UNIROYAL Sees The Light posted 02/06/00 By Michael Pollick STAFF WRITER

Richard Cassidy is monitoring the status of a large wafergrowth system. All the work is done in a clean room.

TAMPA -- Dressed in operating room gowns and face masks, workers at Uniroyal Technology Corp.'s new Optoelectronics plant move quietly from one piece of million-dollar equipment to the next. They are carrying a precious cargo of two-inch, artificial sapphire wafers, each of which is being transformed into thousands of high-brightness, light-emitting diodes.

Sarasota-based Uniroyal is one of only a few companies to attempt the manufacture of blue and green high-brightness LEDs. And its entire future depends on doing it right.

"This particular type of technology is almost on the verge of witchcraft," said Thomas J. Russell, the largest shareholder in Uniroyal Technology Corp. and the man who showed Uniroyal the light.

Russell, until late 1998 a Uniroyal director, is chairman of the New Jersey company EMCORE Inc., which creates most of the high-tech equipment needed to make the diodes.

His company is now a 49 percent venture capital partner in Uniroyal Optoelectronics.

Decisions made by Uniroyal's board, before and after Russell's departure, are transforming the Nasdaq-traded Uniroyal from a successful but pedestrian manufacturer of specialty plastics into a high-flying leader in what may be the biggest advance in lighting since Thomas Edison put a sliver of tungsten between two electrodes.

Running on low power and putting out strong light in all colors, the small semiconductor devices are finding their way into stoplights, onto cars, trucks, boats and planes, and into flashy outdoor video display signs like the ones at Raymond James Stadium.

The manufacture of these lights is expected to be a billion-dollar a year business by 2003, and Uniroyal intends to be a key player.

Even though the company is only beginning to produce diodes, Wall Street has already reacted enthusiastically. In the past four months, Uniroyal's Nasdaq-traded shares have soared from $10 to $30.

The plant and its product

Now that EMCORE's reactors are in place and production has begun, Uniroyal has become nearly paranoid about tours.

When Uniroyal President Robert Soran recently provided a reporter a tour of the plant, which looks more like a laboratory, he would not allow a photographer along.

This may be overkill. But there is much that is proprietary about the manufacture of these small lights.

Company executives now find themselves commuting to the $35 million plant they have established in a business park just off Interstate 75 near Tampa.

The Tampa plant, six months overdue, is just now beginning to turn out commercial quantities of diodes. Uniroyal, for now anyway, isn't planning to make the completed diode lamps, just the semiconducting diode that is its heart.

Each semiconductor is a tiny square 12/1000s of an inch across.

Like semiconductors in general, they are worth far more than their weight in gold. The red and amber LED chips, depending on brightness, might sell for five to 11 cents apiece -- triple that for a completed lamp.

For blues, the raw material can cost between 20 and 40 cents per tiny piece, or about four times as much.

Ten thousand blue-light chips, which might represent the yield from one wafer, will fit on a six-by-six inch sheet of sticky paper.

Send 10 such sheets in a small FedEx box to a joint venture controlled by General Electric, and you'd better make sure you get insurance for $40,000.

Paying their dues

Starting with a bankrupt company in 1991, Uniroyal's Sarasota-based management team managed to satisfy creditors, get nine manufacturing plants running in the black at the same time and more than double Uniroyal's price from $4 to around $10 a share by early 1998.

But that wasn't enough for Howard Curd, Uniroyal's chairman, or Soran, who had together shaped Uniroyal Technology from the plastics, adhesives and fabrics segments of a former conglomerate best known for its Uniroyal tires.

Even before the stock plateaued at $10 in 1998, management began to feel hemmed in.

The company already had a large market share in a number of specialty lines, and could grow those businesses no faster than the industries that depend on them.

For example, the majority of passenger cabin windows and cockpit windows on today's passenger and military planes are made by Uniroyal's Polycast unit, which has developed a special ability to make and form clear acrylic sheets that are both clear and strong. But the number of airplanes built each year doesn't grow in the double-digits, so Uniroyal's growth is limited.

"We are very attuned to building shareholder value, because we are shareholders who spent real money for our stock," Soran said.

Wall Street, in turn, tends to assign value ranges for various industries.

Right now, Wall Street will pay 15 to 20 times what the company earns in a year for specialty chemical companies like Uniroyal.

With half a buck a share in earnings and a stock price hovering near $10, Uniroyal had already arrived.

