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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 1-12261
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SUPERIOR TELECOM INC.
(Exact name of registrant as specified in its charter)
DELAWARE 58-2248978
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1790 BROADWAY 10019-1412
NEW YORK, NEW YORK (Zip code)
(Address of principal
executive offices)
Registrant's telephone number, including area code 212-757-3333
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $.01 per share................. New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
At March 24, 2000, the registrant had 20,186,426 shares of common stock, par
value $.01 per share, outstanding, and the aggregate market value of the
outstanding shares of voting stock held by non-affiliates of the registrant on
such date was $124,788,852, based on the closing price of $____ per share of
such common stock on such date.
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DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Company's Annual Meeting of Stockholders in
Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Superior TeleCom Inc. (together with its subsidiaries, unless the context
otherwise requires, the "Company" or "Superior") is the largest wire and cable
manufacturer in the United States and the fourth largest in the world. Superior
manufactures wire and cable products for the communications, original equipment
manufacturer or "OEM" and electrical markets. Superior is a leading manufacturer
and supplier of communications wire and cable products to telephone companies,
distributors and system integrators; magnet wire and insulation materials for
motors, transformers and electrical controls as well as automotive and specialty
wiring assemblies for automobiles and trucks; and building and industrial wire
for applications in commercial and residential construction and industrial
facilities. Superior operates 33 manufacturing facilities in the United States,
Canada, United Kingdom and Israel.
ORGANIZATIONAL HISTORY
Superior was incorporated in July 1996 as a wholly-owned subsidiary of The
Alpine Group, Inc. ("Alpine"). On October 2, 1996, Alpine completed a
reorganization whereby all of the issued and outstanding common stock of two of
Alpine's wholly-owned subsidiaries, Superior Telecommunications Inc. and DNE
Systems, Inc., were contributed to Superior.
On October 17, 1996, Superior completed an initial public offering of its
common stock, generating net proceeds of approximately $90 million which were
used to reduce outstanding bank debt and pay Alpine certain previously declared
dividends. In November 1996, the underwriters of the initial public offering
exercised their over-allotment option to purchase additional shares of Superior
common stock, resulting in additional net proceeds of approximately
$13.3 million of which $8.1 million was used to repurchase its common stock,
with the balance used to reduce bank debt. As a result of the initial public
offering, Alpine's common stock ownership position in Superior was reduced to
approximately 50.1%. As a result of treasury stock repurchases and other
transactions, Alpine's current common stock interest in Superior is 51.8%.
Superior effected a five-for-four stock split on February 2, 1998 and again
on February 3, 1999, and issued a 3% stock dividend on February 11, 2000. All
references herein to shares of common stock (except shares authorized and
issued) and to per share information have been adjusted to reflect the stock
splits and stock dividend on a retroactive basis.
RECENT SIGNIFICANT GROWTH
Over the past five years, Superior, including its predecessors, has led a
consolidation of the North American wire and cable industry. In May 1995,
Superior Telecommunications Inc. acquired the North American copper
telecommunications wire and cable operations of Alcatel N.A. Cable
Systems, Inc. and Alcatel Canada Wire, Inc. With this acquisition, Superior
became the largest North American manufacturer of copper telephone wire and
cable.
On November 27, 1998, a newly formed, wholly-owned subsidiary of Superior
acquired approximately 81% of the outstanding shares of common stock of Essex
International Inc. through a cash tender offer for an aggregate price of
approximately $770 million. Essex, through its subsidiaries, manufactures and
distributes wire and cable and insulation products, including magnet wire and
insulation materials for electromechanical devices, building wire for commercial
and residential construction applications, copper communications wire and cable,
industrial wire and automotive wire. As a result of the acquisition of Essex,
Superior is now a diversified supplier of wire and cable products and, based on
current annualized sales levels, is the largest wire and cable manufacturer in
North America and the fourth largest wire and cable manufacturer in the world.
1
In connection with the Essex acquisition, Superior amended and restated its
bank credit facility and entered into a new $200.0 million senior subordinated
credit agreement. These credit facilities provide for total borrowings of up to
$1.35 billion. Approximately $1.2 billion of the total proceeds available under
these credit facilities were used to finance the Essex cash tender offer,
including the refinancing of certain indebtedness of Superior and Essex, and to
pay related fees and expenses. The remaining proceeds were available to fund the
working capital requirements of Superior.
On March 31, 1999, Essex merged with a wholly-owned subsidiary of Superior.
In the merger, holders of the remaining 19% of the outstanding shares of common
stock of Essex each received 0.64 (in the aggregate $167 million liquidation
value) of an 8 1/2% trust convertible preferred security of Superior Trust I, a
Delaware trust in which Superior owns all the common equity interests, for each
share of Essex common stock owned. Upon completion of the merger, Essex became a
wholly-owned subsidiary of Superior.
During 1998, Superior expanded its presence in international markets. On
May 5, 1998, Superior acquired 51% of the issued and outstanding shares of
common stock of Cables of Zion United Works, Ltd. for approximately
$25.0 million in cash. Cables of Zion is an Israel-based cable and wire
manufacturer whose primary products include fiber and copper communications wire
and cable and power cable. Cables of Zion products are sold primarily into the
Israeli and European markets.
On December 31, 1998, Superior, through Cables of Zion, acquired the
business and certain operating assets of Cvalim-The Electric Wire & Cable
Company of Israel Ltd. and its wholly-owned subsidiary, Dash Cable Industries
(Israel) Ltd., for approximately $41.2 million in cash. Cvalim was the leading
Israeli manufacturer of electrical, communications and industrial wire and cable
products. Furthermore, in October 1999 Cables of Zion acquired the business and
certain operating assets of Pica Plast Limited, the remaining major wire and
cable company in Israel, for a purchase price of approximately $10 million. As a
result of these acquisitions, Cables of Zion, which has changed its name to
Superior Cables Limited, is the dominant wire and cable manufacturer in Israel
with an approximate 80% market share. Superior believes that expanding its
operational presence in Israel will enable it to participate further in the
growing communications wire and cable markets in Europe and the Middle East. The
operations of Superior Cables Limited, including the acquired operations of
Cvalim and Pica Plast, are hereinafter referred to as "Superior Israel".
BUSINESS LINES
Prior to the acquisitions of Essex and Superior Israel, Superior's product
sales were comprised almost entirely of communications wire and cable. With the
Essex acquisition, Superior broadened its product lines into the OEM segment,
which includes principally magnet wire, automotive wire and related products,
and into electrical wire, which includes low voltage building wire and
industrial wire. With the Superior Israel acquisition, Superior added additional
communications wire and cable product sales on an international basis, including
fiber optic cable, along with low, medium and high voltage power cable, as well
as other wire and cable product lines.
RECENT CORPORATE REORGANIZATION AND OPERATIONAL RESTRUCTURINGS
During 1999, and in connection with the Essex acquisition, the Company
initiated a significant corporate reorganization at Essex and a major
restructuring of certain operations of Essex, including the sale of
non-strategic business lines and the rationalization of certain manufacturing
assets.
In April 1999, the Company completed a corporate reorganization which
included the elimination of more than 130 corporate and divisional general and
administrative positions at Essex. Annual savings in corporate expenses from
these personnel reductions, along with other corporate general and
administrative cost reductions and synergies, approximate $25 million.
2
The Company has also divested non-core product lines, including the sale of
the business and operating assets of Essex's insulation products business in
October 1999 and its Interstate operations (wiring assemblies for trucks and
buses) in December 1999. Total cash proceeds from these sales amounted to
$11 million.
Additionally, the Company has substantially completed a restructuring and
rationalization of the operating assets comprising Essex's Electrical Group.
During 1999, the Company shut down or sold five electrical wire manufacturing
plants and is in negotiations to sell a sixth plant. This will result in the
Electrical Group's manufacturing being consolidated into five remaining
manufacturing facilities. This restructuring resulted in the elimination of 600
positions and a reduction of 22% in the Electrical Group's manufacturing
capacity, all of which was considered excess capacity.
As a result of the above mentioned activities, the Company has eliminated
approximately 1,100 positions in the aggregate, a 25% reduction in Essex total
workforce since the beginning of 1999.
COMMUNICATIONS GROUP
Superior's Communications Group includes its North American communications
wire and cable operations as well as the operations of Superior Israel.
The Communications Group's North American operations manufacture and sell
the following communications wire and cable products:
(1) outside plant ("OSP") wire and cable for voice and data transmission,
including copper OSP products used in the local loop portion of the
telecommunications infrastructure, and, to a lesser degree, fiber optic
OSP products used by the local exchange carriers ("LECs"), CATV companies
and competitive local exchange carriers for both trunking and feeder
applications and OSP composite (or hybrid) cables (including fiber
optic/twisted pair cables and coaxial/twisted pair cables) for local
loop, feeder and distribution applications; and
(2) copper and fiber optic datacom, or premise, wire and cable used within
homes and offices for local area networks ("LANs"), Internet connectivity
and other applications.
Through six geographically dispersed plants, Superior has annual production
capacity in North America of approximately 165 billion conductor feet ("bcf")
for copper OSP and datacom copper wire and cable. Additionally, through Superior
Israel, Superior has seven bcf of production capacity for copper OSP and datacom
products. Superior is currently the largest manufacturer of copper
communications cable in North America, which is Superior's primary market, and
the largest worldwide manufacturer of copper OSP wire and cable products.
Superior's manufacturing capacity (based on current product mix) for fiber optic
OSP and fiber optic premise cable is 480,000 fiber kilometers ("fkm") in North
America and 450,000 fkm in Israel. Superior is currently expanding its North
American capacity for both fiber optic OSP and premise wire and cable products
as well as for copper premise wire and cable products. Superior expects that
this production capacity expansion will increase Superior's total annual sales
capacity for fiber optic and copper premise products by approximately
$100 million, based on current market prices, product mix and estimated
production rates.
The Communications Group also includes the operations of DNE Systems, Inc.
DNE designs and manufactures data communications equipment, integrated access
devices and other electronic equipment for defense, government and commercial
applications. DNE's net sales are not significant in relation to the total net
sales of the Communications Group.
For the year ended December 31, 1999, net sales of copper OSP products
accounted for 71% of the Communications Group's net sales.
3
OSP PRODUCTS
Copper wire and cable are the most widely-used media for voice and data
transmission in the local loop portion of the traditional telecommunications
infrastructure operated by the LECs, which include the regional Bell operating
companies ("RBOCs") and the independent telephone operating companies. The local
loop is the segment of the telecommunications network that connects the
customer's premises to the nearest telephone company switching center or central
office. Superior believes that copper will continue to be a leading transmission
medium in the local loop due to factors such as:
- the installed base of copper cable and associated switches, connectors and
other accessory components represents an investment of over $150 billion
that must be maintained by the LECs;
- the lower installation and maintenance costs of copper compared to optical
fiber and other media;
- technological advances, such as digital subscriber line ("xDSL")
technologies and integrated services digital networks ("ISDN"), that
increase the bandwidth of the installed local loop copper network;
- the increasing demand by consumers for affordable enhanced services,
which, because of technological advances, can be supported by the
copper-based local loop; and
- the increasing demand for affordable multiple residential access lines to
support fax machines, Internet access and multiple voice lines.
Demand for copper communications wire and cable is dependent on several
factors, including the rate at which new access lines are installed in homes and
businesses, the level of infrastructure spending for items such as
road-widenings and bridges, which generally necessitates replacement of existing
utilities, including telephone cable, and the level of general maintenance
spending by the LECs. The installation of new access lines is, in turn,
partially dependent on the level of new home construction and expansion of
business and, increasingly in recent years, on demand for additional telephone
lines and lines dedicated to facsimile machines and computer modems, which are
used for, among other purposes, business communications and access to the
Internet.
The local loop comprises approximately 180 million residential and business
access lines in the United States. The installed base of copper wire and cable
and associated switches and other components utilized in the local loop
represents an investment of over $150 billion that must be maintained by the
LECs. Although other media, such as fiber optic cable, are used for trunk lines
between central offices and for feeder lines connecting central offices to the
local loop, a substantial portion of all local loop lines and systems continue
to be copper-based. Superior believes that in the local loop, copper-based
networks require significantly lower installation and maintenance costs than
other alternative networks such as fiber optics. Installation of fiber optic
systems is both capital and labor intensive, and until very recently deployment
of fiber optic systems has been limited to trunk and feeder lines and wide area
network configurations, where the density of voice and data traffic make such
systems cost efficient.
Copper usage in the local loop continues to be supported by technological
advances that expand the use and bandwidth of the installed local loop copper
network. These advances include xDSL and ISDN technologies. These technologies,
together with regulatory developments and increased competition among service
providers, have accelerated the demand for and the introduction of new
high-speed and bandwidth-intensive telecommunications services, such as
integrated voice and data, broadcast and conference quality video, Internet,
high-speed LAN-to-LAN connectivity, and other specialized bandwidth-intensive
applications.
While these rapid and significant technological advances continue to
increase the use and bandwidth of the copper local loop network, there is
growing use of optical fiber in the feeder network as a funnel to support the
emerging high bandwidth digital copper loops. Superior has developed and is now
manufacturing and selling an optical fiber cable product line that includes
local loop feeder cables for OSP applications.
4
Superior manufactures a wide variety of OSP wire and cable products.
Superior's copper-based OSP products include distribution cable and service wire
products, ranging in size from a single twisted pair wire to a 4,200-pair cable.
The basic unit of virtually all copper OSP wire and cable is the "twisted pair,"
a pair of insulated conductors twisted around each other. Twisted pairs are
bundled together to form communications wire and cable. Superior's copper OSP
wire and cable products are differentiated by design variations, depending on
where the cable is to be installed. Copper OSP products used for direct
underground burial are designed to be water resistant and are filled with
compounds to prevent moisture from penetrating the cable structure. The
individual copper wires utilize either polyethylene or polypropylene insulation.
Copper OSP products used for underground duct or aerial applications, where
water penetration is not a major concern, are designed with polyethylene
insulation and no filling compound. Copper OSP products normally have metallic
shields for mechanical protection and electromagnetic shielding, as well as an
outer polyethylene jacket.
To a lesser extent, Superior also manufactures fiber optic cable for OSP
applications. Superior's fiber optic OSP cables can be used in a variety of
installations such as aerial, buried and underground conduit and can be
configured with two to over 280 fibers, which are typically single-mode fibers.
These cables are sold to traditional customers, such as distributors and LECs,
as well as new customers, such as CATV companies, competitive local exchange
carriers, inter-exchange carriers and competitive access providers. Superior is
currently expanding its manufacturing capabilities for fiber optic cables for
OSP and premise applications. The first phase of this expansion, which includes
plant and equipment additions in its Brownwood, Texas facility, is expected to
be completed in the second quarter of 2000 and will increase Superior's total
manufacturing capacity for these products by over 100%.
One element of Superior's strategy in the Communications Group is to
continue to expand its offering of performance-enhanced OSP wire and cable
products that provide opportunities for growth both within and outside
Superior's basic market. In addition to its recent development and current
expansion of manufacturing capabilities for fiber optic wire and cable products,
Superior has also acquired, developed or is in the process of developing other
new products including:
(1) hybrid OSP products combining twisted-pair copper wires with coaxial or
fiber optic cable for feeder and distribution service; and
(2) a broad band cable to support new technologies within the OSP segment.
Superior has historically been a key supplier of copper OSP wire and cable
to the RBOCs and the two major independent telephone companies, GTE Corporation
and Sprint Corporation. It is estimated that the RBOCs, GTE and Sprint comprise
approximately 80% of the approximately $1.4 billion North American copper OSP
market. The remaining 20% of the North American market is comprised of more than
1,200 smaller independent telephone companies. In recent years, Superior has not
been a major supplier to the smaller independent telephone companies due to
capacity constraints and lack of established distributor relationships. However,
the Essex acquisition provided Superior both the capacity and the established
distributor network to address this market.
For the year ended December 31, 1999, 74% of Superior's OSP net sales were
to the RBOCs and the two major independent telephone companies, 22% of net sales
were primarily to other telephone companies and data product distributors in
North America and 4% of net sales, excluding sales of Superior Israel, were made
outside of North America.
Superior sells to the RBOCs and the two major independent telephone
companies on a direct basis through a sales force of five salespersons. With the
acquisition of Essex, Superior's OSP wire and cable products are increasingly
being sold through domestic and international distributors and sales
representatives. Superior, through Superior Israel, also sells its fiber optic,
OSP and datacom copper wire and cable products to Bezeq, the Israeli telephone
company, and other customers and distributors in Israel, the United Kingdom,
Europe and South America.
5
Superior's sales to the major telephone operating companies are generally
pursuant to multi-year supply arrangements in which the customer agrees to have
Superior supply a certain percentage of the customer's OSP wire or cable needs
during the term of the arrangement. Typically, customers are not required to
purchase any minimum quantities of product under these arrangements. At
December 31, 1999, Superior had multi-year arrangements with three of the four
RBOCs and with the two major independent telephone companies.
In February 2000, the Company was notified that it would experience a
significant reduction in sales of copper OSP products to SBC, one of the four
RBOCs, due to price underbidding by a competitor on a rebid of a major portion
of SBC's annual OSP requirements. The Company expects to continue to sell OSP
cable to SBC on a transitional basis for a portion of 2000. The Company believes
it can recapture a portion of this lost business through increased sales with
other customers and in other markets. The Company also intends to reduce costs
and, if required, manufacturing capacity to offset the impact of these
developments.
DATACOM PRODUCTS
Datacom wire and cable is used within buildings to connect
telecommunications devices, such as telephones, facsimile machines and computer
modems, to the telecommunications network and in commercial buildings to provide
connectivity for LANs. Rapid technological advances in communication and
computer system capabilities have created increasing demand for greater
bandwidth capabilities in wire and cable products. Superior expects demand for
datacom wire and cable products to increase significantly in the future,
particularly as new office buildings are constructed, existing office buildings
are upgraded to accommodate advanced network requirements and multiple
residential access lines for facsimile machines, home offices and access to the
Internet are installed.
There are two primary applications for communications wiring systems within
buildings: voice applications, estimated at 15% of new wiring system investment,
and data applications, estimated at 85% of new wiring system investment. The
primary voice application consists of networking telephone stations. The primary
data application is LANs, which require the wired interconnection of
workstations and peripherals, such as printers, file servers, etc., to form a
network.
