock option transactions for the fiscal years ended September 26, 1999 and September 27, 1998:
The following table summarizes information about stock options at September 26, 1999:
Employee Stock Ownership Plan
The Company established the Uniroyal Technology Corporation Employee Stock Ownership Plan (the "ESOP") in 1992. The ESOP was a stock bonus plan intended to encourage eligible employees to save for their retirement and to increase their proprietary interest in the Company by accumulating the Company's common stock. Employees eligible for the initial distribution generally were all employees employed by the Company on or after January 1, 1993, excluding executive officers of the Company.
The Company made an initial contribution to the ESOP of 425,000 shares of common stock. Future contributions by the Company were discretionary. The initial contribution was allocated to eligible employees of the Company ratably based upon the respective compensation levels of the eligible employees. Shares allocated to each participant account under the ESOP became vested upon the participant's completion of three years of cumulative service with the Company. The Company did not make any contributions to the ESOP nor did they have any ESOP expense during Fiscal 1999, Fiscal 1998 and Fiscal 1997. During Fiscal 1999, the Company merged the ESOP into the three existing employee savings plans effective February 6, 1998. No further contributions are to be made to the Plan, no further benefits will accrue to any participants in the Plan and the accounts of all participants in the Plan as of February 6, 1998 are vested.
13. EMPLOYEE COMPENSATION
Post-retirement Health Care and Life Insurance Benefits
Certain retired employees are currently provided with specified health care and life insurance benefits. Generally, the plan provides for reimbursement of approved medical and prescription drug costs not fully covered by Medicare. The plan also provides for certain deductibles and co-payments. The life insurance benefits provide for amounts based upon the retirees' compensation at the time of their retirement. Eligibility requirements for such benefits vary by division, but generally provide that benefits are available to employees who retire after a certain age with specified years of service or a combined total of age and years of service. The Company has the right to modify or terminate certain of these benefits. The Company's policy is to pay the actual expenses incurred by the retirees; the Company does not intend to fund any amounts in excess of those obligations. The Company is also obligated to provide benefits to certain salaried retirees of Uniroyal Plastics Company, Inc. ("UPC"), which is currently in liquidation proceedings under Chapter 7 of the U.S. Bankruptcy Code and is an affiliate of the Predecessor Companies (Note 14), and Uniroyal, Inc. ("Uniroyal") (not affiliated with the Company) who are class members under a federal district court order. The Company and Uniroyal 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 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 was expected to be approximately 16 years.
The components of net periodic benefit costs are as follows (in thousands):
A reconciliation of the beginning and ending balances of benefit obligations and the funded status of the plans are as follows (in thousands):
The weighted average discount rate assumptions were 6.75% at September 26, 1999, 6.25% at September 27, 1998 and 7.0% at September 28, 1997.
The assumed health care cost trend rate used in measuring the healthcare benefits for Fiscal 1999 was a 6.0% average annual rate of increase in the per capita cost health care benefits. This rate is assumed to change over the years as follows: 5.8% for the fiscal years beginning in 2000, 5.3% for the fiscal years beginning in 2003, 5.1% for the fiscal years beginning in 2005, 4.9% for the fiscal years beginning in 2010, 4.8% for the fiscal years beginning in 2015 and 4.8% for the fiscal years beginning in 2020 and later.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed cost trend would have the following effects for Fiscal 1999 (in thousands):
Post-retirement Benefit Plan ---------------------------- Effective October 1, 1998, the Company established an unfunded post-retirement defined benefit plan for officers and certain key employees of the Company. The net periodic benefit cost recognized in Fiscal 1999 was approximately $525,000 and consisted entirely of service cost. The following tables provide a reconciliation of the changes in the plan's benefit obligations and a reconciliation of the funded status for Fiscal 1999 (in thousands):
The discount rate used as of September 26, 1999 was 7.75%.
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 $383,000 were paid by the Company in Fiscal 1999 with respect to these policies. As of September 26, 1999, $303,000 has been capitalized to reflect the cash surrender value of the contracts.
Other Benefit Plans ------------------- The Royalite, UEP and UAS divisions provide additional retirement benefits to substantially all of their employees and the Polycast division provides such benefits to certain of its employees through three defined contribution savings plans. The plans provide for employee contributions and employer matching contributions to employee savings. Employer contributions are generally either 2% of salaried and certain non-union hourly participants' gross earnings or rates per hour ranging generally from $.05 to $.66 based on years of service. The expenses pertaining to these plans amounted to approximately $334,000, $618,000 and $649,000 for the fiscal years ended in 1999, 1998 and 1997, respectively.
