Insider Buyout

Insider Buyout

Uniroyal Technology Corp.'s chairman led a group that bought the coated-fabrics division for $17.39 million, about $12.6 million less than the Sarasota company was asking for the division prior to bankruptcy.

By David R. Corder

Associate Editor

Uniroyal Technology Corp. did well with Naugahyde. The patented coated fabric accounted for almost $30 million in net sales for the 1999 fiscal year. Naugahyde sales increased by about a million dollars a year from 1996 to 1999 - the last year the publicly traded company provided a breakdown on such information to its shareholders.

But then the Sarasota-based company embarked on a new vision spending millions of research dollars on the development of semiconductor wafers and package-ready dyes used in high-brightness light-emitting diodes.

As part of this new operating vision, the company hired an investment banker in the latter part of 2001 to find a buyer for Uniroyal Engineered Products Inc. - the Sarasota company's coated-fabrics subsidiary - at an asking price of about $30 million. The company then promptly declared the subsidiary a discontinued operation with net sales of $21.2 million for the nine months ended June 30, 2002.

If a potential buyer ever existed, however, the company didn't disclose it to shareholders. It never would either, because in August 2002 the company petitioned the U.S. Bankruptcy Court in Delaware to reorganize under Chapter 11 of the U.S. Bankruptcy Code. It claimed total assets of about $86 million and liabilities of about $69 million.

A little more than a year later, federal bankruptcy Judge Peter Walsh approved the sale of the coated-fabrics subsidiary to an investment group led by Howard R. Curd, Uniroyal Technology's chairman and chief executive officer.

In a shareholder's notice released earlier this month, the company now based in Tampa disclosed that the investment group - New York-based UEP Acquisition LLC - paid $17.39 million for the coated-fabrics subsidiary. But the deal is far more complicated. The actual buyer - the UEP-affiliated Five Points Partners LLC - paid only a fraction of the total in cash.

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It's difficult to determine exactly when Curd formed the idea of acquiring the coated-fabrics division, because his son - Howard F. Curd - is listed in bankruptcy court records as the primary contact for Five Point Partners. The son, a former stockbroker listed as Five Points' president, did not respond to repeated requests for information.

But New York corporate records show that Manhattan entrepreneur John Rigos formed Five Points Partners in March. Only in his early 30s, Rigos has gained a fair amount of public attention since he earned a master's degree in business administration in 1996 from Insead, an international business school affiliated with the University of Pennsylvania's renowned Wharton School. He spent time as an entrepreneur-in-residence at Bill Gross' idealab!, a Pasadena, Calif.-based incubator that nurtures high-tech companies such as NetZero.

Although he referred all questions to Howard F. Curd, Rigos says he did not participate in the acquisition negotiations. So he says he could not talk about the financial details of the transaction. He would only confirm a single mention of his name as Five Points' chief financial officer in the acquisition letter of intent the partnership filed in the bankruptcy court records.

The letter of intent describes both Curds as having equity interests in Five Points Partners. It also says the younger Curd was a director for nine months at Uniroyal Technology. The letter also mentions that Curd served as CEO of Jesup & Lamont Capital Markets Inc., which provided financial advisory services from 1994-2001 to Uniroyal Technology.

Up until March, the National Association of Securities Dealers (NASD) listed the younger Curd as a registered dealer and 100% shareholder of Jesup & Lamont Group Holdings Inc. and KC May Corp. While a NASD spokesman would not release details, the securities regulatory group is investigating a complaint into the trading of Uniroyal Technology stock and KC May Securities.

Besides the Curds and Rigos, the letter of intent also lists Thomas E. Constance as legal counsel to Five Points Partners. Constance, a member of the New York law firm of Kramer Levin Naftalis & Frankel LLP, is a Uniroyal Technology director. His law firm provided legal services to Uniroyal Technology prior to the bankruptcy petition and still has a $68,067 claim against the debtor company.

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In court records, Walsh cites several reasons for his decision to approve the sale of the coated-fabrics subsidiary to Five Points Partners. For one, he accepted the premise the partnership conducted arms-length negotiations with an independent subcommittee of Uniroyal Technology directors.

Walsh also wrote that the sale, approved Oct. 2, satisfied the sound business purpose test, the consideration offered was fair and reasonable, the purchase agreement was negotiated in good faith, adequate notice of the auction sale was given and bidding protections were adopted. He also notes the sale price purportedly was nine times the subsidiary's annual earnings before income tax, depreciation and amortization.

Besides, Five Points Partners is the only group that submitted a bid for the coated-fabrics subsidiary and its main operating facilities in Stoughton, Wis. As part of its participation in the bidding process, Five Points Partners required reimbursement from Uniroyal Technology for all due diligence costs it expended as a "stalking horse" bidder. The agreement also granted Five Points representatives exclusive access to any other bid submitted.

Still, those guarantees satisfied other Uniroyal Technology directors such as Curtis L. Mack, a partner in the Atlanta office of McGuireWoods LLP

"I know whatever sale took place the creditors and the court approved the transaction," Mack says. "Before this transaction occurred, the public was aware of it. Creditors were well aware of it. There were several discussions or opportunities to acquire this, and the board heard all the facts. The bankruptcy judge reviewed the matter. The judge had all the facts and approved it."

Although described as a $17.39 million sale, Five Points Partners actually contributed only about $7.1 million in cash - less any decrease or increase in current assets from the subsidiary's May 25 balance sheet. The difference is the $10.23 million in liabilities the partnership agreed to assume. That amount is all the liabilities owed by the subsidiary, according to court records. All cash proceeds of the sale went to CIT Group/Business Credit Inc., the debtor's post-petition lender.