Four major types of cables are currently deployed in datacom applications:
(1) LAN copper twisted pair (unshielded twisted pair or "UTP" and shielded
twisted pair or "STP"), (2) LAN fiber optic cable, (3) LAN coaxial cable and
(4) voice grade twisted copper pair. Superior anticipates that UTP and fiber
optic cable will provide the most significant growth opportunities due to
increasing demands in the datacom market for cost-effective, high bandwidth
solutions.
Continued high growth for new LAN installations, as well as voice system
upgrades, have resulted in increased demand for LAN UTP cables, particularly
Category 5, advanced Category 5 and Category 6 cables. These high bandwidth
cables have made it possible for UTP to compete with fiber and LAN STP for
high-speed LAN applications. The other large component of the datacom segment is
fiber optic cable, which meets the needs of communications services requiring
bandwidth capabilities greater than can be provided by copper based
technologies.
Superior's current datacom wire and cable product offerings include voice
grade twisted pair, UTP and LAN fiber optic cable. Superior's UTP product
offerings include Category 6 cables and Category 5 cables ranging in size from
4-pair to 25-pair. These cables are designed and manufactured for use in both
plenum vertical and riser horizontal applications. Superior has recently
developed and has begun marketing and sales of LAN fiber optic cables. These
cables, which may be used for LAN trunking or distribution applications, contain
from one to 144 fibers, which are typically multi-mode fibers, and are used in
plenum and riser applications within buildings. Superior is currently expanding
its manufacturing capabilities for both copper UTP and fiber optic cable
products with an anticipated increase in sales and market share in 2000.
6
Superior's datacom wire and cable products are sold primarily through major
national and international distributors, smaller regional distributors and
representatives who in turn resell to contractors, international and domestic
telephone companies and private overseas contractors for installation in the
industrial, commercial and residential markets.
The datacom wire and cable market is fragmented, with nearly 25 datacom wire
and cable manufacturers in North America and more than 75 worldwide. Major
suppliers in North America include Lucent Technologies Inc., Cable Design
Technologies Corporation, Berk-Tek (an Alcatel company), Belden Inc.,
CommScope Inc. and General Cable Corporation. Superior estimates the North
American market for datacom wire and cable products similar to those
manufactured by Superior to be approximately $1.7 billion.
SUPERIOR ISRAEL
As previously discussed, during 1998 Superior acquired 51% of the
outstanding common stock of Cables of Zion, an Israeli wire and cable company.
Cables of Zion, in subsequent transactions, acquired the business and certain
operating assets of Cvalim and Pica Plast. With the consolidation of these three
businesses, Superior Israel is the largest Israeli wire and cable manufacturer
with an approximate 80% share of the Israeli wire and cable market.
Superior Israel's major product offerings include:
(1) communications cable including copper and optical fiber OSP and datacom
products;
(2) high and medium voltage power cable utilized by power utilities; and
(3) industrial and automotive wire and cable.
Superior Israel also owns 80% of Premier Cable Ltd., a UK-based distributor
of communications cable and related products.
Superior Israel's major customers include the two largest public utilities
in Israel: Bezeq, the largest Israeli telephone company, and IEC, the largest
Israeli power utility. Product export sales outside of Israel amounted to 21% of
total sales for the year ended December 31, 1999. The major export markets
include Europe, Latin America and Southeast Asia.
As a result of the combination of the operations of Cables of Zion, Cvalim
and Pica Plast, Superior has consolidated certain manufacturing facilities and
administrative functions. This restructuring resulted in closure of three
manufacturing facilities, closure of administrative offices in Rishon LeZion and
elimination of 146 personnel to date. Superior Israel currently operates five
manufacturing plants.
DNE
DNE Systems, Inc. designs and manufactures data communications equipment,
integrated access devices and other electronic equipment for defense, government
and commercial applications. It is the largest supplier to the U.S. defense
forces of data and voice multiplexers used in tactical secure military
applications. Multiplexers are integrated access devices that combine several
information-carrying channels into one line, thereby permitting simultaneous
multiple voice and data communications over a single line. DNE also produces
military avionic products, including switches, dimmers, relays and other
electronic controllers, sensors and aerial refueling amplifiers. DNE net sales
comprise less than 5% of the Communications Group's net sales.
OEM GROUP
Superior's OEM Group manufactures and sells magnet wire, automotive wiring
and other related products to major OEMs for use in motors, transformers,
electrical controls and automobile harnesses.
7
Through its Essex Brownell distribution business, Superior also distributes its
magnet wire and certain related accessory products to smaller OEMs and motor
repair and refurbishing contractors.
Additionally, in 1998, Essex, prior to its acquisition by Superior, acquired
BICC's UK-based magnet wire operations. This acquisition provides Superior with
European magnet wire capacity to service certain of Superior's existing North
American customers which have major European operations. This acquisition also
provides Superior an opportunity to participate in growth through an anticipated
consolidation of magnet wire manufacturers in the European market. The OEM Group
operates 12 manufacturing plants and 22 warehousing and distribution locations
in North America and the U.K.
For the year ended December 31, 1999, sales of magnet wire accounted for 67%
of the OEM Group's net sales.
MAGNET WIRE
Superior is the leading supplier of magnet wire in the North American
market. The North American market demand for magnet wire has experienced
continued growth since 1990. Sales growth in the magnet wire industry is driven
by increasing demand for electrical devices containing motors for, among other
things, home appliances and automobiles. Additionally, continuing consumer
pressure and federal government mandates for higher energy efficiency are
resulting in increased utilization of magnet wire within individual motors and
electrical converter devices such as transformers. Strong consumer demand for
greater numbers of electrical convenience items in homes, offices and vehicles
has resulted in increased sales of household appliances and increased use of
electric motors and coils in cars and trucks.
Due to the substantial initial capital costs associated with magnet wire
production, the importance of consistent quality, stringent technological
requirements and the cost efficiencies achieved by larger magnet wire producers,
significant industry consolidation has occurred during the past ten years in the
North American magnet wire industry. In addition, the percentage of domestic
magnet wire produced by independent magnet wire manufacturers, such as Superior,
has grown as the manufacturing capacity of captive magnet wire producers
(electrical equipment manufacturers who internally produce their own magnet
wire) has declined as a result of outsourcing over the last several years. It is
estimated that captive magnet wire manufacturers now represent only 7% of total
magnet wire production in North America.
The Company is currently operating its magnet wire facilities at or near
full capacity. In order to provide additional capacity for anticipated growth in
demand and in market share, as well as to service a growing number of customer
manufacturing locations in Mexico, the Company began construction during 1999 of
a new 290,000 square foot magnet wire manufacturing facility in Torreon, Mexico.
This facility is expected to be completed during the summer of 2000 and should
increase the Company's North American magnet wire production capacity by
approximately 13%.
Superior offers a comprehensive line of magnet wire products, including over
500 types of magnet wire used in a wide variety of applications. Magnet wire is
the wire that is wound into coils of electromagnetic devices including motors,
alternators, coils, transformers, control devices and power generators.
Electromagnetic devices are found in numerous industrial, household and
automotive applications.
New magnet wire products have been introduced recently that Superior
believes will further enhance its position as one of the technological and
development leaders in the industry. Specifically, Superior has recently
introduced the Ultra Shield-TM- Plus wire, which is a superior rated magnet wire
now used by many global motor manufacturers in inverter drive applications where
high voltage spikes are encountered. Other new products include
Soderon-Registered Trademark-/180 and Soderex-Registered Trademark-/180, two new
magnet wires that are used in automotive and appliance controls in higher
temperature applications. These products allow for increased throughput with
faster soldering times than conventional high temperature type products. In
addition, Superior has also introduced a new DuPont
Nemon-Registered Trademark-/910 wrapped magnet wire conductor for liquid-filled
8
transformer applications as a replacement for low temperature paper wrap.
Superior is also a leader in product palletizing and packaging with a focus on
ease of handling, reduced freight damage, environmental disposal issues and cost
reduction.
Superior's magnet wire products are sold directly to major OEMs and through
its Essex Brownell distribution business to secondary OEMs, aftermarket repair
facilities, coil manufacturers and distributors. Products are also marketed
internationally through authorized distributors.
Sales to major OEMs, including, among others, Emerson, General Motors, A.O.
Smith, Howard Industries, Cooper Power and Tecumseh, are typically pursuant to
annual supply agreements based on a percentage of the customers' total
requirements and on a negotiated fixed price, subject to adjustment for the cost
of copper. For the year ended December 31, 1999, approximately 85% of magnet
wire sales were pursuant to annual supply arrangements. Sales through the Essex
Brownell distribution business are typically quoted on a daily spot price basis.
As previously mentioned, the magnet wire market in North America is
concentrated, with a small number of large manufacturers. Superior believes it
is the largest supplier of magnet wire in the North American market.
AUTOMOTIVE WIRE
Superior's automotive wire products include primary wire for use in engine
and body harnesses, ignition wire, battery cable and specialty wiring
assemblies. The automotive primary wire market has experienced growth over the
last decade due to steady production levels of new vehicles and an increase in
the installation of electrical options in vehicles, which deliver increased
safety, convenience and engine performance to the consumer. These electrical
options include power windows, supplemental restraint systems, digital displays,
keyless entry, traction control, electronic suspension and anti-lock brakes.
Superior expects the trend of additional electronic features to grow, thereby
increasing demand for automotive wire. Further, the increasing demand for copper
wire content in vehicles has made it essential to use finer-gauge, thinner wall,
higher temperature insulation coated wire, which requires significant advanced
product development and manufacturing technologies.
Superior sells automotive wire products primarily to tier-one motor vehicle
manufacturer suppliers. Automotive wire products are marketed through an
internal sales force and manufacturers' representatives.
ESSEX BROWNELL DISTRIBUTION AND ACCESSORY PRODUCTS
Through its Essex Brownell distribution operations, Superior sells magnet
wire, insulation and other related accessory products to the motor repair and
secondary OEM markets, which represent a fragmented customer base. The Essex
Brownell distribution operations include a nationwide sales force of 60 people,
supported by 26 strategically located distribution and warehouse locations.
Approximately 13% of Superior's magnet wire sales are sold through Essex
Brownell. Additionally, Essex Brownell sells insulation and other related
accessory products, as a complement to its magnet wire product sales, to the
motor repair and secondary OEM markets. Superior believes that it has a distinct
competitive advantage in that it is the only major North American magnet wire
producer that also distributes a full line of complementary electrical accessory
products used by the motor repair and secondary OEM markets. Essex Brownell was
formed with the acquisition of the Brownell distribution business in 1995.
ELECTRICAL GROUP
Superior's Electrical Group manufactures and distributes a complete line of
building wire products as well as a line of industrial wire products. For the
year ended December 31, 1999, net sales of building wire and industrial wire
products were $623.4 million. As discussed above in "Recent Corporate
Reorganization
9
and Operational Restructurings", the Electrical Group has consolidated its
manufacturing operations into five manufacturing facilities in the United States
with annual production capacity of approximately 420 million pounds.
Building wire products include a wide variety of thermoplastic and thermoset
insulated wires for the commercial and industrial construction markets and
service entrance cable, underground feeder wire and nonmetallic jacketed wire
and cable for the residential construction market. These products are generally
installed behind walls, in ceilings and underground. The industrial wire product
segment (which forms a much smaller component of sales than building wire)
includes appliance wire, motor lead wire, submersible pump cable, power cable,
bulk flexible cord, power supply cord sets, welding cable and recreational
vehicle wire.
Superior is the leading manufacturer in North America of copper building
wire products used in commercial and residential applications. Superior
estimates that the building wire market has grown, on average, approximately
2%-4% per annum over the past five years. Sales growth in the building wire
industry has resulted primarily from renovation activity, as well as new
nonresidential and residential construction. Both new construction and
renovation growth are being affected by the increased number of circuits and
amperage handling capacity needed to support the increasing demand for
electrical services. In addition, there has been a greater wiring density
required in new construction and renovation projects to provide for the
electrical needs of appliances such as trash compactors, microwave ovens, air
conditioners, entertainment centers, lighting and climate controls, specialty
and task lighting, electric garages and outdoor lighting systems. New home
automation and computer systems contribute to the increased cable and wire
density requirements in new and renovation construction as well. The average new
home is also increasing in size and thus influencing demand in this industry.
The building wire industry has experienced significant consolidation in
recent years, declining from approximately 28 manufacturers in 1980 to nine
primary manufacturers in 1999. Superior believes this consolidation is due
primarily to cost efficiencies achieved by the larger building wire producers as
they capitalize on the benefits of vertical integration and manufacturing,
purchasing and distribution economies of scale.
In the industrial wire market, Superior has a significantly smaller market
position than in the building wire industry. Factors impacting sales growth in
this market include the construction and expansion of manufacturing plants, mine
expansion and consumer spending for hard goods. Due to the diversity of product
offerings within this industry, Superior's competition is fragmented across
product lines and markets served.
Superior sells its electrical wire and cable products nationally through an
internal sales force and through manufacturers' representatives. Its customer
base is large and diverse, consisting primarily of wholesale electrical and
specialty distributors, consumer product retailers and hardware wholesalers. No
single customer accounts for more than 10% of the Electrical Group's net sales.
Notwithstanding this consolidation of suppliers, there still exists
manufacturing overcapacity for building wire, which is generally viewed as a
commodity product. As a result, the market is extremely competitive, with price
and availability being the most important factors. During 1999, market pricing
for building wire products declined substantially, with copper adjusted pricing
reaching three year lows through much of the year. As previously discussed, the
Company has responded to these conditions by eliminating excess capacity and
consolidating remaining production capacity to achieve cost reductions necessary
to offset, in part, the impact of the recent period price declines.
Prior to 1998, Superior served the wholesale electrical and specialty
distributors through a network of over 30 service centers and stocking locations
in the United States. In 1998, Essex, prior to its acquisition by Superior,
began an initiative to consolidate the service centers and stocking locations
into a smaller
10
number of strategically located regional distribution centers ("RDCs"). These
RDCs provide for centralized stocking of "off-the-shelf" products, including
substantially all of Superior's building and industrial wire products. To a
lesser degree, these RDCs provide regionally centralized distribution for
communication wire and cable, magnet wire and related insulation products. The
Company currently operates four RDCs located in Georgia, Missouri, California
and Oregon.
RAW MATERIALS AND MANUFACTURING
The principal raw materials used by Superior in the manufacture of its wire
and cable products are copper, aluminum, bronze, steel, optical fibers and
plastics, such as polyethylene and polyvinyl chloride. Copper rod is the most
significant raw material used in Superior's manufacturing process. Superior
estimates it is the largest North American consumer of copper rod with over
900 million pounds used annually in its production process. Due to the
importance of copper to its business, Superior maintains a centralized metals
operation that manages copper procurement and provides vertical integration in
the production of copper rod and in scrap recycling.
Superior maintains four copper rod continuous casting units, strategically
located in proximity to many of its major wire producing plants to minimize
freight costs. These facilities convert copper cathode into copper rod which is
then shipped and utilized directly in Superior's manufacturing operations.
Through these continuous casting units, Superior is able to produce
approximately 70% of its North American copper rod requirements.
In addition to converting copper cathode into copper rod, Superior's metal
processing center also processes copper scrap, both internally generated scrap
as well as scrap purchased from other copper wire producers. Copper scrap is
processed in rotary furnaces, which also have refining capability to remove
impurities. Superior uses a continuous casting process to convert scrap material
directly into copper rod. Management believes that internal reclamation of scrap
copper provides greater control over the cost to recover Superior's principal
manufacturing by-product.
Superior purchases copper cathode and, to the extent not provided
internally, copper rod from a number of copper producers and metals merchants.
Generally, copper cathode and rod purchases are pursuant to contracts which
extend for a one-year period and are normally based on the COMEX price, plus a
premium to cover transportation and payment terms. Additionally, Superior, to a
limited extent, utilizes COMEX fixed price futures contracts to manage its
commodity price risk. Superior does not hold or issue such contracts for trading
purposes.
Historically, Superior has had adequate supplies of copper and other raw
materials available to it from producers and merchants, both foreign and
domestic. In addition, competition from other users of copper has not affected
Superior's ability to meet its copper procurement requirements. Although
Superior has not experienced any shortages in the recent past, no assurance can
be given that Superior will be able to procure adequate supplies of its
essential raw materials to meet its future needs.
The cost of copper has been subject to considerable volatility over the past
several years. Fluctuations in the cost of copper have not had a material impact
on profitability due to the ability of Superior in most cases to adjust product
pricing in order to properly match the price of copper billed with the copper
cost component of its inventory shipped.
Superior's manufacturing strategy is primarily focused on maximizing product
quality and production efficiencies while maintaining a high level of vertical
integration through internal production of its principal raw materials. In
addition to copper rod, Superior is also vertically integrated in the production
of magnet wire enamels and extrudable polymeric compounds. Superior believes one
of its primary cost and quality advantages in the magnet wire business is the
ability to produce most of its enamel and copper rod requirements internally.
Similarly, Superior believes its ability to develop and produce PVC and rubber
11
compounds, which are used as insulation and jacketing materials for many of its
building wire, communication wire, automotive wire and industrial wire products,
provides competitive advantages because greater control over the cost and
quality of essential compounds used in production can be achieved.
EXPORT SALES
Superior's export sales during the year ended December 31, 1999 were
$73.1 million. Superior's primary markets for export sales are Latin America and
Europe.
BACKLOG; RETURNS
Backlog in the communications wire and cable segment typically consists of
3-5 weeks of sales depending on seasonal issues. Superior's other product lines
have no significant order backlog because they follow the industry practice of
manufacturing products on an ongoing basis to meet customer demand on a
just-in-time basis. Superior believes that the ability to supply orders in a
timely fashion is a competitive factor in the markets in which it operates.
Historically, sales returns have not had a material adverse effect on Superior's
results of operations.
COMPETITION
The market for wire and cable products is highly competitive. Each of
Superior's businesses competes with at least one major competitor. However, due
to the diversity of Superior's product lines as a whole, no single competitor
competes with Superior across the entire spectrum of Superior's product lines.