The board's collective realization, according to Soran, was that Uniroyal needed to move into a higher technology field, one that Wall Street was willing to pay for.

"We'd like to be in an industry that trades at 40, 80 or 100 times earnings," Soran said.

It looks like they found one.

EMCORE to the rescue

Call it a happy coincidence that one of Uniroyal's board members in 1997 and 1998, a friend of Curd's, was Thomas J. Russell.

At that time, Russell had just become the lead investor in the acquisition of a high-technology New Jersey company called EMCORE Inc. His company was already making sophisticated electro-chemical reactor units that could be used to create new types of compound semiconductors that reflect or absorb light, called optoelectronic devices. These include solar cells that generate twice the electricity as existing silicon cells, high-brightness LEDs and laser diodes that hold promise for speeding up data communications.

Russell's plan for EMCORE was to take it beyond equipment manufacture, and to use the expertise of the two dozen or more Ph.D.s on staff to fabricate the semiconductor devices themselves.

He decided to focus on solar cells and lasers and suggested a partnership in high-brightness LEDs to Uniroyal.

"Sitting on the Uniroyal board, it became clear to me that here you had some serious management talent plodding along in a very pedestrian business," Russell said.

"Remember the movie 'The Graduate,' where the guy says to Dustin Hoffman, 'I have one word for you: plastics?' I went to a board meeting and said, 'I have one word for you: optoelectronics,' " Russell said.

By March 1998, Uniroyal's directors had decided that high-brightness LEDs were a good fit.

From selling airplane windows, automotive fabrics and molded plastic components like dashboards, Uniroyal already was comfortable dealing with corporate powerhouses like General Electric and General Motors, who would be among the expected buyers of the LEDs.

Plus, Uniroyal had experience running chemical processes in the bottom-line conscious environment of the manufacturing plant.

Why not apply it to something for which The Street pays top dollar?

Uniroyal bought the license for making high-brightness, light-emitting diodes from EMCORE in March 1998.

In the fall of 1998, Uniroyal announced that it would build a plant to do so in Tampa, and that EMCORE would be a joint venture partner in the plant.

In November 1998, Uniroyal invested $9 million in EMCORE, beefing up its coffers prior to an early 1999 public stock offer. EMCORE used half the money to invest in a joint venture with Uniroyal Optoelectronics.

That was only about one-seventh of the $35 million required to build the venture's first manufacturing plant -- the clean-room type of operation in Tampa.

"They brought the science and the reactors," Curd said. "We were bringing to the party the capital, the manufacturing expertise and the visibility to the General Motors of the world. We know these companies, and how they make purchases."

While EMCORE was establishing its joint venture with Uniroyal, the New Jersey company was preparing a parallel deal at the other end of the distribution pipeline -- the manufacture and sale of finished diode lamps.

In January 1999, EMCORE announced the creation of a joint venture partnership with General Electric called GELcore L.L.C. Both EMCORE and Uniroyal expect GELcore to become a large, ready-made customer for much of Uniroyal's output of the raw semiconductors.

GELcore, based along with GE's research staff in Independence, Ohio, will receive the valuable FedEx boxes from Uniroyal at an offshore plant. GELcore will turn the little squares into completed lamps by attaching a thin electric wire to each side, then encapsulating each diode in an epoxy lens, according to Bill Kroll, GELcore's vice president of business development and also an officer of EMCORE.

GELcore will go after the stoplight market, which is expected to be huge in its own right.

But, just as importantly, GELcore expects Uniroyal to make semiconductors that produce white light by taking bright blue semiconductors and dousing them with a yellow phosphor, Kroll said.

Burning bridges

As the world was preparing to celebrate the birth of a New Year, Uniroyal was cementing its decision to become an optoelectronic company.

Just before the end of 1999, Uniroyal announced it would sell its bread-and-butter business of high-performance plastics to focus on the new business.

The results of the deal, to close this month, are going to be dramatic.

Nine hundred of Uniroyal's 1,200 employees work at its nine high-performance plastics plants, which accounted for $130 million of Uniroyal's 1999 sales, or about two-thirds of the total.

The buyer, NYSE-listed Spartech Corp., will pay $217.5 million in cash for the plants, or about 1.6 times sales. Both buyer and seller say the price is on the high side for such transactions.

Uniroyal will use the proceeds to wipe out its $110 million debt and to pay for expansion in LED manufacturing.