In addition, the Company provides a savings plan under Section 401(k) of the Internal Revenue Code. The savings plan covers all eligible salaried and non-union wage employees of the Company. The savings plan allows all eligible employees to defer up to 15% of their income on a pre-tax basis through contributions to the savings plan. For every dollar an employee contributes, the Company may contribute an amount equal to 25% of each participant's before-tax obligation up to 6% of the participant's compensation. Such employer contribution may be made in cash or in Company common stock. The expenses pertaining to this savings plan were approximately $242,000, $168,000 and $141,000 for the fiscal years ended 1999, 1998 and 1997. During Fiscal 1999 and Fiscal 1998 the Company contributed 19,672 and 30,260 shares of its common stock with a market value of approximately $199,000 and $191,000, respectively, to the savings plan. The Company did not make any such contributions during Fiscal 1997.
14. COMMITMENTS AND CONTINGENCIES
Bankruptcy Proceedings ---------------------- On September 27, 1992 the Company acquired the businesses of certain direct and indirect subsidiaries of The Jesup Group, Inc. ("Jesup") for $54,400,000 of the Company's common and preferred stocks. These subsidiaries (collectively, the "Predecessor Companies") are the current operating divisions of the Company. The Predecessor Companies previously filed petitions with the United States Bankruptcy Court for the Northern District of Indiana, South Bend Division (the "Bankruptcy Court") seeking protection from their creditors under Chapter 11 of the United States Bankruptcy Code. On August 20, 1992 the Bankruptcy Court approved the Third Amended Plan of Reorganization under Chapter 11 of the Bankruptcy Code for Polycast Technology Corporation and its Affiliated Debtors (the "Plan"). The Plan was substantially consummated at the close of business on September 27, 1992 (the "Effective Date").
As a result of the bankruptcy and the consummation of the Plan at September 27, 1992, the Company recorded certain adjustments to present its consolidated financial statements at September 27, 1992 in conformity with Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), of the American Institute of Certified Public Accountants. Under the provisions of SOP 90-7, the Company was required to adopt fresh start reporting as of September 27, 1992 because (i) the reorganization value of the Company (approximate fair value on the Effective Date) was less than the total of all post-petition liabilities and pre-petition allowed claims and (ii) holders of the voting shares of the Predecessor Companies before the Effective Date received less than 50 percent (50%) of the voting shares of the Company.
As of September 26, 1999, all 10,000,000 shares of the Company's common stock allocated for the disposition of bankruptcy claims have been issued for full settlement to the holders of unsecured claims against the estates of the Predecessor Companies and to the Company's ESOP. The Bankruptcy Court issued its final decree closing the bankruptcy of the Predecessor Companies on September 27, 1999.
Townsend Acquisition -------------------- By letter dated January 30, 1998, the Denver Regional Office of the FTC notified the Company that it was conducting a non-public investigation into the Company's acquisition of the Townsend Plastics Division of Townsend Industries, Inc. in September 1997. The purpose of the investigation was to determine whether the transaction violated Section 7 of the Clayton Act, 15 USC Section 18, Section 5 of the Federal Trade Commission Act, 15 USC Section 45, or any other law enforced by the FTC. The Company has been cooperating with the FTC in its investigation. The Company has been in discussions with the staff of the FTC seeking to meet the concerns of both the Company and the FTC. Management does not expect the cost of compliance with the FTC requests to have a material adverse effect upon the Company's results of operations, cash flows or financial position. The Company is currently seeking to sell certain assets to another entity that could compete with Townsend/Glasflex in order to increase competition in the markets served by Townsend/Glasflex.
Litigation ---------- The Company is also engaged in litigation arising from the ordinary course of business. Management believes the ultimate outcome of such litigation will not have a material adverse effect upon the Company's results of operations, cash flows or financial position.
Environmental Factors --------------------- The Company is subject to a wide range of federal, state and local laws and regulations designed to protect the environment and worker health and safety. The Company's management emphasizes compliance with these laws and regulations. The Company has instituted programs to provide guidance and training and to audit compliance with environmental laws and regulations at Company owned or leased facilities. The Company's policy is to accrue environmental and clean-up related costs of a non-capital nature when it is probable both that a liability has been incurred and that the amount can be reasonably estimated.