Many of Superior's products are made to industry specifications and,
therefore, may be interchangeable with competitors' products. Superior is
subject to competition in many markets on the basis of price, delivery time,
customer service and its ability to meet specialty needs. Superior believes it
enjoys strong customer relations resulting from its long participation in the
industry, emphasis on customer service, commitment to quality control,
reliability and substantial production resources. Furthermore, Superior believes
that its distribution networks enable it to compete effectively with respect to
delivery time.
RESEARCH AND DEVELOPMENT
In response to the changing requirements of the communications industry,
Superior established a product development center during the fourth quarter of
fiscal 1997. This 58,000 square foot facility is located in Kennesaw, Georgia
and is dedicated to defining and creating new wire and cable systems that meet
the needs of the evolving communications networks. Recent projects include the
development of single mode and multimode fiber optic cable products for use in
LANs as well as telephone networks. Initial sales and shipments of these
products began in 1998.
Superior also has development projects underway for performance enhanced
copper-based communications wire products that are designed to meet the existing
and future needs of telephone and datacom customers. Several of these projects
have been undertaken in conjunction with Superior's telephone company customers
and include the development of composite cables that incorporate copper twisted
pair wire and coaxial cable or optical fibers in a single cable construction.
Superior is also developing extensions of its UTP product line for certain LAN
datacom applications, including the development of Category 6 UTP products.
Superior also operates research and development facilities in Lafayette and
Fort Wayne, Indiana. Research activities at the Lafayette facility are focused
on development of improved PVC and rubber compounds, which are used as
insulation and jacketing materials for many communication, automotive, building
and industrial wire products. At the Fort Wayne facility, Superior's
metallurgical and chemical labs are focused on the development of magnet wire
metal properties and processing qualities, as well as enhancement of enamels and
their application in the magnet wire manufacturing process.
12
Aggregate research and development expenses of Superior during the fiscal
years ended April 30, 1997 and 1998, the eight months ended December 31, 1998
and the year ended December 31, 1999 amounted to $2.2 million, $3.0 million,
$2.7 million and $6.6 million, respectively.
Although Superior holds certain trademarks, licenses and patents, none is
considered to be material to its business.
EMPLOYEES
As of December 31, 1999, Superior employed approximately 6,600 employees.
Approximately 2,300 persons employed by Superior are represented by unions.
Collective bargaining agreements expire at various times between 1999 and 2004,
with contracts covering approximately 36% of Superior's unionized work force due
to expire at various times in 2000. Superior considers relations with its
employees to be satisfactory.
ENVIRONMENTAL MATTERS
The manufacturing operations of Superior's subsidiaries are subject to
extensive and evolving federal, foreign, state and local environmental laws and
regulations relating to, among other things, the storage, handling, disposal,
emission, transportation and discharge of hazardous substances, materials and
waste products, as well as the imposition of stringent permitting requirements.
Superior does not believe that compliance with environmental laws and
regulations will have a material effect on the level of capital expenditures of
Superior or its business, financial condition, liquidity or results of
operations. No material expenditures relating to these matters were made in
1997, 1998 or 1999. However, violation of, or non-compliance with, such laws,
regulations or permit requirements, even if inadvertent, could result in an
adverse impact on the operations, business, financial condition, liquidity or
results of operations of Superior.
13
ITEM 2. PROPERTIES
The Company conducts its principal operations at the facilities set forth
below:
SQUARE
OPERATION LOCATION FOOTAGE LEASED/OWNED
- - --------- ------------------------------ -------- ---------------------
COMMUNICATIONS
OSP/Datacom........................ Chester, South Carolina 218,000 Owned
Hoisington, Kansas 257,000 Owned
Brownwood, Texas 328,000 Leased (expires 2013)
Tarboro, North Carolina 295,000 Owned
Winnipeg, Manitoba 190,000 Owned
Elizabethtown, Kentucky 163,000 Owned
Kennesaw, Georgia 58,000 Leased (expires 2002)
DNE................................ Wallingford, Connecticut 65,000 Leased (expires 2007)
OEM
Magnet Wire........................ Charlotte, North Carolina 26,000 Leased (expires 2001)
Fort Wayne, Indiana 181,000 Owned
Franklin, Indiana 35,000 (a)
Franklin, Tennessee 289,000 Leased (expires 2008)
Kendallville, Indiana 88,000 Owned
Rockford, Illinois 319,000 Owned
Vincennes, Indiana 267,000 Owned
Automotive Wire.................... Orleans, Indiana 425,000 Owned
Accessory Products................. Athens, Georgia 30,000 Leased (expires 2016)
Clifton Park, New York 22,000 Leased (expires 2016)
Willowbrook, Illinois 60,000 Leased (expires 2016)
United Kingdom..................... Huyton Quarry, U.K. 146,000 Owned
ELECTRICAL
Building Wire...................... Anaheim, California 174,000 Owned
Columbia City, Indiana 400,000 Owned
Sikeston, Missouri 189,000 Owned
Florence, Alabama 129,000 Owned
Industrial Wire.................... Lafayette, Indiana 350,000 Owned
Pawtucket, Rhode Island 412,000 Owned (b)
SUPERIOR ISRAEL...................... Shaar Hanegav, Israel 66,000 Owned
Eilat, Israel 53,000 Owned
Bet-Shean, Israel 51,000 Leased (expires 2002)
Maalot, Israel 10,000 Leased (expires 2003)
Nazareth, Israel 25,000 Leased (expires 2003)
METALS PROCESSING.................... Columbia City, Indiana 75,000 Owned
Jonesboro, Indiana 56,000 Owned
ADMINISTRATIVE OFFICES............... Atlanta, Georgia 31,000 Leased (expires 2001)
Fort Wayne, Indiana 295,000 Owned
- - ------------------------
(a) The Franklin, Indiana facility is approximately 70,000 square feet, of
which 35,000 square feet is leased to Femco as a joint venture between
Superior and the Furukawa Electric Company, LTD., Tokyo, Japan. Femco
manufactures and markets magnet wire with special emphasis on products
required by Japanese manufacturers with production facilities in the
United States.
(b) Currently listed for sale.
14
In addition to the facilities described in the table above, Superior owns or
leases 32 warehousing and distribution facilities throughout the United States,
Canada and United Kingdom to facilitate the sale and distribution of its
products.
Superior believes that its plants are generally suitable and adequate for
the business being conducted and to service the requirements of its customers.
Capital spending plans are primarily designed to keep up with current
technology, to increase capacity in existing product lines and for cost
reduction initiatives. The extent of current utilization is generally consistent
with historical patterns and, in the view of management, is satisfactory.
Superior does not view any of its plants as being underutilized. A majority of
Superior's plants operate on 24 hour-a-day schedules, on either a five day or
seven day per week basis. During the year ended December 31, 1999, Superior's
facilities have operated at approximately 90% capacity.
ITEM 3. LEGAL PROCEEDINGS
The Company is engaged in certain routine litigation arising in the ordinary
course of business. While the outcome of litigation can never be predicted with
certainty, the Company does not believe that any of its existing litigation,
either individually or in the aggregate, will have a material adverse effect
upon its business, financial condition, liquidity or results of operations.
Superior's operations are subject to environmental laws and regulations in
each of the jurisdictions in which it operates governing, among other things,
emissions into the air, discharges to water, the use, handling and disposal of
hazardous substances and the investigation and remediation of soil and
groundwater contamination both on-site at Superior's facilities and at off-site
disposal locations. On-site contamination at certain of Superior's facilities is
the result of historic disposal activities, including activities attributable to
Superior's operations and those occurring prior to the use of a facility by
Superior. Off-site liability includes clean-up responsibilities at various
sites, to be remedied under federal or state statutes, for which Superior has
been identified by the United States Environmental Protection Agency, or the
equivalent state agency, as a Potentially Responsible Party ("PRP").
Essex has been named as a PRP at a number of sites. Most of the sites for
which Essex is currently named as a PRP are covered by an indemnity from United
Technologies Corporation provided in connection with the February 1988 sale of
Essex by United Technologies to Essex's previous stockholders. Pursuant to the
indemnity, United Technologies agreed to indemnify Essex against losses incurred
under any environmental protection and pollution control laws or resulting from,
or in connection with, damage or pollution to the environment arising from
events, operations or activities of Essex prior to February 29, 1988, or from
conditions or circumstances existing at or prior to February 29, 1988. In order
to be covered by the indemnity, the condition, event, or circumstance must have
been known to United Technologies prior to February 29, 1988. The sites covered
by the indemnity are handled directly by United Technologies and all payments
required to be made are paid directly by United Technologies. These sites are
all mature sites where allocations have been settled and remediation is well
underway or has been completed. Superior is not aware of any inability or
refusal on the part of United Technologies to pay amounts that are owing under
the indemnity or any disputes between Essex and United Technologies concerning
matters covered by the indemnity.
United Technologies also provided an additional environmental indemnity,
referred to as the "basket indemnity." This indemnity relates to liabilities
arising from environmental events, conditions or circumstances existing at or
prior to February 29, 1988 that only became known to United Technologies in the
five-year period commencing February 29, 1988. As to such liabilities, Essex is
responsible for the first $4.0 million incurred. Thereafter, United Technologies
has agreed to indemnify Essex fully for any liabilities in excess of
$4.0 million. To date, Essex has incurred less than $0.2 million in the basket.
Apart from the indemnified sites and those subject to the basket indemnity,
Essex has been named as a PRP or a defendant in a civil lawsuit at eight sites.
Operations of Superior Telecommunications and DNE have resulted in releases of
hazardous substances or wastes at sites currently or formerly owned or
15
operated by such companies. Superior Telecommunications is presently involved in
investigatory and remedial activities at one site subject to the oversight of a
state governmental authority. Superior has provided a reserve in the amount of
$2.9 million to cover its environmental contingencies as of December 31, 1999.
This accrual is based on management's best estimate of Superior's exposure in
light of relevant available information, including the allocations and remedies
set forth in applicable consent decrees, third-party estimates of remediation
costs, actual remediation costs incurred, the probable ability of other PRPs to
pay their proportionate share of remediation costs, the conditions at each site
and the number of participating parties. Superior currently does not believe
that any of the environmental proceedings in which it is involved, and for which
it may be liable, will individually, or in the aggregate, have a material
adverse effect upon its business, financial condition, liquidity or results of
operations. There can be no assurance that future developments will not alter
this conclusion. None of the sites mentioned above involves sanctions, fines or
administrative penalties against Superior.
Since approximately 1990, Essex has been named as a defendant in a number of
product liability lawsuits brought by electricians and other skilled tradesmen
claiming injury from exposure to asbestos found in electrical wire products
produced many years ago. Litigation against various past insurers of Essex who
had previously refused to defend and indemnify Essex against these lawsuits was
settled during 1999. Pursuant to the settlement, Essex was reimbursed for
substantially all of its costs and expenses incurred in the defense of these
lawsuits, and the insurers have undertaken to defend, are currently directly
defending and, if it should become necessary, will indemnify Essex against such
asbestos lawsuits, subject to the express terms and limits of the respective
policies. Superior believes that Essex's liability, if any, in these matters
will not have a material adverse effect either individually, or in the
aggregate, upon its business, financial condition, liquidity or results of
operations. There can be no assurance, however, that future developments will
not alter this conclusion.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of security holders during
the fourth quarter of the year ended December 31, 1999.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S SECURITIES AND RELATED SECURITY HOLDER MATTERS
(a) Market Information
The Company's common stock, $.01 par value, is listed on the New York Stock
Exchange (the "NYSE") under the symbol SUT. The following table sets forth the
high and low daily closing sales prices for the Superior common stock as
reported on the NYSE (adjusted for the impact of stock splits and a stock
dividend) for the fiscal year ended April 30, 1998, the eight-month period ended
December 31, 1998, and the year ended December 31, 1999.
HIGH LOW
-------- --------
Fiscal Year Ended April 30, 1998
First Quarter ended July 31, 1997......................... $20.39 $13.28
Second Quarter ended October 31, 1997..................... 25.40 18.25
Third Quarter ended January 31, 1998...................... 24.89 20.50
Fourth Quarter ended April 30, 1998....................... 33.40 24.17
Eight Months Ended December 31, 1998
First Quarter ended July 31, 1998......................... $34.47 $25.92
Second Quarter ended October 31, 1998..................... 39.51 24.47
Two-month period ended December 31, 1999.................. 37.67 29.47
Year Ended December 31, 1999
First Quarter ended March 31, 1999........................ $38.06 $16.99
Second Quarter ended June 30, 1999........................ 30.89 18.75
Third Quarter ended September 30, 1999.................... 28.70 13.47
Fourth Quarter ended December 31, 1999.................... 16.08 11.59
(b) Holders
The Company's transfer agent is American Stock Transfer & Trust Company, 40
Wall Street, New York, New York 10005.
At March 24, 2000, 20,186,426 shares of Superior common stock were issued
and outstanding, and there were approximately 44 record holders (exclusive of
beneficial owners of shares held in street name or other nominee form) thereof.
(c) Dividends
The Company paid regular quarterly cash dividends on the Superior common
stock at a rate of $0.25 per share, beginning in January 1998 and continuing
through October 1999. In January 2000, the Company suspended the payment of
quarterly cash dividends on the Superior common stock. The Company does not
currently anticipate reinstating any regular common stock cash dividend
payments. The Company's principal credit agreements contain certain limitations
and restrictions on the payment of cash dividends on the Superior common stock.
17
ITEM 6. SELECTED FINANCIAL DATA
HISTORICAL FINANCIAL DATA
Set forth below are certain selected historical consolidated financial data
of the Company. This information should be read in conjunction with the
consolidated financial statements of the Company and related notes thereto
appearing elsewhere herein and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected historical
consolidated financial data for, and as of the end of, each of the fiscal years
in the four-year period ended April 30, 1998, for, and as of the end of, the
eight months ended December 31, 1998, and for, and as of the end of, the year
ended December 31, 1999, are derived from the audited consolidated financial
statements of Superior.
EIGHT
MONTHS
FISCAL YEAR ENDED APRIL 30 ENDED YEAR ENDED
----------------------------------------- DECEMBER 31, DECEMBER 31,
1995 1996 1997 1998 1998 (A) 1999
-------- -------- -------- -------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA (B) (C):
Net sales........................................... $164,485 $410,413 $463,840 $516,599 $ 486,101 $2,027,529
Cost of goods sold.................................. 142,144 362,854 384,271 417,358 383,106 1,643,636
-------- -------- -------- -------- ---------- ----------
Gross profit...................................... 22,371 47,559 79,569 99,241 102,995 383,893
Selling, general and administrative expenses........ 11,632 14,223 17,166 22,181 32,333 150,833
Nonrecurring and unusual charges.................... -- -- -- -- 13,511 8,431
Amortization of goodwill............................ 1,124 1,556 1,726 1,715 2,447 19,629
-------- -------- -------- -------- ---------- ----------
Operating income.................................. 9,615 31,780 60,677 75,345 54,704 205,000
Interest expense.................................... (3,700) (17,355) (12,907) (8,090) (16,651) (120,100)
Other income (expense), net......................... 231 404 (305) 206 (346) 2,503
-------- -------- -------- -------- ---------- ----------
Income from continuing operations before income
taxes, distributions on preferred securities of
Superior Trust I, minority interest and
extraordinary (loss).............................. 6,146 14,829 47,465 67,461 37,707 87,403
Provision for income taxes.......................... (2,240) (6,722) (18,989) (26,786) (15,544) (36,733)
-------- -------- -------- -------- ---------- ----------
Income from continuing operations before
distributions on preferred securities of Superior
Trust I, minority interest and extraordinary
(loss)............................................ 3,906 8,107 28,476 40,675 22,163 50,670
Distributions on preferred securities of Superior
Trust I........................................... -- -- -- -- -- (11,289)
-------- -------- -------- -------- ---------- ----------
Income from continuing operations before minority
interest and extraordinary (loss)................. 3,906 8,107 28,476 40,675 22,163 39,381
Minority interest in (earnings) losses of
subsidiaries...................................... -- -- -- -- 93 (596)
-------- -------- -------- -------- ---------- ----------
Income from continuing operations before
extraordinary (loss).............................. 3,906 8,107 28,476 40,675 22,256 38,785
(Loss) from discontinued operations................. (176) -- -- -- -- --
-------- -------- -------- -------- ---------- ----------
Income before extraordinary (loss).................. 3,730 8,107 28,476 40,675 22,256 38,785
Extraordinary (loss) on early extinguishment of
debt.............................................. -- (2,645) -- -- (1,243) (1,617)
-------- -------- -------- -------- ---------- ----------
Net income........................................ $ 3,730 $ 5,462 $ 28,476 $ 40,675 $ 21,013 $ 37,168
======== ======== ======== ======== ========== ==========
Net income per share of common stock:
Basic:
Income before extraordinary (loss)................ $ 1.95 $ 1.07 $ 1.91
Extraordinary (loss) on early extinguishment of
debt............................................ -- (0.06) (0.08)
-------- ---------- ----------
Net income basic per share of common stock........ $ 1.95 $ 1.01 $ 1.83
======== ========== ==========
Diluted:
Income before extraordinary (loss)................ $ 1.91 $ 1.04 $ 1.86
Extraordinary (loss) on early extinguishment of
debt............................................ -- (0.06) (0.08)
-------- ---------- ----------
Net income per diluted share of common stock...... $ 1.91 $ 0.98 $ 1.78
======== ========== ==========
18
EIGHT
MONTHS
FISCAL YEAR ENDED APRIL 30 ENDED YEAR ENDED
----------------------------------------- DECEMBER 31, DECEMBER 31,
1995 1996 1997 1998 1998 (A) 1999
-------- -------- -------- -------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital................................... $ 22,750 $ 58,726 $ 47,617 $ 38,532 $ 232,397 $ 161,549
Total assets...................................... 120,127 244,065 238,108 232,243 1,886,556 2,000,354
Total debt, including intercompany................ 37,067 125,760 122,089 75,380 1,398,306 1,396,343
Total stockholders' equity........................ 49,854 51,656 44,028 82,206 91,380 113,008
- - ------------------------------
(a) On December 15, 1998, the Company elected to change its fiscal year end
to December 31 from April 30. This change was made effective on
December 31, 1998.
(b) The results of operations set forth above for the period May 1, 1994
through October 1, 1996 include the combined operations of Superior
Telecommunications Inc. and DNE Systems, Inc. on a prospective basis from
the date such entities were acquired by Alpine. From October 2, 1996
through December 31, 1998, the results of operations represent the
consolidated results of the Company subsequent to its reorganization and
initial public offering as described in Note 1 to the accompanying
consolidated financial statements.