In the letter of intent, the Five Points partnership disclosed it planned to finance the acquisition with $2.5 million in founder equity and the remaining amount through subordinated debt capital. The partnership agreed to disclose the source of the subordinated debt at the Oct. 17 closing, but court records contain no mention of the source. Neither officials at Five Points Partners nor Uniroyal Technology responded to requests for information about the source of that subordinated debt.

As part of the acquisition, Five Points Partners also secured a purchase option agreement on another Uniroyal Technology subsidiary - SAP America Inc. The SAP subsidiary spent nearly $5 million in costs from 1994 to 1996 to develop a computer database and mainframe system capable of integrating order entry, production, inventory control, shipping, billing and financial information. That system is considered vital to the operation of the coated-fabrics subsidiary.

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The bankruptcy court received only three objections to the sale of the coated-fabrics subsidiary - the federal Environmental Protection Agency; the Official Committee of the Uniroyal Retiree Benefits Inc., a non-profit group representing company retirees; and the Official Committee of the Pre-86 Plastic Retirees, another nonprofit retirees group.

In its objection, the EPA took issue with a provision that authorized the sale free and clear of liens, claims, interests and encumbrances on the subsidiary's Stoughton facility, where considerable environmental reclamation has taken place over the years. The agency objected to any declaration that would nullify its role as a public watchdog in any future cleanup at the site.

The federal agency had a curious relationship with Uniroyal Technology. The proxy statement the company filed with the SEC in January 2001 shows the EPA owns about 1.7 million shares of Uniroyal Technology stock or about 6.84% of total shares outstanding. The agency apparently acquired the stock through an earlier consent agreement, though an EPA spokesperson says the agency no longer owns any interest in that stock, which trades at less than a penny a share. A search of SEC records shows no indication of how the agency disposed of that stock, and the spokesperson says he doesn't have enough details to comment any further.

As for the retiree committees, those claims relate to claims Uniroyal Technology assumed from predecessor companies. Both of those committees offered limited objections to the sale but then filed additional objections after Uniroyal Technology filed a request in September to terminate its obligations to those corporate retirees.

"There is serious doubt whether they'll ever be able to recover anything on the amounts that were not paid for - the prescription drug plan, health plan, medical benefits," says New York attorney Richard Dorn of Levy Ratner & Behrooze PC who represents the Pre-86 retirees. "That certainly is a concern. The question of what's going to happen going forward has not been fully determined. Uniroyal moved to diminish, to cut them off entirely. That motion and our opposition were mooted by the fact the judge put them into Chapter 7."

Some creditors don't expect to recover any proceeds from the debtor. For instance, the corporation owed about $498,866 to the New York law firm of Sullivan & Cromwell. Law firm partner Robinson B. Lacy says nobody at the firm follows that claim any more.

One of Uniroyal Technology's unsecured creditors, Jupiter resident Keith McIntosh, didn't object even though he filed a claim in August 2002 for nearly $1.3 million.

Still, McIntosh expressed concerns about the sale to the Five Points partnership. He attributes part of his concerns to the structure of the U.S. bankruptcy code. "If it was such a good deal, (the creditors) should have gotten an interest in that future business rather than just lose everything," he says. "The way I look at it we were insiders, too; we lost our money. The people who mismanaged the company ended up with something in return, where creditors such as myself ended up losing 100%. Howard Curd certainly didn't lose 100%."

McIntosh lost future compensation from the $5.2 million sale of Rockledge-based Happel Marine Inc. in June 1999 to Uniroyal Technology. He acknowledges now trepidation then about selling his business to the Sarasota company.

"There was nobody there who knew how to run a profitable operation," McIntosh argues. "Unfortunately, I knew that when I sold the business to them. By the time they filed bankruptcy, the unsecured creditors had reached a point where they knew they were not going to get anything out of it, anyway."

At the time of his sale, McIntosh says he saw a telltale sign - fragmented operations with too little central control. He says little changed from the time Howard R. Curd resurrected the predecessor companies in the early 1990s and then took it public as Uniroyal Technology.

"The company, when it originally went into Chapter 11, had too many independent divisions," he says. "The cost of overhead was way out of line. It was a totally inefficient operation."

Uniroyal Technology Corp.

The company emerged in 1992 under the leadership of Howard R. Curd as a publicly traded successor to Polycast Technology Corp. and its affiliated companies through a bankruptcy reorganization plan. Under its corporate umbrella, the corporation developed, manufactured and sold various materials that used plastics and specialty chemicals technologies.

It did not post a profitable year until 1997, when it produced net income of $379,000, or 3 cents a share, on net sales of about $209 million.

Two years later, the company discontinued some of its operations in pursuit of a plan to produce semiconductor wafers and high-brightness, light-emitting diodes, switches and transformers.

In 1999, the company reported net income of about $47 million, or $1.87 a share on total net sales of $68 million. Its stock traded as high as $37.50 in February 2000, though shares fell steadily throughout the year to about $6.25 by yearend.

Cash flow became an increasing problem over the past three years as the company discontinued hard-manufacturing operations in favor of its highly competitive high-tech operations. The company filed for protection in August 2002 under Chapter 11 of the U.S. Bankruptcy Code. It converted to Chapter 7 in October.

Uniroyal Engineered Products Inc.

Balance sheet

July 27, 2003May 25, 2003Sept. 29, 2002

Assets$15,734,000$16,153,000$17,396,000

Liabilities$10,320,000$10,230,000$10,647,000

Income statement

10 months ended 8 months ended 12 months ended

July 27, 2003May 25, 2003 Sept. 29, 2002

Net sales$22,674,000$18,204,000$28,658,000

Gross profit$3,207,000$2,566,000$3,779,000

Operating expense$2,249,000$1,883,000$2,764,000

Net income$823,000$575,000$667,000