The sale leaves Uniroyal with two other business segments in addition to LEDs: specialty adhesives and the Naugahyde brand of plastic coated fabrics.

"I was a little surprised," said Linc Werden, an analyst at the New York brokerage firm of H.G. Wellington & Co. Werden was one of the first stock analysts to latch onto Uniroyal.

"It is an aggressive move. You usually don't sell your cash cow," Werden said. ". . . But they've chosen to do this, pay down debt and run it as an LED company."

Werden added that the two remaining old-line businesses, adhesives and coated fabrics, "are even more extraneous now than they were before."

Curd agreed in principle.

"They don't fit strategically," he said. But he has no immediate plans to get rid of them. He said both businesses are running well and generate good cash flow.

Curd pointed out that, in addition to an outright sale, Uniroyal's options include spinning the chemical businesses off to Uniroyal shareholders as a separate stock company or companies, or selling them to the public with their own initial public stock offer or offers.

A stock explodes

Uniroyal stayed a quiet $10 stock until early November, when the company put out a press release stating that it was increasing demand for high-brightness, light-emitting diodes and had decided to double its capacity to make the blue and green versions at the Tampa plant.

The volume of shares traded tripled from Nov. 9 to Nov. 10, and the stock settled into the teens.

But the shares really began moving in late December, and hit $20 a share by Dec. 27, when Uniroyal announced the sale of its mainstay plastics business to Spartech.

Since then the shares have hit $30 during some trading days, and currently hover near that level.

There are roughly 12 million shares of stock outstanding.

That means the runup from $10 to $30 took the market's estimation of Uniroyal's worth from $120 million to $360 million in about three months.

Analyst Werden thinks the stock, as an emerging pure play in the high-brightness field, has a lot of room to move.

"People have just started to wake up to it," he said.

Execution

The remaining question is simple: Can Uniroyal live up to its advance billing in this new field.

Originally, Uniroyal announced that it would be producing high-brightness, light-emitting diodes by last summer. That proved to be too optimistic.

It is only now, more than six months later, that the company can say it is beginning to produce in volume.

"Our plan is to introduce product this first quarter, and we certainly are hoping Uniroyal will be ready for us," said Kroll of GELcore. "We think it will. We are already getting preliminary product from them."

Uniroyal and its partner, EMCORE, both acknowledge that there were problems but say they are now ironed out.

"Yeah, there were problems with the reactors," Russell said, noting the complexity of the process. "You are laying down mono-molecular layers of gallium nitride on a spinning two-inch sapphire disk. This is very, very difficult to do."

Meanwhile, the competition already knows how to make the sought-after blues and greens, and is selling them as fast as it can make them.

While Uniroyal was signing on the dotted line with EMCORE, South Dakota-based Daktronics Inc. was busy installing two huge TV-screen like panels in Tampa. The twin 24-by-95-foot electronic display signs at Raymond James Stadium are made out of hundreds of thousands of high-brightness LEDs.

Daktronics buys all of its LEDs from Nichia Chemical Co. of Japan, according to the company's manager of large matrix systems, Reece Kurtenbach.

Kurtenbach looks at these diodes like an artist looks at paint.

Nichia was able to do two things nobody else had done, he said. The company achieved a higher intensity blue and then was able to shift the process to make a high-intensity green.

"Once we had the blue and green from Nichia and the red from other manufacturers," Kurtenbach said, "we were really able to make high-intensity video displays."

While Daktronics has been a Nasdaq stock since 1994, there are many younger companies out there creating their own markets for bright-light LEDs.

"We see all sorts of little companies popping up, using these things in ways no one thought of," said Robert Steele of Strategies Unlimited, which monitors the emerging industry. "It's a cottage industry that is starting to be very interesting."

High-brightness LEDs are already showing up in stoplights, where their higher cost is offset by their longer life and lower power usage.

They use so much less power than incandescents that the backup power supply box -- basically a box of batteries -- at each intersection can be reduced from the size of a filing cabinet to the size of a breadbox.

Strategies Unlimited estimates that $400 million worth were sold in 1999, but that the market will explode to more than $1 billion within four years.

"Thirty-three percent of the world's energy goes to light things up," said Russell. "You reduce that by 80 to 90 percent, that has a macroeconomic impact on the world, on the environment. On oil. OPEC is not going to like this one bit. This is heavy stuff."

Staff writer Michael Pollick can be contacted at (941) 957-5142 or by e-mail at michael.pollick@herald-trib.com.