(c) The results of operations include, on a prospective basis, the
acquisition of Superior Telecommunications Inc. in November 1993; the
acquisition of Alcatel N.A., which was acquired by Superior
Telecommunications Inc. on May 11, 1995; the acquisition of 51% of Cables
of Zion on May 5, 1998; the acquisition of 81% of Essex on November 27,
1998; and the acquisition of the remaining 19% of Essex on March 31,
1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Superior TeleCom Inc. ("Superior" or the "Company") manufactures a portfolio
of wire and cable products grouped into the following primary industry segments:
(i) communications, (ii) original equipment manufacturer ("OEM") and
(iii) electrical. The Communications Group includes communications wire and
cable products sold to telephone companies, distributors and systems
integrators, principally in North America. In addition, included within the
Communications Group is the Company's 51% owned Israeli subsidiary, Superior
Cables Limited ("Superior Israel"), which manufactures a range of wire and cable
products in Israel, including communications cable, power cable and other
industrial and electronic wire and cable products. The OEM Group includes magnet
wire and accessory products for motors, transformers and electrical controls
sold primarily to OEMs, as well as automotive and specialty wiring assemblies
for automobiles and trucks. The Electrical Group includes building and
industrial wire for applications in commercial and residential construction and
industrial facilities.
Prior to the acquisitions of Essex and Superior Israel (see Note 5 to the
consolidated financial statements), the Company's operations consisted
principally of its North American communications wire and cable business. The
Essex acquisition, which occurred on November 27, 1998, resulted in the addition
of the OEM and Electrical Group product lines as well as incremental sales of
communications wire and cable. The May 1998 acquisition of 51% of Superior
Israel and Superior Israel's subsequent acquisition of two major Israeli
competitors resulted in the addition to the Company's operating results of its
Israeli operations. These acquisitions were accounted for under the purchase
method of accounting with the operating results from these acquired businesses
being included in the Company's consolidated statements of operations
prospectively, from the date of acquisition.
Comparative tables reflecting certain operating statement data for Superior
are included herein. In 1998, the Company changed its year end to December 31
from April 30 resulting in a December 31, 1998 eight-month transitional
reporting period. To facilitate a meaningful full year comparison, Table I
provides supplemental unaudited historical results of operations for the twelve
month period ended December 31, 1998 compared with audited results for the year
ended December 31, 1999, along with management's
19
discussion and analysis of the operating results for these periods. Table II
presents certain industry segment operating statement data for the twelve month
periods ended April 30, 1997 and 1998, the eight-month transition period ended
December 31, 1998, and the twelve month periods ended December 31, 1998 and
1999, along with management's discussion and analysis of the operating results
for these periods.
As previously mentioned, the results of operations presented in Table I and
Table II reflect the operating results for Essex and Superior Israel for the
period from the date of their respective acquisitions; thus comparisons to
results of operations for periods ended prior to the date of these acquisitions
will be accordingly impacted.
IMPACT OF COPPER PRICE FLUCTUATIONS ON OPERATING RESULTS
Copper is one of the principal raw materials used in the Company's wire and
cable product manufacturing. Fluctuations in the price of copper do affect per
unit product pricing and related revenues. However, the cost of copper has not
had a material impact on profitability as the Company, in most cases, has the
ability to adjust prices billed for its products to properly match the copper
cost component of its inventory shipped.
20
TABLE I
CONSOLIDATED RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
TWELVE MONTHS ENDED
DECEMBER 31,
------------------------
1998 1999
----------- ----------
(UNAUDITED)
Net sales................................................... $647,802 $2,027,529
Gross profit................................................ 136,747 383,893
Selling, general and administrative expenses................ 39,382 150,833
Amortization of goodwill.................................... 3,009 19,629
-------- ----------
Operating income before nonrecurring and unusual charges.... 94,356 213,431
Nonrecurring and unusual charges............................ (13,511) (8,431)
-------- ----------
Operating income............................................ 80,845 205,000
Interest expense............................................ (18,807) (120,100)
Other income (expense), net................................. (13) 2,503
-------- ----------
Income before income taxes, distributions on preferred
securities of Superior Trust I, minority interest and
extraordinary (loss)...................................... 62,025 87,403
Provision for income taxes.................................. (25,368) (36,733)
-------- ----------
Income before distributions on preferred securities of
Superior Trust I, minority interest and extraordinary
(loss).................................................... 36,657 50,670
Distributions on preferred securities of Superior Trust I... -- (11,289)
-------- ----------
Income before minority interest and extraordinary (loss).... 36,657 39,381
Minority interest in (earnings) loss of subsidiaries........ 219 (596)
-------- ----------
Income before extraordinary (loss).......................... 36,876 38,785
Extraordinary (loss)........................................ (1,243) (1,617)
-------- ----------
Net income.............................................. $ 35,633 $ 37,168
======== ==========
Net income per diluted share of common stock:
Income before extraordinary (loss), nonrecurring and
unusual charges......................................... $2.06 $2.07
Nonrecurring and unusual charges.......................... (0.33) (0.21)
Extraordinary (loss)...................................... (0.06) (0.08)
----- -----
Net income per diluted share of common stock............ $1.67 $1.78
===== =====
21
TABLE II
COMBINED UNAUDITED INDUSTRY SEGMENT OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR EIGHT MONTHS TWELVE MONTH
ENDED APRIL ENDED PERIOD ENDED YEAR ENDED
------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 1998 1998 1999
-------- -------- ------------ ------------ ------------
Net sales:
Communications Group.............. $463,840 $516,599 $384,323 $546,024 $ 750,208
OEM Group......................... -- -- 48,572 48,572 653,941
Electrical Group.................. -- -- 53,206 53,206 623,380
-------- -------- -------- -------- ----------
$463,840 $516,599 $486,101 $647,802 $2,027,529
======== ======== ======== ======== ==========
Operating income:
Communications Group.............. $ 63,440 $ 80,975 $ 68,222 $ 95,328 $ 131,675
OEM Group......................... -- -- 4,030 4,030 86,658
Electrical Group.................. -- -- 4,426 4,426 32,937
Corporate and other............... (1,037) (3,915) (6,016) (9,428) (18,210)
Amortization of goodwill.......... (1,726) (1,715) (2,447) (3,009) (19,629)
Nonrecurring and unusual
charges......................... -- -- (13,511) (13,511) (8,431)
-------- -------- -------- -------- ----------
$ 60,677 $ 75,345 $ 54,704 $ 77,836 $ 205,000
======== ======== ======== ======== ==========
RESULTS OF OPERATIONS--TWELVE MONTHS ENDED DECEMBER 31, 1999 (1999)
COMPARED TO THE TWELVE MONTHS ENDED DECEMBER 31, 1998 (1998) (UNAUDITED)
Net sales for 1999 were $2.027 billion, representing an increase of
$1.379 billion, or 213%, as compared to net sales of $648 million for 1998. The
comparative growth in 1999 net sales was largely attributable to the acquisition
of Essex which, in addition to contributing to revenue growth, also resulted in
a more diversified product offering and customer base.
Net sales for the Company's Communications Group were $750 million in 1999,
representing comparative net sales growth of approximately 37% as compared to
1998. This increase in net sales was attributable to the incremental impact of
communications wire and cable related revenues from the Essex and Superior
Israel acquisitions and growth in sales of fiber optic and datacom/premise wire
and cable products. Partially offsetting the 1999 revenue growth was an
approximate 9% reduction in sales of outside plant copper wire and cable
products to the Company's RBOC and other major telephone exchange carrier
customers. The Company believes this slowdown in sales, which occurred
principally in the second half of 1999, was primarily due to planned reductions
in customer inventory levels and current year capital budget constraints enacted
by certain customers and, in some cases, associated with pending or recently
completed mergers among certain of the RBOCs and other major telephone exchange
carrier customers.
Net sales for the Company's OEM Group (which was acquired in the Essex
acquisition in November 1998) amounted to $654 million in 1999 as compared to
$49 million in 1998 (1998 revenues reflect only one month of activity for the
OEM Group). Sales of magnet wire, which comprise nearly two-thirds of the OEM
Group's revenues, reached record shipment levels in 1999, reflecting year over
year demand growth from the Company's major OEM customer base.
Net sales for the Company's Electrical Group (which was also acquired in the
Essex acquisition) amounted to $623 million in 1999 as compared to $53 million
in 1998. While industry-wide demand levels for electrical wire and cable
products have been generally strong during the current year, net sales were
22
impacted substantially in 1999 by lower pricing levels resulting from extremely
competitive market conditions due to, among other factors, current industry
manufacturing overcapacity.
Gross profit in 1999 was $384 million, representing an increase of
$247 million, or 181%, as compared to $137 million in 1998. The gross margin
percentage was 18.9% and 21.1% in 1999 and 1998, respectively. The reduction in
gross margin percentage was primarily attributable to the significant change in
product mix, including the addition of net sales of lower margin electrical wire
and cable products (which margins have been impacted by the aforementioned
pricing pressures) and lower margins product sales of Superior Israel.
Selling, general and administrative expenses ("SG&A expenses") increased
from $39 million in 1998 to $151 million in 1999. The increase was directly
related to the incremental expenses associated with the acquired operations of
Essex and Superior Israel. Since the completion of the Essex acquisition, the
Company has been involved in the consolidation and integration of manufacturing,
corporate and distribution functions of Essex into Superior. In that regard, the
Company implemented a restructuring plan in April 1999 that has resulted in
annual reductions of more than $25 million in corporate and other general and
administrative expenses.
Goodwill amortization increased from $3.0 million in 1998 to $19.6 million
in 1999. The increase was primarily associated with incremental goodwill related
to the acquisition of Essex.
Operating income (excluding nonrecurring and unusual charges) was
$213.4 million for 1999, representing an increase of $119.1 million, or 126%, as
compared to 1998. The increase in operating income was primarily attributable to
the impact of the acquired operations of Essex, and the aforementioned general
and administrative overhead cost reductions.
The Company incurred nonrecurring and unusual charges of $8.4 million during
1999 and $13.5 million during 1998. The charges incurred during 1999 included
$4.4 million associated with the evaluation of management information systems at
Essex, $2.2 million related to plant rationalization activities at Essex,
$1.3 million related to restructuring activities of Superior Israel and
$0.5 million of start-up costs for the Company's Mexican magnet wire facility.
The nonrecurring and unusual charges in 1998 consisted of a $10.0 million
investment advisory fee for services provided by The Alpine Group, Inc. related
to the acquisition of Essex, a $2.9 million restructuring charge at Superior
Israel related to plant consolidations and overhead restructuring activities and
$0.6 million associated with the evaluation of management information systems at
Essex.
Interest expense increased from $18.8 million during 1998 to $120.1 million
during 1999. The increase was directly attributable to the debt associated with
the acquisition of Essex and, to a lesser degree, Superior Israel.
Other income in 1999 of $2.5 million related principally to foreign currency
conversion associated with certain debt of Superior Israel which is linked to
nonfunctional (principally euro-based) currency.
The Company recorded after tax extraordinary charges of $1.6 million, or
$0.08 per diluted share, and $1.2 million, or $0.06 per diluted share, in 1999
and 1998, respectively. The charges represented previously capitalized deferred
financing fees written off in connection with refinancing the Company's
$200.0 million senior subordinated notes in 1999 and financing the Essex
acquisition in 1998.
Net income for 1999 was $37.2 million, or $1.78 per diluted share, as
compared to $35.6 million, or $1.67 per diluted share for 1998. Excluding the
impact of extraordinary, nonrecurring and unusual charges, income for 1999 was
$43.3 million, or $2.07 per diluted share, as compared to prior year income
before extraordinary, nonrecurring and unusual charges of $44.1 million or $2.06
per diluted share.
23
RESULTS OF OPERATIONS--TWELVE MONTHS ENDED DECEMBER 31, 1999
COMPARED TO THE EIGHT MONTHS ENDED DECEMBER 31, 1998
Net sales were $2.027 billion for the twelve months ended December 31, 1999
as compared to net sales of $486.1 million during the eight months ended
December 31, 1998. The comparative increase in net sales was due to the longer
1999 period used for comparison (twelve months versus eight months) and the
inclusion of net sales from the acquired operations of Essex for twelve months
versus only one month during the eight months ended December 31, 1998.
The Communications Group net sales were $750 million for the twelve months
ended December 31, 1999 compared to $384 million for the eight months ended
December 31, 1998. The comparison is impacted by the longer 1999 period, the
inclusion of net sales from the acquired operations of Essex for a full year in
1999, growth in net sales of fiber optic and datacom/premise wire and cable
products in 1999; partially offset by a reduction in sales of outside wire cable
products to the RBOCs and other major telephone exchange carriers during the
second half of 1999.
The OEM Group net sales were $654 million for the twelve months ended
December 31, 1999 as compared to $49 million for the 1998 eight month period,
with the 1998 period reflecting only one month's activity following the Essex
acquisition.
Net sales for the Electrical Group were $623 million for the twelve months
ended December 31, 1999 as compared to $53 million for the 1998 eight month
period, which 1998 period also reflects only one month's activity following the
Essex acquisition.
Gross profit for the twelve months ended December 31, 1999 was $384 million
as compared to $103 million for the eight months ended December 31, 1998. The
increase in gross profit resulted from the longer 1999 period (twelve months
versus eight months) and the inclusion of gross profit contributed by the
acquired operations of Essex for a full twelve month period. The gross margin
percentage was 18.9% for the twelve months ended December 31, 1999 and 21.1% for
the eight months ended December 31, 1998. The reduction in gross margin
percentage was primarily attributable to the significant change in product mix
resulting from the product lines acquired in the acquisition of Essex.
SG&A expenses increased from $32 million for the eight months ended
December 31, 1998 to $151 million for the twelve months ended December 31, 1999.
The increase resulted from the longer comparison period (twelve month versus
eight months) and the incremental expenses associated with the acquired
operations of Essex, offset to some degree by corporate cost reductions
instituted during 1999.
Goodwill amortization increased from $2.4 million for the eight months ended
December 31, 1998 to $19.6 million for the twelve months ended December 31, 1999
with such increase due to incremental goodwill associated with the acquisition
of Essex.
Operating income (excluding nonrecurring and unusual charges) was
$213.4 million for the twelve months ended December 31, 1999 as compared to
$68.2 for the eight months ended December 31, 1998. The increase reflects the
longer comparison period and the operating income contribution from the acquired
operations of Essex.
The Company incurred nonrecurring and unusual charges of $8.4 million during
the twelve months ended December 31, 1999 and $13.5 million during the eight
months ended December 31, 1998. The charges incurred during 1999 included
$4.4 million associated with the evaluation of management information systems at
Essex, $2.2 million related to plant rationalization activities at Essex,
$1.3 million related to restructuring activities of Superior Israel and
$0.5 million of start-up costs for the Company's Mexican magnet wire facility.
The nonrecurring and unusual charges in 1998 consisted of a $10.0 million
investment advisory fee for services provided by The Alpine Group, Inc. related
to the acquisition of Essex, a $2.9 million restructuring charge at Superior
Israel related to plant consolidations and corporate
24
rationalization activities and $0.6 million associated with the evaluation of
management information systems at Essex.
Interest expense was $120.1 million for the twelve months ended
December 31, 1998, as compared to $16.7 million for the eight months ended
December 31, 1998. The increase in interest expense in 1999 was attributable to
the longer comparison period and to the debt incurred in connection with the
Essex acquisition.
Other income of $2.5 million for the twelve months ended December 31, 1999
related principally to foreign currency conversion associated with certain debt
of Superior Israel which is linked to nonfunctional (principally euro-based)
currency.
The Company recorded an after tax extraordinary charges of $1.6 million, or
$0.08 per diluted share, and $1.2 million, or $0.06 per diluted share, during
the twelve months ended December 31, 1999 and eight months ended December 31,
1998, respectively. The charges represented previously capitalized deferred
financing fees written off in connection with refinancing the Company's
$200.0 million senior subordinated notes in 1999 and refinancing certain of the
Company's debt in connection with the Essex acquisition in 1998.
Net income for the twelve months ended December 1999 was $37.2 million, or
$1.78 per diluted share, as compared to $21.0 million, or $0.98 per diluted
share for the eight months ended December 31, 1998. Excluding the impact of
extraordinary, nonrecurring and unusual charges, income for the twelve month
period ended December 31, 1999 was $43.3 million, or $2.07 per diluted share, as
compared to income before extraordinary, nonrecurring and unusual charges of
$29.4 million, or $1.38 per diluted share, for the eight months ended
December 31, 1998.
RESULTS OF OPERATIONS--EIGHT MONTHS ENDED DECEMBER 31, 1998
COMPARED TO THE YEAR ENDED APRIL 30, 1998
Net sales were $486.1 million for the eight months ended December 31, 1998,
representing a decrease of $30.5 million, as compared to net sales of
$516.6 million for the fiscal year ended April 30, 1998. The comparative
decrease in net sales for the eight month period ended December 31, 1998 was due
to the shorter period comparison (eight months versus twelve months) and the
impact of lower copper prices in the December 31, 1998 eight month period,
partially offset by (i) the inclusion in the 1998 eight month period of
$113.9 million and $43.5 million in net sales contributed by the acquired
operations of Essex and Superior Israel, respectively.
Gross profit increased to $103.0 million during the eight month period ended
December 31, 1998, as compared to gross profit of $99.2 million for the fiscal
year ended April 30, 1998. The comparative increase in gross profit for the
eight month period ended December 31, 1998 included the gross profit
contribution from the Essex and Superior Israel acquisitions of $20.1 million
and $7.1 million, respectively, and a comparative increase in gross margin
percentage in the operations of the Communications Group; offset by the impact
of the shorter period comparison.
SG&A expenses increased to $32.3 million during the eight month period ended
December 31, 1998, as compared to $22.2 million for the fiscal year ended
April 30, 1998. The increase in SG&A expenses of $10.1 million during the eight
month period ended December 31, 1998 was due to $11.7 million and $4.1 million
in incremental SG&A expenses associated with the acquired operations of Essex
and Superior Israel, respectively, partially offset by the shorter period
comparisons.
As previously discussed, during the eight month period ended December 31,
1998, the Company incurred nonrecurring and unusual charges of $13.5 million.