The Company may become subject to claims relating to certain environmental matters. The operations of the Predecessor Companies and certain of their affiliates produced waste materials that, prior to 1980, were disposed of at some 36 known unregulated sites throughout the United States. After 1980, waste disposal was limited to sites permitted under federal and state environmental laws and regulations. If any of the disposal sites (unregulated or regulated) are found to be releasing hazardous substances into the environment, under current federal and state environmental laws, the appropriate company might be subject to liability for clean-up and containment costs.
Prior to the Effective Date of the Predecessor Companies' Plan, several sites were identified where there were potential liabilities for the cost of environmental clean-up. In most instances, this potential liability resulted from the alleged arrangement for the off-site disposal of hazardous substances by Uniroyal, Inc.
Pursuant to a settlement agreement with the United States Environmental Protection Agency ("EPA"), the United States Department of the Interior and the States of Wisconsin and Indiana (the "EPA Settlement Agreement"), entered into in connection with the Plan, the Predecessor Companies compromised and settled (in exchange for common stock of the Company) substantially all of the pre-petition liabilities of the Predecessor Companies and the Company relating to disposal activities under Sections 106 and 107 of the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA"), Section 3008 of the Resource Conservation and Recovery Act ("RCRA") and similar state laws for clean-up of the remaining unsettled 20 designated sites not owned by any of the Predecessor Companies (the "Known Sites") and for natural resource damages at 15 of the 20 Known Sites. Pursuant to the EPA Settlement Agreement, the Predecessor Companies and the Company received from the United States and the States of Indiana and Wisconsin a covenant not to sue for response costs and, with the exception of five Known Sites, natural resource damages at each of the Known Sites. In addition, pursuant to Section 113(f)(2) of CERCLA, and as provided under the EPA Settlement Agreement, the Predecessor Companies and the Company will be protected against contribution claims filed by private parties for any Known Site for matters covered by the EPA Settlement Agreement. The EPA Settlement Agreement established a mechanism for the Company to resolve its liability for any other sites, except for those owned by the Company (the "Additional Sites"), arising from pre-petition disposal activity. The Company also agreed to share with such parties the proceeds of claims relating to the known sites made against certain insurers of the Predecessor Companies and their affiliates.
In the event that the United States, or the State of Wisconsin or the State of Indiana asserts a claim against any of the Predecessor Companies or the Company for response costs associated with pre-petition disposal activities at any Additional Site, the governmental party will be entitled to pursue its claim in the ordinary course, and the Company and the Predecessor Companies will be entitled to assert all of their defenses. However, if and when the Company or any of the Predecessor Companies is held liable, and if the liability is determined to arise from pre-petition disposal activities, the Company or such Predecessor Company may pay the claims in discounted "plan dollars" (i.e., the value of the consideration that the party asserting such claim would have received if the liability were treated as a general unsecured claim under the Plan). Such payment may be made in cash or securities, or a combination thereof, at the Company's or such Predecessor Company's option.
The Company received a letter dated October 30, 1997, from the EPA, Region 5, informing the Company that it might be financially responsible for a pollution incident at the facility formally leased by the Company at 312 North Hill Street, Mishawaka, Indiana. The EPA notified the Company that it expected the Company to pay for part or all of the approximately $1,700,000 of costs associated with the clean-up of a portion of such plant. The Company and the EPA negotiated a settlement whereby the EPA was given an allowed unsecured claim of $1,700,000 under the Plan, and the Company made a payment of $525,000 to the EPA in March of 1999. The liability had been fully accrued for in a prior fiscal year.
In October 1996, the EPA sent the Company a General Notice and Special Notice of Liability concerning the Refuse Hideaway landfill Superfund Site at Middleton, Wisconsin. While a unit of Uniroyal, Inc. is believed to have sent non-hazardous waste to the site between 1978 and 1984, the Company is not aware that the Uniroyal, Inc. unit sent any hazardous materials to the site. The Company has entered into an Administrative Order on Consent with the EPA and a Potentially Responsible Parties Agreement with certain other potentially responsible parties. The Company does not presently anticipate any material liability in connection with the site, and in any event, if the Company is found to have liability in connection with the site, such liability will be subject to the terms of the EPA Settlement Agreement.