Operating income was $54.7 million for the eight month period ended
December 31, 1998, representing a decrease of $20.6 million, as compared to
operating income of $75.3 million for the fiscal year ended
25
April 30, 1998. The comparative decrease in operating income for the eight
months ended December 31, 1998 reflects the shorter period comparison and the
impact of the aforementioned nonrecurring charges, offset by the operating
income contribution of the acquired operations of Essex and Superior Israel.
Interest expense was $16.7 million for the eight month period ended
December 31, 1998, representing an increase of $8.6 million, as compared to
interest expense of $8.1 million during the fiscal year ended April 30, 1998.
The increase in interest expense reflects the increase in debt associated with
the Essex and Superior Israel acquisitions offset by the shorter period
comparison.
Income before nonrecurring, unusual and extraordinary charges during the
eight month period ended December 31, 1998 was $29.4 million, or $1.38 per
diluted share, as compared to $40.7 million, or $1.91 per diluted share, for the
fiscal year ended April 30, 1998.
RESULTS OF OPERATIONS--FISCAL YEAR ENDED APRIL 30, 1998
COMPARED TO THE FISCAL YEAR ENDED APRIL 30, 1997
The results of operations for the years ended April 30, 1998 ("fiscal
1998"), and 1997 ("fiscal 1997") are comprised entirely of the operations of the
Communications Group, which includes principally the manufacture and sale of
telecommunications wire and cable products in the North American market.
In fiscal 1998, net sales were $516.6 million, representing an increase of
$52.8 million, or 11.4%, as compared to fiscal 1997 net sales of
$463.8 million. The increase in comparative net sales in fiscal 1998 resulted
principally from the increased demand for copper wire and cable products due to
the growth in new copper-based telephone access lines and increased maintenance
spending by several of the Company's major telephone company customers, and an
increase in market share from new multi-year supply agreements entered into with
several of the Company's major telephone company customers.
Along with the comparative increase in net sales in fiscal 1998, the Company
also achieved substantial growth in gross profit and a significant increase in
its gross margin percentage during fiscal 1998. In fiscal 1998, gross profit
increased $19.7 million, or 24.7%, to $99.2 million, as compared to fiscal 1997,
while the gross margin percentage increased to 19.2% in fiscal 1998 from 17.2%
in fiscal 1997. The increase in gross margin percentage resulted principally
from the impact of manufacturing cost reductions and efficiencies including
efficiencies resulting from the integration of acquired operations, raw material
price and cost reductions and the benefit from improved cost absorption due to
increases in production volumes.
SG&A expenses increased from $17.2 million in fiscal 1997 to $22.2 million
in fiscal 1998. The increase in SG&A expenses was attributable to: (i) costs
associated with incremental sales and marketing staff to support the increased
level of sales activity; (ii) expansion of administrative activities,
particularly in the area of information systems, to support the level of growth;
(iii) and the expansion of product development activities, including the
establishment and staffing of a product development facility in the fourth
quarter of fiscal 1997.
Commensurate with the growth in net sales and gross profit, operating income
increased substantially in fiscal 1998 to $75.3 million, representing an
increase of 24.2%, as compared to fiscal 1997 operating income of
$60.7 million.
Interest expense in fiscal 1997 and fiscal 1998 was $12.9 million and
$8.1 million, respectively. The reduction in comparative interest expense in
fiscal 1998 reflected reduced levels of weighted average debt resulting from
positive operating cash flow applied to debt reduction during fiscal 1998.
As a result of the substantial growth in operating income and reduction in
interest expense, net income increased on a comparative basis by $12.2 million,
or 42.8% in fiscal 1998 as compared to fiscal 1997.
26
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1999, the Company generated $116.3 million
in cash flows from operating activities consisting of $100.3 million in cash
flows generated from operations (net income plus non-cash charges) plus
$16.0 million in cash flows provided from reductions in net working capital.
Included in cash flows generated from operating activities was a use of cash
flow from operating activities of $26.0 million in the Company's 51% owned
Israeli subsidiary, Superior Israel. The remainder of the Company's wholly-owned
operations generated $142.3 million in cash flow from operating activities,
including $43.8 million in cash flow generated primarily from net working
capital reductions, principally from inventory reduction. Cash used for
investing activities amounted to $97.6 million and consisted principally of
capital expenditures and pre-arranged long-term loans ("Israel Customer Loans")
made to one of Superior Israel's principal customers, partially offset by
$14.2 million in asset sales. Cash used for financing activities amounted to
$20.4 million. The major components were a net increase in borrowings of
Superior Israel of $71.3 million (including $28.7 million related to Superior
Israel Customer Loans), other debt reductions of $69.5 million, treasury stock
repurchases of $13.0 million and common stock dividend payments of
$4.9 million.
As discussed in Note 5 to the accompanying consolidated financial
statements, the Company completed a cash tender offer for the acquisition of 81%
of the outstanding common shares of Essex on November 27, 1998. In connection
with this acquisition, the Company entered into a $1.15 billion amended and
restated credit agreement (the "Credit Agreement") and a $200 million senior
subordinated credit agreement (the "Sub Notes"). Proceeds from these financing
arrangements amounting to approximately $1.15 billion were used to (i) pay
$770 million, representing the cash portion of the Essex acquisition purchase
price, (ii) refinance approximately $84 million under Superior's existing credit
facility, (iii) refinance approximately $275 million of Essex's existing debt,
and (iv) pay related transaction expenses. Obligations under the Credit
Agreement and the Sub Notes are secured by substantially all of the assets of
the Company and its domestic subsidiaries, and by the common stock of the
Company's domestic subsidiaries and 65% of the common stock of its principal
foreign subsidiaries. At December 31, 1999, the Company had $167 million in
excess availability under the Credit Agreement. The Credit Agreement contains
certain performance and financial covenants. As of December 31, 1999, the
Company was in compliance with all financial covenants. Further, in March 2000
the Credit Agreement was amended, reducing certain prospective financial
covenant thresholds related to, among other things, operating cash flow (EBITDA)
levels.
In addition to financing provided by the Credit Agreement and Sub Notes, the
Company has financing availability under a receivable securitization program
providing for up to $160.0 million in short term financing through the issuance
of secured commercial paper. The receivable securitization program expires on
November 30, 2000, although it may be extended for successive one-year periods,
subject to agreement. At December 31, 1999, $140.4 million was outstanding under
this program bearing an interest rate of 6.75%.
As discussed in Note 5 to the accompanying consolidated financial
statements, the Company acquired 51% of Superior Israel on May 5, 1998. On
December 31, 1998, Superior Israel completed the acquisition of all of the
business and certain operating assets of Cvalim for $41.2 million. In connection
with this acquisition, Superior Israel entered into a $83.0 million credit
facility, consisting of a $53.0 million term loan and a $30.0 million revolving
credit facility. Proceeds from this financing were used to finance the
acquisition, pay related expenses and provide for working capital requirements
of Superior Israel. Obligations under this credit facility are secured by all of
the assets of Superior Israel. The credit facility contains customary
performance and financial covenants. At December 31, 1999, Superior Israel had
$10 million in excess availability under its revolving credit facility.
The Company's principal debt service commitments for the next 12 months
amount to $86.0 million and capital expenditures are expected to approximate
$70.0-$80.0 million. Management anticipates that
27
the Company will generate in excess of $100 million in cash flows from its
operating activities over the next twelve months subject to fluctuations
resulting from operating performance and working capital changes. The Company
believes that operating cash flows plus excess funds available under the
Company's credit facilities will be sufficient to fund its aforementioned debt
service obligations and its estimated capital expenditure levels.
DERIVATIVE FINANCIAL INSTRUMENTS
To a limited extent, the Company uses forward fixed price contracts and
derivative financial instruments to manage foreign currency exchange and
commodity price risks. To protect the Company's anticipated cash flows from the
risk of adverse foreign currency exchange fluctuations for firm sales and
purchase commitments, the Company enters into foreign currency forward exchange
contracts. Superior TeleCom's principal raw material, copper, experiences marked
fluctuations in market prices, thereby subjecting the Company to copper price
risk with respect to copper repurchases on fixed customer sales contracts.
Forward fixed price contracts and derivative financial instruments in the form
of copper futures contracts are utilized by the Company to reduce those risks.
The Company does not hold or issue financial instruments for financial or
trading purposes. The Company is exposed to credit risk in the event of
nonperformance by counterparties for foreign exchange forward contracts, metal
forward price contracts and metals futures contracts; however, the Company does
not anticipate nonperformance by any of these counterparties. The amount of such
exposure is generally the unrealized gains with respect to the underlying
contracts.
YEAR 2000 UPDATE
The Company did not experience any significant disruptions in its business
operations as a result of the Year 2000 problem. The Year 2000 problem was
defined as the potential system and mechanical failures or miscalculations
resulting from the inability of computer programs to recognize dates after
December 31, 1999. Most computer programs had been written using two digits
(rather than four) to define the applicable year.
In fiscal 1997, the Company established project teams to identify and
resolve Year 2000 problems. The teams' processes included (i) the readiness
assessment of service providers, major vendors and internal operating systems
and applications; (ii) the upgrade or remediation of non-compliant items
identified; and (iii) the testing and implementation of the upgraded or
remediated items.
The Company incurred approximately $6.0 million related to the Year 2000
project. The costs associated with code modification and testing (approximately
$5.0 million) were expensed as incurred. The personal computer and purchased
software upgrades (approximately $1.0 million) were incurred in the ordinary
course of business and capitalized.
The Company does not anticipate any future disruptions in its business
related to the Year 2000 problem.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk primarily relates to interest rates on
long-term debt. The Company enters into interest rate swap agreements to manage
its exposure to interest rates changes. At December 31, 1999, the Company has an
interest rate swap on $600 million principal amount with a fixed LIBOR rate of
5.27% expiring December 10, 2000. Considering the impact of the existing
interest rate swap, a one percent increase in interest rates affecting the
Company's $1.15 billion credit agreement and its $200 million sub notes would
increase annual interest expense by approximately 4% or $5.2 million. Excluding
the impact of the existing rate swap, a one percent increase in interest rates
affecting the Company's $1.15 billion credit agreement and its $200 million sub
notes would increase annual interest expense by approximately 9% or
$11.2 million.
28
EXCEPT FOR THE HISTORICAL INFORMATION HEREIN, THE MATTERS DISCUSSED IN THIS
ANNUAL REPORT ON FORM 10-K INCLUDE FORWARD-LOOKING STATEMENTS THAT MAY INVOLVE A
NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY VARY SIGNIFICANTLY BASED
ON A NUMBER OF FACTORS, INCLUDING, BUT NOT LIMITED TO, RISKS IN PRODUCT AND
TECHNOLOGY DEVELOPMENT, MARKET ACCEPTANCE OF NEW PRODUCTS AND CONTINUING PRODUCT
DEMAND, PREDICTION AND TIMING OF CUSTOMER ORDERS, THE IMPACT OF COMPETITIVE
PRODUCTS AND PRICING, CHANGING ECONOMIC CONDITIONS, INCLUDING CHANGES IN SHORT
TERM INTEREST RATES AND FOREIGN EXCHANGE RATES, AND OTHER RISK FACTORS DETAILED
IN THE COMPANY'S MOST RECENT FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements as of December 31, 1999 and
1998 and April 30, 1998 and for the year ended December 31, 1999, the eight
months ended December 31, 1998 and each of the two years in the period ended
April 30,1998 and the report of the independent public accountants thereon and
financial statement schedules required under Regulation S-X are submitted herein
as a separate section following Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this Item is incorporated herein by reference to
the Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the end of
the fiscal year covered by this report (the "Company's Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
the Company's Proxy Statement.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1), (a)(2) See the separate section of this report following Item 14 for
a list of financial statements and schedules filed herewith.
(a)(3) Exhibits as required by Item 601 of Regulation S-K are listed in Item
14(c) below.
(b) None.
ITEM 14(C) EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- - -------------- ------------------------------------------------------------
2(a) Stock Purchase Agreement, dated February 14, 1992, by and
between Alpine and Dataproducts Corporation, relating to the
purchase of shares of capital stock of DNE Systems, Inc.
(incorporated herein by reference to Exhibit 1 to the
Current Report on Form 8-K of Alpine dated March 2, 1992).
2(b) Agreement and Plan of Merger, dated as of June 17, 1993 and
amended on September 24, 1993, by and between Alpine and
Superior TeleTec Inc. (incorporated herein by reference to
Exhibit 2 to the Registration Statement on Form S-4
(Registration No. 33-9978) of Alpine, as filed with the
Securities and Exchange Commission (the "Commission") on
October 5, 1993).
2(c) Asset Purchase Agreement, dated as of March 17, 1995, by and
among Alcatel NA Cable Systems, Inc., Alcatel Canada Wire,
Inc., Superior Cable Corporation and Superior TeleTec Inc.
(the "Alcatel Acquisition Agreement") (incorporated herein
by reference to Exhibit 1 to the Current Report on Form 8-K
of Alpine dated May 24, 1995).
2(d) Amendment dated May 11, 1995 to Asset Purchase Agreement by
and among Alcatel NA Cable Systems, Inc., Alcatel Canada
Wire, Inc., Superior Cable Corporation and Superior TeleTec
Inc. (incorporated herein by reference to Exhibit 2 to the
Current Report on Form 8-K of Alpine dated May 24, 1995).
2(e) Agreement Regarding Certain Employee Benefit Plans, amending
the Alcatel Acquisition Agreement, dated June 10, 1996
(incorporated herein by reference to Exhibit 2(b) to the
Annual Report on Form 10-K of Alpine for the year ended
April 30, 1996).
2(f) Share Purchase Agreement, dated as of May 5, 1998, among
CLAL Industries and Investments Ltd., ISAL Holland B.V. and
Halachoh Hane'eman Hashivim Veshmona Ltd. (incorporated
herein by reference to Exhibit 1 to the Current Report on
Form 8-K of the Company dated May 5, 1998).
2(g) Agreement and Plan of Merger, dated as of October 21, 1998,
by and among the Company, SUT Acquisition Corp. and Essex
International Inc. (incorporated herein by reference to
Appendix A-1 to the Joint Proxy Statement/Prospectus filed
as part of the Registration Statement on Form S-4
(Registration No. 333-68889) of the Company and Superior
Trust I, as filed with the Commission on December 14, 1998,
as amended (the "S-4"))
2(h) Amendment No. 1 to Agreement and Plan of Merger, dated as of
February 24, 1999, by and among the Company, SUT Acquisition
Corp. and Essex International Inc. (incorporated herein by
reference to Appendix A-2 to the Joint Proxy Statement/
Prospectus filed as part of the S-4).
30
EXHIBIT NUMBER DESCRIPTION
- - -------------- ------------------------------------------------------------
2(i) Asset Purchase Agreement, dated October 2, 1998, among
Cables of Zion United Works Ltd., Cvalim--The Electric Wire
and Cable Company of Israel Ltd. and Dash Cable Industries
(Israel) Ltd. (incorporated herein by reference to
Exhibit 1 to the Current Report on Form 8-K of the Company
dated December 31, 1998 (the "Cvalim 8-K")).
2(j) Amendment No. 1 to Asset Purchase Agreement, dated December
31, 1998, among Cables of Zion United Works Ltd.,
Cvalim--The Electric Wire and Cable Company of Israel Ltd.
and Dash Cable Industries (Israel) Ltd. (incorporated herein
by reference to Exhibit 2 to the Cvalim 8-K).
3(a) Certificate of Incorporation of the Company (incorporated
herein by reference to Exhibit 3.2 to the Registration
Statement on Form S-1 (Registration No. 333-09933) of the
Company, as filed with the Commission on August 9, 1996, as
amended (the "S-1")).
3(b) Certificate of Amendment, dated July 12, 1996, to the
Certificate of Incorporation of the Company (incorporated
herein by reference to Exhibit 3.2 to the S-1).
3(c) Certificate of Amendment, dated August 6, 1996, to the
Certificate of Incorporation of the Company (incorporated
herein by reference to Exhibit 3.3 to S-1).
3(d) Certificate of Amendment, dated March 31, 1999, to the
Certificate of Incorporation of the Company (incorporated
herein by reference to Exhibit 4.4 to the Registration
Statement on Form S-3 (Registration No. 333-68889) of the
Company, as filed with the Commission on August 17, 1999
(the "S-3")).
3(e) By-laws of the Company (incorporated herein by reference to
Exhibit 3.4 to the S-1).
4(a) Amended and Restated Declaration of Trust of Superior Trust
I, dated as of March 31, 1999, among the Company, American
Stock Transfer & Trust Company, as Property Trustee,
Wilmington Trust Company, as Delaware Trustee, and the
Administrative Trustees named therein (incorporated herein
by reference to Exhibit 4.6 to the S-3).
4(b) Indenture for the 8 1/2% Convertible Subordinated Debentures
of the Company Due 2014, dated as of March 31, 1999, between
the Company and American Stock Transfer & Trust Company, as
Indenture Trustee (incorporated herein by reference to
Exhibit 4.7 to the S-3).
4(c) Guarantee Agreement for the 8 1/2% Trust Convertible
Preferred Securities of Superior Trust I, dated as of
March 31, 1999, between the Company and American Stock
Transfer & Trust Company, as Guarantee Trustee (incorporated
herein by reference to Exhibit 4.8 to the S-e).
10(a) Amended and Restated Superior TeleCom Inc. 1996 Stock Option
Plan (incorporated herein by reference to Appendix D to the
Joint Proxy Statement/Prospectus filed as part of the S-4).
10(b) Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit 10.1 to the S-1).
10(c) Lease Agreement, dated as of December 16, 1993, by and
between ALP(TX) QRS 11-28, Inc. and Superior TeleTec
Transmission Products, Inc. (incorporated herein by
reference to Exhibit (i) to the Quarterly Report on
Form 10-Q of Alpine for the quarter ended January 31, 1994).
10(d) First Amendment to Lease Agreement, dated as of May 10,
1995, by and between ALP (TX) QRS 11-28, Inc. and Superior
TeleTec Inc. (incorporated herein by reference to
Exhibit 10(o) to the Annual Report on Form 10-K of the
Alpine for the year ended April 30, 1995 (the "1995
Alpine 10-K")).
10(e) Second Amendment to Lease Agreement, dated as of July 21,
1995, by and between ALP (TX) QRS 11-28, Inc. and Superior
Telecommunications Inc. (incorporated herein by reference to
Exhibit 10(x) to the 1995 Alpine 10-K).
31
EXHIBIT NUMBER DESCRIPTION
- - -------------- ------------------------------------------------------------
10(f) Third Amendment to Lease Agreement, dated as of October 2,
1996, by and between ALP (TX) QRS 11-28, Inc. and Superior
Telecommunications Inc. (incorporated herein by reference to
Exhibit 10.8 to the S-1).
10(g) First Amendment to Guaranty and Surety Agreement, dated as
of October 2, 1996, among the Company, Alpine and ALP (TX)
QRS 11-28, Inc. (incorporated herein by reference to
Exhibit 10.12 to the S-1).
10(h) Employment Agreement, dated April 26, 1996, between Superior
Telecommunications Inc. and Justin F. Deedy, Jr.
(incorporated herein by reference to Exhibit 10.3 to the
S-1).
10(i) Employment Agreement, dated as of October 17, 1996, between
the Company and Steven S. Elbaum (incorporated herein by
reference to Exhibit 10(14) to the Quarterly Report on
Form 10-Q of the Company for the quarter ended January 31,
1997).
10(j) Letter Agreement, dated October 8, 1996, between the Company
and Alpine relating to a capital contribution by Alpine to
the Company (incorporated herein by reference to
Exhibit 10.2 to the S-1).
10(k) Letter Agreement, dated October 2, 1996, between the Company
and Alpine relating to tax indemnification (incorporated
herein by reference to Exhibit 10.5 to the S-1).
10(l) Tax Allocation Agreement, dated as of October 2, 1996, among
Alpine, the Company and its subsidiaries (incorporated
herein by reference to Exhibit 10.9 to the S-1).
10(m) Exchange Agreement, dated October 2, 1996, between the
Company and Alpine (incorporated herein by reference to
Exhibit 10.10 to the S-1).
10(n) Registration Rights Agreement, dated October 2, 1996,
between the Company and Alpine (incorporated herein by
reference to Exhibit 10.11 to the S-1).
10(o) Services Agreement, dated October 2, 1996, between the
Company and Alpine (incorporated herein by reference to
Exhibit 10.4 to the S-1).
10(p) Amendment No. 1, dated as of May 1, 1997, to the Services
Agreement (incorporated herein by reference to
Exhibit 10(t) to the Annual Report on Form 10-K of the
Company for the year ended April 30, 1997).
10(q) Amendment No. 2, dated as of May 1, 1998, to the Services
Agreement (incorporated herein by reference to
Exhibit 10(w) to the Annual Report on Form 10-K of the
Company for the year ended April 30, 1998).
10(r) Amended and Restated Credit Agreement, dated as of November
27, 1998, among Superior/Essex Corp., Essex Group, Inc., the
guarantors named therein, various lenders, Merrill Lynch &
Co., as documentation agent, Fleet National Bank, as
syndication agent, and Bankers Trust Company, as
administrative agent (incorporated herein by reference to
Exhibit 99.7 to the Schedule 13D/A of Alpine, the Company,
Superior/ Essex Corp. and SUT Acquisition Corp., as filed
with the Commission on December 7, 1998).
10(s)* Senior Subordinated Credit Agreement, dated as of May 26,
1999, among Superior/ Essex Corp., as borrower, the Company,
as parent, the subsidiary guarantors named therein, various
lenders, Fleet Corporate Finance, Inc., as syndication
agent, and Bankers Trust Company, as administrative agent.
10(t) Addendum No. 1 to the Application to Open an Account, dated
December 29, 1998, between Cables of Zion United Works Ltd.
and Bank Hapoalim B.M. (incorporated herein by reference to
Exhibit 3 to the Cvalim 8-K).
10(u) Superior TeleCom Inc. Stock Compensation Plan for
Non-Employee Directors (incorporated herein by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q of the
Company for the quarter ended March 31, 1999).
32
EXHIBIT NUMBER DESCRIPTION
- - -------------- ------------------------------------------------------------
10(v)* Amendment No. 1, dated as of December 10, 1999, to the
Senior Subordinated Credit Agreement, dated as of May 26,
1999, among Superior/Essex Corp., as borrower, the Company,
as parent, the subsidiary guarantors named therein, various
lenders, Fleet Corporate Finance, Inc., as syndication
agent, and Bankers Trust Company, as administrative agent.
10(w)* Amendment No. 2, dated as of February 18, 2000, to the
Senior Subordinated Credit Agreement, dated as of May 26,
1999, among Superior/Essex Corp., as borrower, the Company,
as parent, the subsidiary guarantors named therein, various
lenders, Fleet Corporate Finance, Inc., as syndication
agent, and Bankers Trust Company, as administrative agent.
10(x)* Fourth Amendment to Lease Agreement, dated as of November
27, 1998, between ALP (TX) QRS 11-28, Inc. and Superior
Telecommunications Inc.
10(y)* Second Amendment to Guaranty and Suretyship Agreement, dated
as of November 27, 1998, among ALP (TX) QRS 11-28, Inc.,
the Company and Alpine.
10(z)* Employment Agreement, dated as of January 1, 2000, between
the Company and Gregory R. Schriefer.
21 * List of Subsidiaries
23(a)* Consent of Arthur Andersen LLP
27 * Financial Data Schedule
- - ------------------------
* Filed herewith.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 2000
SUPERIOR TELECOM INC.
By: /s/ STEVEN S. ELBAUM
-----------------------------------------
Steven S. Elbaum
CHAIRMAN OF THE BOARD AND
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.
Chairman of the Board and
/s/ STEVEN S. ELBAUM Chief Executive Officer
------------------------------------------- (principal executive March 30, 2000
Steven S. Elbaum officer)
Chief Financial Officer and
/s/ DAVID S. ALDRIDGE Treasurer (principal
------------------------------------------- financial and accounting March 30, 2000
David S. Aldridge officer)
/s/ EUGENE P. CONNELL Director
------------------------------------------- March 30, 2000
Eugene P. Connell
/s/ ROBERT J. LEVENSON Director
------------------------------------------- March 30, 2000
Robert J. Levenson
/s/ CHARLES Y.C. TSE Director
------------------------------------------- March 30, 2000
Charles Y.C. Tse
/s/ BRAGI F. SCHUT Director
------------------------------------------- March 30, 2000
Bragi F. Schut
34
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of independent public accountants.................... F-2
Consolidated balance sheets as of April 30, 1998, and
December 31, 1998 and 1999................................ F-3
Consolidated statements of operations for the years ended
April 30, 1997 and 1998, the eight months ended December
31, 1998, and the year ended December 31, 1999............ F-4
Consolidated statements of stockholders' equity for the
years ended April 30, 1997 and 1998, the eight months
ended December 31, 1998, and the year ended December 31,
1999...................................................... F-5
Consolidated statements of cash flows for the years ended
April 30, 1997 and 1998, the eight months ended December
31, 1998, and the year ended December 31, 1999............ F-7
Notes to consolidated financial statements.................. F-9
SCHEDULE:
Report of independent public accountants.................... F-34
Schedule II--Valuation and qualifying accounts.............. F-35
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Superior TeleCom Inc.:
We have audited the accompanying consolidated balance sheets of Superior
TeleCom Inc. (a Delaware corporation) and subsidiaries as of April 30, 1998, and
December 31, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended April 30,
1997 and 1998, the eight months ended December 31, 1998, and the year ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of April 30,
1998, and December 31, 1998 and 1999, and the results of their operations and
their cash flows for the years ended April 30, 1997 and 1998, the eight months
ended December 31, 1998, and the year ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Atlanta, Georgia
March 3, 2000
F-2
SUPERIOR TELECOM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
APRIL 30, DECEMBER 31, DECEMBER 31,
1998 1998 1999
--------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents............................... $ 9,866 $ 16,110 $ 14,305
Accounts receivable, net................................ 41,108 222,568 261,263
Inventories............................................. 43,190 346,614 313,571
Other current assets.................................... 6,683 44,661 38,325
-------- ---------- ----------
Total current assets.................................. 100,847 629,953 627,464
Property, plant and equipment, net........................ 83,121 513,433 513,914
Other assets.............................................. 3,792 48,505 65,586
Goodwill, net............................................. 44,483 694,665 793,390
-------- ---------- ----------
Total assets........................................ $232,243 $1,886,556 $2,000,354
======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings................................... $ -- $ 120,109 $ 140,369
Current portion of long-term debt....................... 139 62,603 85,831
Accounts payable........................................ 43,815 110,737 147,290
Accrued expenses........................................ 18,361 104,107 92,425
-------- ---------- ----------
Total current liabilities............................. 62,315 397,556 465,915
Long-term debt, less current portion...................... 74,883 1,215,594 1,170,143
Minority interest in subsidiaries......................... -- 64,571 13,205
Other long-term liabilities............................... 12,839 117,455 104,124
-------- ---------- ----------
Total liabilities................................... 150,037 1,795,176 1,753,387
-------- ---------- ----------
Company-obligated Manditorily Redeemable Trust Convertible
Preferred Securities of Superior Trust I holding solely
convertible debentures, net of discount................. -- -- 133,959
Commitments and contingencies
Stockholders' equity:
Common stock (16,170,666, 20,287,274, and 20,980,101
shares issued at April 30, 1998, December 31, 1998 and
1999, respectively)................................... $ 162 $ 203 $ 210
Capital in excess of par value.......................... 27,528 28,332 38,560
Accumulated other comprehensive deficit................. (1,528) (6,081) (5,447)
Retained earnings....................................... 56,044 75,043 98,828
-------- ---------- ----------
82,206 97,497 132,151
Shares of common stock in treasury...................... -- (6,117) (19,143)
-------- ---------- ----------
Total stockholders' equity............................ 82,206 91,380 113,008
-------- ---------- ----------
Total liabilities and stockholders' equity.......... $232,243 $1,886,556 $2,000,354
======== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
SUPERIOR TELECOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED EIGHT MONTHS
--------------------- ENDED YEAR ENDED
APRIL 30, APRIL 30, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
--------- --------- ------------ ------------
(NOTE 1) (NOTE 1)
Net sales....................................... $463,840 $516,599 $486,101 $2,027,529
Cost of goods sold.............................. 384,271 417,358 383,106 1,643,636
-------- -------- -------- ----------
Gross profit.................................. 79,569 99,241 102,995 383,893
Selling, general and administrative expenses.... 17,166 22,181 32,333 150,833
Nonrecurring and unusual charges................ -- -- 13,511 8,431
Amortization of goodwill........................ 1,726 1,715 2,447 19,629
-------- -------- -------- ----------
Operating income.............................. 60,677 75,345 54,704 205,000
Interest expense................................ (12,907) (8,090) (16,651) (120,100)
Other income (expense), net..................... (305) 206 (346) 2,503
-------- -------- -------- ----------
Income before income taxes, distributions on
preferred securities of Superior Trust I,
minority interest and extraordinary
(loss)...................................... 47,465 67,461 37,707 87,403
Provision for income taxes...................... (18,989) (26,786) (15,544) (36,733)
-------- -------- -------- ----------
Income before distributions on preferred
securities of Superior Trust I, minority
interest and extraordinary (loss)........... 28,476 40,675 22,163 50,670
Distributions on preferred securities of
Superior Trust I.............................. -- -- -- (11,289)
-------- -------- -------- ----------
Income before minority interest and
extraordinary (loss)...................... 28,476 40,675 22,163 39,381
Minority interest in (earnings) losses of
subsidiaries.................................. -- -- 93 (596)
-------- -------- -------- ----------
Income before extraordinary (loss).......... 28,476 40,675 22,256 38,785
Extraordinary (loss) on early extinguishment of
debt, net..................................... -- -- (1,243) (1,617)
-------- -------- -------- ----------
Net income.................................. $ 28,476 $ 40,675 $ 21,013 $ 37,168
======== ======== ======== ==========
Net income per share of common stock:
Basic:
Income before extraordinary (loss).......... $1.95 $1.07 $1.91
Extraordinary (loss) on early extinguishment
of debt................................... -- (0.06) (0.08)
-------- -------- ----------
Net income per basic share of common
stock..................................... $1.95 $1.01 $1.83
======== ======== ==========
Diluted:
Income before extraordinary (loss).......... $1.91 $1.04 $1.86
Extraordinary (loss) on early extinguishment
of debt................................... -- (0.06) (0.08)
-------- -------- ----------
Net income per diluted share of common
stock..................................... $1.91 $0.98 $1.78
======== ======== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
SUPERIOR TELECOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED APRIL 30, 1997 AND 1998, THE EIGHT MONTHS ENDED
DECEMBER 31, 1998, AND THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
SUBSIDIARIES'
COMMON SUPERIOR TELECOM INC. CAPITAL ACCUMULATED
STOCK COMMON STOCK IN EXCESS OTHER
COMPREHENSIVE ------------- ----------------------- OF PAR COMPREHENSIVE RETAINED
INCOME AMOUNT SHARES AMOUNT VALUE DEFICIT EARNINGS
------------- ------------- ------------ -------- --------- ------------- --------
Balance at April 28, 1996.......... $ 1 -- $ -- $ 42,254 $ (214) $ 9,615
6% Cumulative Preferred Stock
issued by Superior
Telecommunications Inc......... (20,000)
October 2, 1996 Reorganization
(Note 1)....................... (1) 6,024,048 60 20,599 103 (20,701)
Dividends paid on common stock... (117,129)
Initial public offering of common
stock.......................... 6,900,000 69 101,573
Purchase of treasury stock.......
Exchange of treasury stock for
preferred Stock of subsidiary..
Employee stock purchase plan..... 2,488 -- 43
Comprehensive income:
Net income..................... 28,476 28,476
Foreign currency translation
adjustment................... (720) (720)
-------
Total comprehensive income..... $27,756
======= --- ---------- ---- --------- ------- --------
Balance at April 30, 1997.......... -- 12,926,536 129 27,340 (831) 17,390
Employee stock purchase plan..... 7,333 1 174
Exercise of stock options........ 3,162 46
Partial stock split.............. 3,233,635 32 (32)
Cash dividends declared.......... (2,021)
Comprehensive income:
Net income..................... 40,675 40,675
Foreign currency translation
adjustment................... (697) (697)
-------
Total comprehensive income..... $39,978
======= --- ---------- ---- --------- ------- --------
Balance at April 30, 1998.......... $-- 16,170,666 $162 $ 27,528 $(1,528) $ 56,044
TREASURY STOCK
-------------------
SHARES AMOUNT TOTAL
-------- -------- ---------
Balance at April 28, 1996.......... -- $ -- $ 51,656
6% Cumulative Preferred Stock
issued by Superior
Telecommunications Inc......... (20,000)
October 2, 1996 Reorganization
(Note 1)....................... -- -- 60
Dividends paid on common stock... (117,129)
Initial public offering of common
stock.......................... 101,642
Purchase of treasury stock....... (450,000) (8,055) (8,055)
Exchange of treasury stock for
preferred Stock of subsidiary.. 450,000 8,055 8,055
Employee stock purchase plan..... 43
Comprehensive income:
Net income..................... 28,476
Foreign currency translation
adjustment................... (720)
Total comprehensive income.....
-------- ------- ---------
Balance at April 30, 1997.......... -- -- 44,028
Employee stock purchase plan..... 175
Exercise of stock options........ 46
Partial stock split.............. --
Cash dividends declared.......... (2,021)
Comprehensive income:
Net income..................... 40,675
Foreign currency translation
adjustment................... (697)
Total comprehensive income.....
-------- ------- ---------
Balance at April 30, 1998.......... -- $ -- $ 82,206
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
SUPERIOR TELECOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED APRIL 30, 1997 AND 1998, THE EIGHT MONTHS ENDED
DECEMBER 31, 1998, AND THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
SUPERIOR TELECOM INC. CAPITAL ACCUMULATED
COMMON STOCK IN EXCESS OTHER
COMPREHENSIVE ----------------------- OF PAR COMPREHENSIVE RETAINED
INCOME SHARES AMOUNT VALUE DEFICIT EARNINGS
------------- ------------ -------- --------- ------------- --------
Balance at April 30, 1998.......... 16,170,666 $ 162 $ 27,528 $(1,528) $ 56,044
Employee stock purchase plan..... 4,745 165
Exercise of stock options........ 52,163 680
Cash dividends declared.......... (2,014)
Purchase of treasury stock.......
Comprehensive income:
Net income..................... 21,013 21,013
Foreign currency translation
adjustment................... (4,553) (4,553)
-------
Total comprehensive income..... $16,460
=======
Partial stock split.............. 4,059,700 41 (41)
---------- ------- --------- ------- --------
Balance at December 31, 1998....... 20,287,274 203 28,332 (6,081) 75,043
Employee stock purchase plan..... 63,655 1 889
Exercise of stock options........ 18,101 905
Cash dividends declared.......... (4,943)
Purchase of treasury stock.......
Comprehensive income:
Net income..................... $37,168 37,168
Foreign currency translation
adjustment................... 1,500 1,500
Additional minimum pension
liability.................... (866) (866)
-------
Total comprehensive income..... $37,802
=======
Stock dividend................... 611,071 6 8,434 (8,440)
---------- ------- --------- ------- --------
Balance at December 31, 1999....... 20,980,101 $ 210 $ 38,560 $(5,447) $ 98,828
========== ======= ========= ======= ========
TREASURY STOCK
-------------------
SHARES AMOUNT TOTAL
-------- -------- ---------
Balance at April 30, 1998.......... -- $ -- $ 82,206
Employee stock purchase plan..... 165
Exercise of stock options........ 680
Cash dividends declared.......... (2,014)
Purchase of treasury stock....... (168,700) (6,117) (6,117)
Comprehensive income:
Net income..................... 21,013
Foreign currency translation
adjustment................... (4,553)
Total comprehensive income.....
Partial stock split.............. (42,175) --
-------- -------- ---------
Balance at December 31, 1998....... (210,875) (6,117) 91,380
Employee stock purchase plan..... 890
Exercise of stock options........ 905
Cash dividends declared.......... (4,943)
Purchase of treasury stock....... (593,300) (13,026) (13,026)
Comprehensive income:
Net income..................... 37,168
Foreign currency translation
adjustment................... 1,500
Additional minimum pension
liability.................... (866)
Total comprehensive income.....