Claims arising from real property owned by the Company are not affected by the EPA Settlement Agreement. In connection with the 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 26, 1999, the Company had incurred approximately $615,000 of related remediation costs.
The Company's acquisition of assets of Townsend Plastics in September 1997, included the building in which the business operates in Pleasant Hill, Iowa. The seller retained the underlying real property, which is leased to the Company for a term of ten years. The Company also has an option to acquire such real property until September 30, 2007. The real property is subject to a RCRA Facility Investigation/Corrective Measures Study with Interim Measures ordered by the EPA pursuant to RCRA. Two former lessees of the property are performing corrective measures on the real property to remediate soil and ground water contamination. The Company does not anticipate that such corrective measures will interfere with the Company's use of the property. The Company does not anticipate any liability to the Company in connection with such contamination or corrective measures as long as the Company remains a lessee of the property.
Based on information available as of September 26, 1999, the Company believes that the costs of known environmental matters either have been adequately provided for or are unlikely to have a material adverse effect on the Company's operations, cash flows or financial position.
Leases ------ The Company is a party to non-cancelable lease agreements involving equipment. The leases extend for varying periods up to 5 years and generally provide for the payment of taxes, insurance and maintenance by the lessee. Generally these leases have options to purchase at varying dates.
The Company's property held under capitalized leases, included in property, plant and equipment (Note 4) consists of the following (in thousands):
The approximate minimum future lease obligations on long-term non-cancelable capital lease obligations included in long-term debt (Note 10) during subsequent fiscal years ending in September are as follows (in thousands):
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.
The Company leases equipment, vehicles and warehouse and office space under various lease agreements, certain of which are subject to escalations based upon increases in specified operating expenses or increases in the Consumer Price Index. The approximate future minimum rentals under non-cancelable operating leases during subsequent fiscal years ending in September are as follows (in thousands):
Rent expense was approximately $2,027,000, $1,463,000 and $1,264,000 for Fiscal 1999, Fiscal 1998 and Fiscal 1997, 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 will earn interest at 12% per annum. The program is not qualified under Section 401 of the Internal Revenue Code. At September 26, 1999 and September 27, 1998 participant deferrals, which are included in accrued liabilities, were $726,000 and $519,000, respectively. The expense during the Fiscal 1999, Fiscal 1998 and Fiscal 1997 was $208,000, $184,000 and $161,000, respectively.
Also during the fiscal year ended October 1, 1995, split dollar life insurance contracts were purchased on the lives of the five executive officers. Annual insurance premiums of $186,000 are paid by the Company with respect to these policies. As of September 26, 1999 and September 27, 1998, $929,000 and $717,000, respectively, has been capitalized to reflect the cash surrender value of these contracts due the Company, net of loan balances.
As of September 26, 1999, the Company had employment contracts with four officers of the Company, providing for total annual payments of approximately $1,509,000 plus bonuses through September 1, 2000.
15. SALE OF THE AUTOMOTIVE DIVISION OF THE COATED FABRICS SEGMENT
During the fourth quarter of Fiscal 1996, management of the Company concluded that, based not only on its decision to sell, but also on discussions with interested buyers, a sale of the automotive operations of the Coated Fabrics Segment was probable. The automotive operations were comprised of 100% of the operations at the Port Clinton, Ohio ("Port Clinton") facility and a portion of overall operations at the Stoughton, Wisconsin facility ("Stoughton"). Further, on December 11, 1996, the Board of Directors approved the closure of the Port Clinton operation of the Coated Fabrics Segment during the fiscal year ending September 28, 1997 in the event a sale did not occur. Port Clinton had incurred operating losses of approximately $7,640,000 and $5,540,000 during the fiscal years ended September 29, 1996 and October 1, 1995.
In accordance with SFAS No. 121, the Company recorded a write-down of long-lived assets related to the automotive operations totaling approximately $8,900,000 during the fiscal year ended September 29, 1996. The related assets were classified as held for sale and depreciation ceased on September 29, 1996. The carrying value of the remaining long-lived assets to be disposed of was $3,217,000 as of September 26, 1999 and $4,530,000 as of September 27, 1998. The Company expects to dispose of the remaining automotive assets, the majority of which represent the real property at Port Clinton, in Fiscal 2000.