Stock dividend................... (24,125) --
-------- -------- ---------
Balance at December 31, 1999....... (828,300) $(19,143) $ 113,008
======== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
SUPERIOR TELECOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED EIGHT MONTHS
--------------------- ENDED YEAR ENDED
APRIL 30, APRIL 30, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
--------- --------- ------------ ------------
(NOTE 1) (NOTE 1)
Cash flows from operating activities:
Income before extraordinary (loss).............. $ 28,476 $ 40,675 $ 22,256 $ 38,785
Adjustments to reconcile income before
extraordinary (loss) to cash provided by
operating activities:
Depreciation and amortization................. 9,295 10,045 11,926 58,813
Amortization of deferred financing costs...... 609 1,059 1,046 4,805
(Benefit) provision for deferred taxes........ 1,419 (545) 174 12,536
Change in assets and liabilities, net of
effects from companies acquired:
Accounts receivable......................... 5,590 1,971 18,655 (37,505)
Inventories................................. 1,464 12,998 (19,615) 26,751
Other current and noncurrent assets......... 1,243 (213) 638 14,834
Accounts payable and accrued expenses....... 2,425 4,756 (20,538) (3,153)
Other, net.................................. 372 (1,158) 605 418
--------- -------- ----------- ---------
Cash flows provided by operating activities....... 50,893 69,588 15,147 116,284
--------- -------- ----------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired.............. -- -- (1,104,679) (10,842)
Capital expenditures............................ (9,807) (18,488) (28,014) (72,237)
Net proceeds from sale of assets................ 2,534 5,113 1,751 14,197
Customer loans.................................. -- -- (4,953) (28,708)
Other........................................... 35 -- -- (53)
--------- -------- ----------- ---------
Cash flows used for investing activities.......... (7,238) (13,375) (1,135,895) (97,643)
--------- -------- ----------- ---------
Cash flows from financing activities:
Net proceeds from sale of common stock.......... 101,642 -- -- --
Short-term borrowings, net...................... -- -- (12,895) 20,260
(Repayments) borrowings under revolving credit
facilities, net............................... 111,657 (42,307) 8,899 12,596
Debt issuance costs............................. (4,122) -- (31,026) (6,294)
Advances from (repayments to) Alpine, net....... (112,939) (439) 171 (498)
Long-term borrowings............................ -- -- 1,171,153 279,348
Repayments of long-term borrowings.............. (2,389) (3,963) (1,044) (310,342)
Dividends paid on common stock.................. (117,129) (1,011) (2,014) (4,943)
Purchase of treasury stock...................... (8,055) -- (6,117) (13,026)
Redemption of subsidiary preferred stock........ (11,300) -- -- --
Other........................................... (319) 321 (135) 2,453
--------- -------- ----------- ---------
Cash flows provided by (used for) financing
activities...................................... (42,954) (47,399) 1,126,992 (20,446)
--------- -------- ----------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
SUPERIOR TELECOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
YEARS ENDED EIGHT MONTHS
--------------------- ENDED YEAR ENDED
APRIL 30, APRIL 30, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
--------- --------- ------------ ------------
(NOTE 1) (NOTE 1)
Net increase (decrease) in cash and cash
equivalents..................................... $ 701 $ 8,814 $ 6,244 $ (1,805)
Cash and cash equivalents at beginning of
period.......................................... 351 1,052 9,866 16,110
------- ------- ---------- --------
Cash and cash equivalents at end of period........ $ 1,052 $ 9,866 $ 16,110 $ 14,305
======= ======= ========== ========
Supplemental disclosures:
Cash paid for interest, net of amount
capitalized................................. $12,696 $ 7,402 $ 11,702 $109,963
======= ======= ========== ========
Cash paid for income taxes.................... $13,820 $29,440 $ 27,396 $ 3,818
======= ======= ========== ========
Non--cash investing and financing activities:
Exchange of common stock for subsidiary
preferred stock:
Preferred stock acquired.................... $(8,055)
=======
Treasury stock issued....................... $(8,055)
=======
Acquisition of businesses:
Assets, net of cash acquired.................. $1,599,305
Liabilities assumed........................... (428,097)
Minority interest in subsidiaries............. (66,529)
----------
Net cash paid................................. $1,104,679
==========
Acquisition of Essex minority interest:
Net assets acquired including goodwill........ $ 83,044
Minority interest in subsidiary............... 50,246
--------
Issuance of Company-obligated Manditorily
Redeemable Trust Convertible Preferred
Securities of Superior Trust I holding
solely convertible debentures (net of
discount of $33.3 million).................. $133,290
========
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
DESCRIPTION OF BUSINESS
Superior TeleCom Inc. (together with its subsidiaries, unless the context
otherwise requires, the "Company" or "Superior") manufactures wire and cable
products for the communications, original equipment manufacturer ("OEM"), and
electrical markets. The Company is a manufacturer and supplier of communications
wire and cable products to telephone companies, distributors and system
integrators; magnet wire and insulation materials for motors, transformers and
electrical controls, as well as automotive and specialty wiring assemblies for
automobiles and trucks; and building and industrial wire for applications in
commercial and residential construction and industrial facilities. The Company
operates manufacturing and distribution facilities in the United States, Canada,
the United Kingdom, and Israel.
ORGANIZATIONAL HISTORY
Superior was incorporated in July 1996 as a wholly owned subsidiary of The
Alpine Group, Inc. ("Alpine"). At the date of incorporation, the Company had no
operations or material assets or liabilities. On October 2, 1996, Alpine
completed a reorganization (the "Reorganization") whereby 100% of the common
stock of two of Alpine's subsidiaries, Superior Telecommunications Inc. ("STI")
and DNE Systems, Inc. ("DNE"), were contributed to the Company in exchange for
100% of the shares of the Company's then outstanding common stock. Prior to the
Reorganization and pursuant to a recapitalization of STI and DNE, STI issued to
Alpine 20,000 shares of 6% Cumulative Preferred Stock (the "STI Preferred
Stock"), with a liquidation preference of $1,000 per share, and STI and DNE
declared a dividend payable to Alpine of $117.1 million. In conjunction with the
Reorganization, the Company borrowed $154.0 million under a revolving credit
facility, the net proceeds of which were used to repay the net amount of
intercompany debt owed by STI and DNE to Alpine of $87.9 million and to pay to
Alpine $63.8 million of the aforementioned dividend.
In October 1996, the Company sold 9.4 million shares of its common stock
(the "Common Stock") through an initial public offering (the "Offering") and
used the proceeds to repay $34.4 million of bank debt and to pay to Alpine the
remaining balance of the aforementioned dividend declared by STI and DNE.
In November 1996, the underwriters of the Offering exercised their
overallotment option to purchase an additional 1.4 million shares of Common
Stock. The Company used the net proceeds of approximately $13.3 million to
repurchase 0.7 million shares of Common Stock for approximately $8.1 million,
with the balance used to reduce bank debt. The repurchased shares of Common
Stock were then transferred to Alpine in exchange for $8.1 million in principal
amount of STI Preferred Stock. On February 12, 1997, STI redeemed, at face
value, an additional $11.3 million in principal amount of STI Preferred Stock.
The remaining $0.6 million of STI Preferred Stock held by Alpine is included in
other long-term liabilities in the accompanying consolidated balance sheet.
After giving effect to the exercise of the overallotment option and the
subsequent repurchase and exchange of Common Stock, Alpine's ownership interest
was reduced to 50.1%. As a result of treasury stock purchases and other
transactions following the Offering, Alpine's ownership interest was
approximately 51.8% at December 31, 1999.
On November 27, 1998, the Company completed a cash tender offer for 81% of
the outstanding common shares of Essex International Inc. ("Essex"). On
March 31, 1999, the Company acquired the remaining 19% of the Essex common stock
through the issuance of 8 1/2% trust convertible preferred stock (see Note 5).
F-9
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION (CONTINUED)
CHANGE IN YEAR END
On December 15, 1998, the Company elected to change its year end to
December 31 from April 30. This change was made effective December 31, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These financial statements present the consolidated balance sheets of the
Company at April 30, 1998 and December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended April 30, 1997 ("fiscal 1997") and 1998 ("fiscal 1998"), for the
eight months ended December 31, 1998, and for the year ended December 31, 1999.
The fiscal 1997 statements of operations, stockholders' equity and financial
statement disclosures include the combined operations of STI and DNE for the
periods prior to the Reorganization. All significant intercompany accounts and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
All highly liquid investments purchased with a maturity at acquisition of
90 days or less are considered to be cash equivalents
INVENTORIES
Inventories of communications products are stated at the lower of cost or
market, using the first-in, first-out ("FIFO") cost method. Inventories of OEM
and electrical products are primarily stated at the lower of cost or market,
using the last-in, first-out ("LIFO") cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. Leasehold improvements are amortized over the
lesser of the estimated useful lives of the assets or the lease term.
Depreciation and amortization are provided over the estimated useful lives of
the assets using the straight-line method. The estimated lives are as follows:
Building and improvements................................... 10 to 40 years
Machinery and equipment..................................... 3 to 15 years
Maintenance and repairs are charged to expense as incurred. Long-term
improvements are capitalized as additions to property, plant and equipment. Upon
retirement or other disposal, the asset cost and related accumulated
depreciation are removed from the accounts and the net amount, less any
proceeds, is charged or credited to income. Interest is capitalized during the
active construction period of major capital projects. During 1999, $2.0 million
was capitalized in connection with various capital projects.
GOODWILL
The excess of the purchase price over the net identifiable assets of
businesses acquired is amortized ratably over periods not exceeding 40 years.
Accumulated amortization of goodwill at April 30, 1998, and
F-10
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
December 31, 1998 and 1999, was $6.5 million, $8.9 million and $28.6 million,
respectively. The Company periodically reviews goodwill to assess recoverability
from future operations using undiscounted cash flows. If the carrying amount
exceeds undiscounted cash flows, an impairment loss would be recognized for the
difference between the carrying amount and its estimated fair value.
DEFERRED FINANCING COSTS
Origination costs incurred in connection with outstanding debt financings
are included in the balance sheet in other assets. These deferred financing
costs are being amortized over the lives of the applicable debt instruments on a
straight-line basis and are charged to operations as additional interest
expense.
AMOUNTS DUE CUSTOMERS
Included in accrued expenses at December 31, 1998 and 1999, are certain
amounts due customers totaling $11.1 million and $12.8 million, respectively,
representing cash discount liabilities to customers who meet certain contractual
sales volume criteria. Such discounts are paid periodically to those qualifying
customers.
REVENUE RECOGNITION
Substantially all revenue is recognized at the time the product is shipped,
except for limited product consignments which are not reflected in revenue until
sold to the end user.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of foreign subsidiaries are
measured using local currency as the functional currency. Assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at exchange
rates in effect at fiscal year-end. The resulting translation gains and losses
are charged directly to accumulated other comprehensive income, a component of
stockholders' equity, and are not included in net income until realized through
sale or liquidation of the investment. Revenues and expenses are translated at
average exchange rates prevailing during the fiscal year. Foreign currency
exchange gains and losses incurred on foreign currency transactions are included
in income as they occur.
EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding for the period.
Diluted earnings per common share is determined assuming the conversion of
outstanding stock options and grants under the treasury stock method. Historical
earnings per common share for the periods prior to the Offering are not
presented since STI and DNE were wholly-owned subsidiaries of Alpine.
CONCENTRATION OF CREDIT RISK AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
During fiscal 1997 and 1998, and the eight months ended December 31, 1998,
sales to the regional Bell operating companies and major independent telephone
companies represented 91%, 88% and 88% of STI's North American net sales,
respectively. At April 30, 1998, and December 31, 1998 and 1999, accounts
receivable from these customers amounted to $35.9 million, $18.9 million and
$25.6 million, respectively.
F-11
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts receivable includes allowances for doubtful accounts of
$0.2 million, $5.0 million and $3.2 million at April 30, 1998, and December 31,
1998 and 1999, respectively.
USE OF ESTIMATES
The Company's consolidated financial statements are prepared in accordance
with generally accepted accounting principles, which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 1997, fiscal 1998 and
December 31, 1998, consolidated financial statements to conform with the
December 31, 1999, presentation.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities--Deferral of Effective Date of FASB Statement
No. 133--an amendment of FASB Statement No. 133" which delayed SFAS No. 133's
effective date for one year. SFAS No. 133, which will be effective for the
Company beginning January 1, 2001, establishes accounting and reporting
standards for derivative instruments and requires recognition of all derivatives
as either assets or liabilities in the statements of financial position and
measurement of those instruments at fair value. The Company has not yet
quantified the impact of adopting SFAS No. 133, nor the timing of, or method of
adoption; however, the Company believes the effect of adoption will not be
material.
3. INVENTORIES
At April 30 1998, and December 31, 1998 and 1999, the components of
inventories are as follows:
APRIL 30, DECEMBER 31, DECEMBER31,
1998 1998 1999
--------- ------------ -----------
(IN THOUSANDS)
Raw materials............................... $ 8,672 $ 47,519 $ 50,618
Work in process............................. 8,170 45,661 42,150
Finished goods.............................. 26,348 254,099 233,142
------- -------- --------
43,190 347,279 325,910
LIFO reserve................................ -- (665) (12,339)
------- -------- --------
$43,190 $346,614 $313,571
======= ======== ========
During the year ended December 31, 1999, the Company changed its method of
determining the cost of inventories for the acquired communications segment of
Essex International Inc. from the LIFO method to the FIFO method. This change
was made to conform to consistent operational and accounting policies for the
Company's communications segment. Utilization of the FIFO method of accounting
for the
F-12
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVENTORIES (CONTINUED)
year ended December 31, 1999 resulted in net income being $0.6 million or ($0.03
per diluted share) greater than net income under the LIFO method.
Inventories valued using the LIFO method amounted to $220.9 million and
$167.3 million at December 31, 1998 and 1999, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
At April 30, 1998 and December 31, 1998 and 1999, property, plant and
equipment consists of the following:
APRIL 30, DECEMBER 31, DECEMBER 31,
1998 1998 1999
--------- ------------ ------------
(IN THOUSANDS)
Land....................................... $ 2,851 $ 24,890 $ 25,230
Buildings and improvements................. 17,003 129,878 122,810
Machinery and equipment.................... 89,540 399,520 443,062
------- -------- --------
109,394 554,288 591,102
Less accumulated depreciation.............. 26,273 40,855 77,188
------- -------- --------
$83,121 $513,433 $513,914
======= ======== ========
Depreciation expense for fiscal 1997, fiscal 1998, the eight months ended
December 31, 1998, and the year ended December 31, 1999, was $7.6 million,
$8.3 million, $9.5 million and $38.5 million, respectively.
5. ACQUISITIONS
ESSEX ACQUISITION
On November 27, 1998, the Company completed a cash tender offer for 81% of
the outstanding common shares of Essex, at an aggregate cash tender value of
$770 million (the "Essex Acquisition"). In connection with the Essex
Acquisition, the Company entered into a $1.15 billion amended and restated
credit facility and a $200 million senior subordinate credit facility (the
"Credit Facilities"). Proceeds from the Credit Facilities were used to (i) pay
the cash portion of the purchase price, (ii) repay certain Essex indebtedness,
(iii) refinance the Company's existing outstanding bank debt and (iv) pay
related transaction expenses. On March 31, 1999, the Company acquired the
remaining outstanding common stock of Essex through the issuance of
approximately $167 million (face amount) of 8 1/2% Company-obligated Manditorily
Redeemable Trust Convertible Preferred Securities of Superior Trust I holding
solely convertible debentures (see Note 9).
The acquisition of Essex was accounted for using the purchase method and,
accordingly, the results of operations of Essex have been included in the
consolidated financial statements on a prospective basis from the dates of
acquisition. The purchase price was allocated based upon assessments of the fair
values of assets and liabilities at the dates of acquisition which included
accruals for planned consolidations, overhead rationalization and loss
contingencies. The excess of the purchase price over the net assets acquired is
being amortized on a straight-line basis over 40 years.
F-13
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS (CONTINUED)
CABLES OF ZION AND CVALIM ACQUISITIONS
On May 5, 1998, the Company acquired 51% of the common stock of Cables of
Zion United Works Ltd. ("Cables of Zion"), an Israel--based cable and wire
manufacturer whose common stock is traded on the Tel Aviv Stock Exchange, for
approximately $25 million in cash. The Company has an option through May 5, 2000
to purchase an additional 19% ownership interest in Cables of Zion at the same
purchase price per share paid for its initial 51% investment (as adjusted for
inflation).
On December 31, 1998, Cables of Zion acquired the business and certain
operating assets of Cvalim-The Electric Wire and Cable Company of Israel Ltd.
("Cvalim") for an adjusted purchase price of $41.2 million in cash. In
connection with the acquisition, Cables of Zion entered into an $83.0 million
credit facility (the "Cables of Zion Credit Facility") consisting of a
$53.0 million term loan and $30.0 million revolving line of credit. Proceeds
from the Cables of Zion Credit Facility were used to finance the acquisition,
pay related fees and expenses and provide for working capital requirements.
Following the Cvalim Acquisition, Cables of Zion changed its name to Superior
Cables Limited ("Superior Israel").
On October 20, 1999, Superior Israel acquired the business and certain
operating assets of Pica Plast Limited for $10.8 million in cash.
The acquisitions of Cables of Zion, Cvalim and Pica Plast were accounted for
using the purchase method and, accordingly, the results of operations of Cables
of Zion, Cvalim and Pica Plast are included in the Company's consolidated
financial statements on a prospective basis from the date of their respective
acquisitions. The purchase price was allocated based upon the estimated fair
values of assets and liabilities at the date of acquisitions. The excess of the
purchase price over the net assets acquired is being amortized on a
straight-line basis over 30 years.
PRO FORMA FINANCIAL DATA (UNAUDITED)
Unaudited condensed pro forma results of operations for the year ended
April 30, 1998, the eight months ended December 31, 1998, and the year ended
December 31, 1999, which give effect to the acquisition of Essex and the
acquisition of Cables of Zion as if the transactions had occurred on May 1,
1997, are presented below. The pro forma results of operations do not include
the results of operations of Cvalim or Pica Plast prior to their dates of
acquisition as they are not material to the Company's consolidated results of
operations. The pro forma amounts reflect acquisition-related purchase
accounting adjustments, including adjustments to depreciation and amortization
expense and interest expense on acquisition debt and certain other adjustments,
together with related income tax effects. The pro forma financial information
does not purport to be indicative of either the results of operations that would
have
F-14
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS (CONTINUED)
occurred if the transactions had taken place at the beginning of the period
presented or of the future results of operations.