On May 15, 1997 the Company agreed to sell certain assets of the automotive division of the Coated Fabrics Segment located at the Company's Stoughton, Wisconsin, facility ("Stoughton") to Textileather Corporation, a subsidiary of Canadian General-Tower, Limited ("CGT") for $6,657,500. The Company received $4,657,500 in cash and Textileather retained $2,000,000 which was to be paid pursuant to the terms of a supply agreement and to bear interest at the rate of 9% per annum. Under the terms of the supply agreement, the Company agreed to continue to manufacture and supply Stoughton automotive products to its customers until Textileather Corporation could transfer production of the Stoughton automotive products to its own facility. The $2,000,000 plus accrued interest was payable in stages and contingent upon the successful transfer of certain automotive programs to Textileather Corporation. The first installment was due September 30, 1997. The Company requested payment and was denied payment by CGT. On October 10, 1997, the Company filed suit against CGT and Textileather Corporation in the Dane County, Wisconsin Circuit Court. The Company sought damages for non-payment of the holdback and declaratory and injunctive relief. On October 30, 1997, the defendants filed their answer, basically denying the claims. Textileather Corporation later commenced an arbitration in Madison, Wisconsin in connection with claims by Textileather Corporation under the asset purchase agreement. The two cases were settled on July 17, 1998. As part of the settlement the Company retained in perpetuity certain automotive programs it had previously sold, and two programs were retained until February 28, 1999. In addition, Textileather made a cash payment to the Company of approximately $379,000 which was recorded by the Company as a gain, and also transferred ownership back to the Company of an asset located at the Company's Port Clinton, Ohio facility.
On October 17, 1997 the Company further agreed to sell certain assets at Port Clinton to CGT for $5,325,000 plus the value of purchased inventories and plus or minus adjustments contingent upon the transfer of certain automotive programs to CGT as defined in the agreement. On July 10, 1998, the Company received $4,930,000 from CGT under this agreement relative to assets related to the Company's door panel program. Under the terms of a supply agreement, the Company agreed to continue to manufacture and supply customers of the door panel programs until CGT could transfer the production of the door panels to its own facility. The Company stopped producing door panels at its Port Clinton, Ohio facility in November, 1998. The Company received an additional $800,000 when CGT secured purchase orders for the twelve months following the door panel closing from certain customers as identified in the agreement. The Company also received an additional $900,000 on July 19, 1999 for certain customer approvals and resulting transfer to CGT of purchased assets that relate to the Company's instrument panel programs. During Fiscal 1999 and Fiscal 1998, the Company recognized a gain of $667,000 and $133,000, respectively, in connection with this transaction.
Management believes that the Company will not have any further significant gain or loss upon the disposal of the remaining Port Clinton assets.
16. JOINT VENTURE
As of September 29, 1997, the Company entered into a technology agreement with Emcore to acquire certain technology for the manufacture of epitaxial wafers used in high brightness LEDs for lamps and display devices. Included in other assets at September 26, 1999 are license fees relating to the technology agreement of $5,000,000 paid to Emcore during the fiscal year ended September 26, 1999 and September 27, 1998 (Note 8). On the date of the transaction, Thomas J. Russell, the Chairman of the Board of Directors of Emcore, was a director and major stockholder of the Company and Howard R. Curd, the Chairman of the Board of Directors and Chief Executive Officer of the Company, was a director and stockholder of Emcore. Subsequent to the transaction, Thomas J. Russell resigned from the Board of Directors of the Company and Howard R. Curd resigned from the Board of Directors of Emcore.
Uniroyal Optoelectronics, Inc., a wholly-owned subsidiary of the Company, entered into a joint venture (Uniroyal Optoelectronics, LLC) with Emcore which Uniroyal Optoelectronics, Inc. manages and owns a 51% interest. Emcore is the 49% owner. In July 1998, both owners capitalized the joint venture through cash contributions of $510,000 by the Company and $490,000 by Emcore.
During Fiscal 1999, Emcore made additional capital contributions to the joint venture of $5,500,000. The Company is required to fund its equivalent contribution of approximately $5,700,000 as cash is required by the joint venture.
Included in selling and general administrative expenses of the Company for Fiscal 1999 and Fiscal 1998 are $4,345,000 and $302,000, respectively, of joint venture start-up costs.
In July 1998, the joint venture entered into a supply agreement with Emcore whereby Emcore agreed to supply epitaxial wafers, dies and package-ready devices to the joint venture until the joint venture was ready to produce its own products. During Fiscal 1999, Uniroyal Optoelectronics, LLC sales of approximately $479,000 were a result of product supplied by Emcore.
In July 1998, the joint venture entered into a lease agreement for a facility in Tampa, Florida and has completed construction of leasehold improvements. It is anticipated that the joint venture will begin production for commercial applications in the second quarter of Fiscal 2000.
17. INCOME (LOSS) PER COMMON SHARE
FASB has issued SFAS No. 128, Earnings Per Share, which was required to be adopted for financial statement periods ending after December 15, 1997. SFAS No. 128 requires that the primary and fully diluted earnings per share be replaced by "basic" and "diluted" earnings per share, respectively. The basic calculation computes earnings per share based only on the weighted average number of shares outstanding as compared to primary earnings per share which included common stock equivalents. The diluted earnings per share calculation is computed similarly to fully diluted earnings per share. The Company has adopted SFAS No. 128 for the fiscal years ended September 26, 1999, September 27, 1998 and September 28, 1997.
The reconciliation of the numerators and denominators of the basic and diluted earnings per share computation is as follows:
Additional stock options to purchase 578,848, 577,848 and 1,224,478 shares of common stock at various prices were outstanding at September 26, 1999, September 27, 1998 and September 28, 1997, respectively. These shares were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares. Warrants to purchase 800,000 shares of common stock at $4.375 per share were not included in the computation of diluted earnings per share at September 28, 1997 because the exercise price was greater than the average market price of the common shares.
The calculation for earnings per share for Fiscal 1997 has been revised to include the effect of the dividends paid to the owners of preferred stock paid in common stock.
18. RELATED PARTY TRANSACTIONS
The Company has an agreement with an investment banking firm that employs relatives of one of the Company's executive officers. The investment banking firm has provided financial advisory services to the Company for fees of approximately $157,000, $732,000 and $274,000 during Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively. Of the $732,000 incurred during Fiscal 1998, $650,000 was incurred in connection with the Fleet Financing.
During the fiscal years ended September 26, 1999 and September 27, 1998, the Company incurred legal fees of approximately $299,000 and $326,000, respectively, with a law firm of which one of the Company's directors is a senior partner. Approximately $231,000 of the legal fees incurred in Fiscal 1998, were incurred in connection with the Fleet Financing. No legal fees were paid to this firm during the fiscal year ended September 28, 1997.
19. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of Enterprise and Related Information," which establishes standards for reporting information about a Company's operating segments, in the fourth quarter of Fiscal 1999. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance of the Segment.
The Company's operations are classified into four reportable segments: High Performance Plastics, Coated Fabrics, Specialty Adhesives and Optoelectronics. The High Performance Plastics Segment manufactures thermoplastic and acrylic products. The Coated Fabrics Segment manufactures vinyl coated fabric products. The Specialty Adhesives Segment manufactures industrial adhesives and sealants. The Optoelectronics Segment will manufacture epitaxial wafers, dies and package-ready dies used in high brightness light-emitting diodes (LEDs) once operations commence.
The Company's reportable segments are strategic business units that offer different products and are managed separately based on fundamental differences in their operations.
The High Performance Plastics Segment includes Uniroyal HPP Holdings, Inc. and its subsidiary, High Performance Plastics, Inc. The Coated Fabrics Segment includes Uniroyal Engineered Products, Inc.'s operating division, Uniroyal Engineered Products. The Specialty Adhesives Segment includes Uniroyal Engineered Products, Inc.'s operating division, Uniroyal Adhesives and Sealants. The Optoelectronics Segment includes Uniroyal Optoelectronics, Inc. and its majority-owned subsidiary, Uniroyal Optoelectronics, LLC. All other subsidiaries are considered part of corporate.
The Company's assets and operations are located in the United States. The principal markets for the Company's products are in the United States. Export sales to foreign countries, based upon where the products are shipped to, were approximately $8,758,000, $11,639,000 and $7,189,000 in Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively. No single customer accounted for 10% or more of the Company's net sales.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Management evaluates a Segment's performance based upon profit or loss from operations before interest and income taxes. Intersegment sales are not significant.
Segment data for Fiscal 1999, Fiscal 1998 and Fiscal 1997 is as follows (in thousands):
Included in each Segment's operating income in Fiscal 1999 is an allocation of corporate overhead based upon 3.5% of Segment sales with the exception of the Optoelectronics Segment for which the corporate overhead allocation was $876,000.
During Fiscal 1998, the Company changed its methodology for the allocation of corporate overhead from an allocation of 100% of certain corporate costs to an allocation of costs based upon 3.0 - 3.5% of Segment sales. Prior fiscal year allocations were not restated. Had prior year allocations been restated for consistency with current year allocations, it would have resulted in additional corporate overhead allocation to the High Performance Plastics, Coated Fabrics and Specialty Adhesives Segments' in Fiscal 1998 of $245,000, $177,00 and $48,000, respectively. It would have resulted in (less) additional corporate overhead allocation to the High Performance Plastics, Coated Fabrics and Specialty Adhesives Segments in Fiscal 1997 of ($2,386,000), $273,000 and ($772,000), respectively.
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (in thousands):
21. Subsequent to the Company's year end, a nonbinding letter of intent was signed with a potential buyer of HPPI, which may result in a substantial gain if consummated. The potential sale is subject to a number of conditions including the negotiation of definitive agreements, approval by the Board of Directors of both companies, clearance by the appropriate governmental agencies and additional due diligence and investigation. Either party may terminate the discussions. Due to the contingencies involved, the Company is unable to predict whether or when a transaction with the potential buyer will be consummated.
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 26, 1999 and September 27, 1998, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity and cash flows for the years ended September 26, 1999, September 27, 1998 and September 28, 1997 and have issued our report thereon dated December 20, 1999 (included in this Form 10-K). Our audits also included the accompanying consolidated financial statement schedule listed in Item 14 of this Form 10-K. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP Certified Public Accountants
Tampa, Florida December 20, 1999
(a) Amount represents recovery of amounts previously written-off and reserve established for receivables of an acquired business.
(b) Amount includes write-off of uncollectible accounts.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNIROYAL TECHNOLOGY CORPORATION
Date: December 23, 1999 /s/ Howard R. Curd --------------------- By: Howard R. Curd, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Robert L. Soran /s/ Richard D. Kimbel ------------------- --------------------------- Robert L. Soran, Director, President Richard D. Kimbel, Director and Chief Operating Officer Date: December 23, 1999 Date: December 23, 1999
/s/ George J. Zulanas, Jr. /s/ Curtis L. Mack -------------------------- ---------------------------- George J. Zulanas, Jr., Vice President, Curtis L. Mack, Director Treasurer and Chief Financial Officer Date: December 23, 1999 Date: December 23, 1999
/s/ Howard R. Curd /s/ Roland H. Meyer ------------------- ---------------------------- Howard R. Curd, Director, Chairman of Roland H. Meyer, Director the Board and Chief Executive Officer Date: December 23, 1999 Date: December 23, 1999
/s/ Peter C. B. Bynoe /s/ John A. Porter ---------------------- ---------------------------- Peter C. B. Bynoe, Director John A. Porter, Director Date: December 23, 1999 Date: December 23, 1999
/s/ Thomas E. Constance ------------------------ Thomas E. Constance, Director Date: December 23, 1999
POWER OF ATTORNEY
Each person whose signature to this report appears below hereby appoints Howard R. Curd, Robert L. Soran and Oliver J. Janney, and each individually, any one of whom may act without the joinder of the others, as his agent and attorney-in-fact to sign on his behalf individually and in the capacity stated below and to file all amendments to this report, which amendments make such changes and additions to this report as such agent and attorney-in-fact may deem necessary and appropriate.
/s/ Howard R. Curd /s/ Peter C.B Bynoe ------------------- -------------------- Howard R. Curd, Director, Chairman of the Peter C.B. Bynoe, Director Board and Chief Executive Officer Date: December 23, 1999 Date: December 23, 1999
/s/ Robert L. Soran /s/ Thomas E. Constance -------------------- ------------------------ Robert L. Soran, Director, President and Thomas E. Constance, Director Chief Operating Officer Date: December 23, 1999 Date: December 23, 1999
/s/ Richard D. Kimbel ------------------------ Richard D. Kimbel, Director Date: December 23, 1999
/s/ Curtis L. Mack ------------------------- Curtis L. Mack, Director Date: December 23, 1999
/s/ Roland H. Meyer ------------------------- Roland H. Meyer, Director Date: December 23, 1999
/s/ John A. Porter ------------------------- John A. Porter, Director Date: December 23, 1999