EIGHT MONTHS
YEAR ENDED ENDED YEAR ENDED
APRIL 30, DECEMBER 31, DECEMBER 31,
1998 1998 1999
---------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales............................................... $2,277,246 $1,351,089 $2,027,529
Income before income taxes, distributions on preferred
securities of subsidiary trust, minority interest and
extraordinary (loss).................................. 119.521 30,204 86,613
Income before extraordinary (loss)...................... 55,129 6,617 37,429
Extraordinary (loss) on early extinguishment of debt.... -- (1,243) (1,617)
---------- ---------- ----------
Net income applicable to common stock................... $ 55,129 $ 5,374 $ 35,812
========== ========== ==========
Net income per diluted share of common stock:
Income before extraordinary (loss).................... $ 2.59 $ 0.31 $ 1.79
Extraordinary (loss) on early extinguishment of
debt................................................ -- (0.06) (0.08)
---------- ---------- ----------
Net income per diluted share of common stock.......... $ 2.59 $ 0.25 $ 1.71
========== ========== ==========
6. ACCRUED EXPENSES
At April 30, 1998, and December 31, 1998 and 1999, accrued expenses consist
of the following:
APRIL 30, DECEMBER 31, DECEMBER 31,
1998 1998 1999
--------- ------------ ------------
(IN THOUSANDS)
Accrued wages, salaries and employee
benefits................................. $ 7,697 $ 32,516 $26,657
Other accrued expenses..................... 10,664 71,591 65,768
------- -------- -------
$18,361 $104,107 $92,425
======= ======== =======
7. SHORT-TERM BORROWINGS
At December 31, 1998 and 1999, short-term borrowings consist principally of
$114.7 million and $140.4 million, respectively, in borrowings under an accounts
receivable securitization program which provides for up to $160.0 million in
short-term financing through the issuance of secured commercial paper through a
limited purpose subsidiary. Under the receivable securitization program, the
Company has granted a security interest in all its trade accounts receivable of
domestic subsidiaries to secure borrowings under the facility. The receivable
securitization program expires on November 30, 2000, although it may be extended
for successive one-year periods subject to agreement. Borrowings under this
agreement bear interest at the lender's commercial paper rate (which
approximated 5.25% and 6.40% at December 31, 1998 and 1999) plus 0.35%.
F-15
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT
At April 30, 1998, and December 31, 1998 and 1999, long-term debt consists
of the following:
APRIL 30, DECEMBER 31, DECEMBER 31,
1998 1998 1999
--------- ------------ ------------
(IN THOUSANDS)
Senior revolving credit facility (a)....................... $69,350 $ 77,750 $ 53,735
Term loan A (a)............................................ -- 500,000 446,433
Term loan B (a)............................................ -- 425,000 415,542
Senior subordinated notes (a).............................. -- 200,000 200,000
Cables of Zion credit facility (b)......................... -- 41,237 82,507
Other...................................................... 5,672 34,210 57,757
------- ---------- ----------
Total debt................................................. 75,022 1,278,197 1,255,974
Less current portion of long--term debt.................... 139 62,603 85,831
------- ---------- ----------
$74,883 $1,215,594 $1,170,143
======= ========== ==========
At December 31, 1999, the fair value of the Company's debt, based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities, approximates
its recorded value. The Company has entered into several of interest rate swap
and interest rate cap agreements in order to limit the effect of changes in
interest rates on the Company's floating rate long-term obligations. Amounts
currently due to or from interest rate swap counterparties are recorded in
interest expense in the period in which they accrue. The Company does not enter
into financial instruments for trading or speculative purposes. The fair value
of the interest rate caps and swaps was $1.9 million and $6.4 million,
respectively, at December 31, 1998 and 1999.
The aggregate principal maturities of long-term debt for the five years
subsequent to December 31, 1999 are as follows:
YEAR AMOUNT
- - ---- --------------
(IN THOUSANDS)
2000........................................................ $ 85,831
2001........................................................ 86,151
2002........................................................ 97,849
2003........................................................ 192,177
2004........................................................ 401,045
Thereafter.................................................. 392,921
----------
$1,255,974
==========
- - ------------------------
(a) In connection with the Essex Acquisition (see Note 5), the Company
amended and restated its existing credit facilities. The amended and
restated credit facilities provide for total borrowing availability of up
to $1.35 billion, consisting of a $225.0 million revolving credit
facility, a $500.0 million term loan A facility, a $425.0 million term
loan B facility and $200.0 million in senior subordinated notes.
The revolving credit facility is available to the Company's principal
subsidiaries. Borrowings under the facility are allowable up to
$225 million in the aggregate and mature on May 27, 2004.
F-16
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT (CONTINUED)
Interest on the outstanding balance is based upon LIBOR plus 3.0% or the
base rate (prime) plus 2.0% (8.63% and 9.97% at December 31, 1998 and
1999, respectively), and is payable quarterly.
The term loan A is repayable in varying installments over five and
one-half years, with interest payable quarterly based upon LIBOR plus
3.0% or the base rate (prime) plus 2.0% (8.25% and 10.5% at December 31,
1998 and 1999, respectively), and matures on May 27, 2004.
The term loan B is repayable in varying installments over seven years,
with interest payable quarterly based upon LIBOR plus 3.75% or the base
rate (prime) plus 2.75% (8.86% and 9.94% at December 31, 1998 and 1999,
respectively), and matures on November 27, 2005.
The senior subordinated notes were due in November 2006. Interest for the
initial six months was LIBOR plus 4.25% or base rate (prime) plus 3.25%.
On May 26, 1999, the Company refinanced its $200 million senior
subordinated notes. The new subordinated notes include a $120 million
term loan A and an $80 million term loan B, which are due May 26, 2007.
Interest for the term loan A for the first 270 days ranges from LIBOR
plus 2.5% to LIBOR plus 4.0% (10.19% at December 31, 1999). Interest on
the term loan B for the first 270 days ranges from LIBOR plus 3.625% to
LIBOR plus 4.0% (10.19% at December 31, 1999). After the nine-month
anniversary of the borrowing date through maturity, interest on term
loans A and B is LIBOR plus 5.0%.
All the borrowings under the above described credit arrangements are
guaranteed by each of the Company's domestic subsidiaries. The common
stock of all domestic subsidiaries of the Company and 65% of the common
stock of its foreign subsidiaries have been pledged to secure the
guarantees. The obligations under these credit arrangements are secured
by substantially all of the assets of the Company and its domestic
subsidiaries.
(b) In connection with the December 31, 1998, acquisition of the Cvalim
assets, Superior Israel entered into an $83.0 million credit facility
consisting of a $53.0 million term loan ("Superior Israel term loan") and
a $30.0 million revolving credit facility ("Superior Israel revolving
credit facility"). Proceeds from these facilities were used to finance
the acquisition of the Cvalim assets, pay related transaction expenses
and provide for ongoing working capital requirements. In October 1999,
Superior Israel increased the amount available under the credit facility
by $10.0 million, which increased the term loan availability to
$63.0 million.
The Superior Israel term loan is repayable on December 31, 2008. Interest
on the Superior Israel term loan is based upon LIBOR plus 1.0% or the
average of the gross yield to maturity of all the series of fixed rate
bonds issued by the State of Israel, listed on the Tel-Aviv stock
exchange and having a remaining maturity of 18-30 months, plus 1.3% or
the lending bank's wholesale rate of interest for credits linked to the
Israeli consumer price index plus 0.7%. Interest on the Superior Israel
revolving credit facility outstanding balance is based upon either LIBOR
plus 0.4%, the lending bank's prime rate minus 1.1%, or a rate to be
agreed upon by the parties. The Superior Israel credit facility
terminates on December 31, 2003. Obligations under the Superior Israel
credit facility are secured by all of the assets of Superior Israel.
F-17
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT (CONTINUED)
The above credit agreements contain certain restrictive covenants,
including, among other things, requirements to maintain certain financial
ratios, limitations on the amount of dividends the Company is allowed to pay on
its common stock and restrictions on additional indebtedness. On March 13, 2000,
the above credit facilities described in (a) above were amended with respect to
certain restrictive covenants relating to maintenance of certain financial
ratios. In connection with such amendment, Superior paid a fee of approximately
$2.1 million which will be amortized over the remaining term of the facilities.
In connection with the amendment and restatement of the Company's credit
facility, the Company recognized an extraordinary charge on the early
extinguishment of debt of $1.2 million (net of income taxes of $0.8 million), or
$0.06 per diluted share, during the eight months ended December 31, 1998. In
connection with the refinancing of the senior subordinated notes, the Company
recognized an extraordinary charge on the early extinguishment of debt of
$1.6 million (net of income taxes of $1.0 million), or $0.08 per diluted share,
for the year ended December 31, 1999.
9. TRUST CONVERTIBLE PREFERRED SECURITIES
On March 31, 1999, Superior Trust I (the "Trust"), a trust in which the
Company owns all the common equity interests, issued 3,332,254 shares of 8 1/2%
Trust Convertible Preferred Securities ("Trust Convertible Preferred
Securities") with a liquidation value of $50 per share. The sole assets of the
Trust are the Company's 8 1/2% Convertible Subordinated Debentures ("Convertible
Debentures") due 2014 with an aggregate face amount equivalent to approximately
103% of the liquidation value of the Trust Convertible Preferred Securities
issued. The Company has fully and unconditionally guaranteed the Trust's
obligations under the Trust Convertible Preferred Securities. The Trust
Convertible Preferred Securities are currently convertible into common stock of
the Company at the rate of 1.1496 shares of the Company's common stock for each
Trust Convertible Preferred Security (equivalent to a conversion price of $43.49
per share of common stock). This conversion rate is subject to customary
anti-dilution adjustments. Dividends on the Trust Convertible Preferred
Securities are payable quarterly by the Trust. The Trust Convertible Preferred
Securities are subject to mandatory redemption on March 30, 2014, at a
redemption price of $50 per Trust Convertible Security, plus accrued and unpaid
dividends.
The Trust Convertible Preferred Securities are not redeemable before
April 1, 2003. At any time on and after that date, the Trust Convertible
Preferred Securities may be redeemed by the Company at a per share redemption
price of $52.55, periodically declining to $50.00 in April 2008 and thereafter.
In addition, the Company has the option to call the Trust Convertible Preferred
Securities during the one-year period commencing on March 31, 2002, at a per
share redemption cash redemption price of $52.975, plus accrued and unpaid
dividends, if any, provided the average closing price of the Company's common
stock, for any 10 consecutive trading days preceding the date of the call,
multiplied by the then effective conversion rate equals or exceeds $65.00 per
share. The Company has reserved 3,830,788 shares of its common stock for
possible conversion of the Trust Convertible Preferred Securities.
The Company may cause the Trust to defer the payment of dividends for
successive periods of up to 20 consecutive quarters. During such periods,
accrued dividends on the Trust Convertible Preferred Securities will accrue
interest at the rate of 8 1/2% per annum and the Company may not declare or pay
dividends on its common stock. Also during such period, if holders of Trust
Convertible Preferred Securities convert such securities into Company common
stock, the holder will not receive any cash related to the deferred dividends.
F-18
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. TRUST CONVERTIBLE PREFERRED SECURITIES (CONTINUED)
The estimated aggregate fair value of the Trust Convertible Preferred
Securities, when issued, was approximately $133.3 million based on average per
share trading values on the New York Stock Exchange. The resulting discount of
$33.3 million is being amortized using the effective interest method over the
term of the Trust Convertible Preferred Securities.
10. EARNINGS PER SHARE
The computation of basic and diluted earnings per share for the year ended
April 30, 1998, the eight months ended December 31, 1998, and the year ended
December 31, 1999, is as follows:
YEAR ENDED EIGHT MONTHS ENDED
APRIL 30, 1998 DECEMBER 31, 1998
------------------------------- -------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-----------------------------------------------------------------
NET PER SHARE NET PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- -------- --------- -------- -------- ---------
Basic earnings per common share before
extraordinary (loss)......................... $40,675 20,811 $1.95 $22,256 20,735 $1.07
======= ===== ======= =====
Dilutive impact of stock options and grants.... 492 613
------ ------
Diluted earnings per common share before
extraordinary (loss)......................... $40,675 21,303 $1.91 $22,256 21,348 $1.04
======= ====== ===== ======= ====== =====
YEAR ENDED
DECEMBER 31, 1999
---------------------------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
---------------------------------
NET PER SHARE
INCOME SHARES AMOUNT
--------- --------- ---------
Basic earnings per common share before extraordinary
(loss).................................................... $38,785 20,351 $1.91
======= =====
Dilutive impact of stock options and grants................. 557
------
Diluted earnings per common share before extraordinary
(loss).................................................... $38,785 20,908 $1.86
======= ====== =====
As a publicly traded company, Superior Israel has certain stock options
outstanding pursuant to stock option plans in existence prior to the
acquisition. At December 31, 1999, the dilutive impact of such stock options to
the Company's earnings per share calculation was immaterial. The Company has
excluded the assumed conversion of the Trust Convertible Preferred Securities
from the earnings per share calculation as the impact would be anti-dilutive.
11. STOCKHOLDERS' EQUITY
The Company has 35,000,000 shares of common stock authorized for issuance,
with a $0.01 par value. At April 30, 1998, and December 31, 1998 and 1999, the
Company had 16,170,666, 20,287,274 and 20,980,101 common shares, respectively,
issued.
On both January 15, 1998 and January 11, 1999, the Company declared
five-for-four common stock splits, which were effected in the form of a 25%
stock dividend paid on February 2, 1998 and February 3, 1999, respectively. As a
result, 3,233,635 shares and 4,059,700 shares, respectively, were issued to
F-19
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY (CONTINUED)
stockholders of record on January 23, 1998 and January 20, 1999, respectively.
On January 25, 2000, the Company declared a 3% stock dividend to stockholders of
record on February 3, 2000. As a result, 612,069 shares were issued on
February 11, 2000. All references to common shares (except shares authorized and
issued) and to per share information in the consolidated financial statements
have been adjusted to reflect the stock splits and stock dividend on a
retroactive basis.
The Company declared a $0.25 per common share cash dividend payable
quarterly at a rate of $0.0625 per share beginning in January 1998 and
continuing through October 1999. Cash dividends, totaling $2.0 million,
$2.0 million and $4.9 million, were declared during fiscal 1998, the eight
months ended December 31, 1998, and the year ended December 31, 1999,
respectively.
12. STOCK BASED COMPENSATION PLANS
The Company sponsors the Superior TeleCom Inc. 1996 Stock Option Plan (the
"Option Plan") which has 3,170,469 shares of common stock reserved for issuance.
At December 31, 1999, there were 136,712 shares of common stock available for
issuance under the Option Plan. Participation in the Option Plan is limited to
employees, directors, and consultants of the Company, its parent and affiliates
thereof. The Option Plan provides for grants of incentive and non-incentive
stock options, which cannot be exercised in the first year or after ten years
from the date of grant.
The Company also sponsors the Superior TeleCom Employee Stock Purchase Plan
(the "ESPP") which allows eligible employees the right to purchase common stock
of the Company on a quarterly basis at the lower of 85% of the common stock's
fair market value on the last day of the preceding calendar quarter or on the
last day of the current calendar quarter. There are 402,344 shares of the
Company's common stock reserved under the ESPP, of which 4,005 shares, 11,170
shares, 6,109 shares and 65,565 shares were issued to employees during fiscal
1997 and 1998, the eight months ended December 31, 1998, and the year ended
December 31, 1999, respectively.
The Company also adopted the Stock Compensation Plan for Non-Employee
Directors (the "Stock Plan") in January, 1999. Under the Stock Plan, each
non-employee director of the Company automatically receives 50% of the annual
retainer in either restricted common stock or non-qualified stock options, as
elected by the director. In addition, each non-employee director may also elect
to receive all or a portion of the remaining amount of the annual retainer and
any meeting fees in the form of restricted stock or stock options in lieu of
cash payment. Any shares issued pursuant to the Stock Plan will be issued from
the Company's treasury stock.
The Company continues to account for stock-based compensation (including
options issued under the Option Plan and the ESPP) using the intrinsic value
method prescribed by APB Opinion No. 25, under which no compensation cost for
stock options is recognized for stock option awards granted at an exercise price
at or above the common stock's fair market value. Had compensation expense been
determined based on the fair value of the stock option award at the grant date
as prescribed by SFAS No. 123, the Company's net income and basic and diluted
net income per share of common stock for the period from
F-20
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK BASED COMPENSATION PLANS (CONTINUED)
Reorganization to April 30, 1997, the year ended April 30, 1998, the eight
months ended December 31, 1998, and the year ended December 31, 1999, would
approximate the following pro forma amounts:
PERIOD ENDED YEAR ENDED
APRIL 30, APRIL 30,
1997 1998
------------------- -------------------
AS PRO AS PRO
REPORTED FORMA REPORTED FORMA
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income.............................................. $17,390 $16,281 $40,675 $39,030
Basic net income per share of common stock.............. 0.87 0.83 1.95 1.88
Diluted net income per share of common stock............ 0.86 0.83 1.91 1.83
EIGHT MONTHS
ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------- -------------------
AS PRO AS PRO
REPORTED FORMA REPORTED FORMA
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income.............................................. $21,013 $18,882 $37,168 $32,407
Basic net income per share of common stock.............. $ 1.01 $ 0.91 $ 1.83 $ 1.59
Diluted net income per share of common stock............ $ 0.98 $ 0.88 $ 1.78 $ 1.57
The effects of applying SFAS No. 123 in the pro forma disclosure are not
necessarily indicative of future amounts, since the estimated fair value of
common stock options is amortized to expense over the vesting period and
additional options may be granted in future years. The fair value for these
options was estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions for
April 30, 1997 and 1998, and December 31, 1998 and 1999, respectively: dividend
yield of 0%, 1%, 1% and 2%; expected volatility of 44%, 39%, 43% and 53%;
risk-free interest rate of 6.42%, 5.53%, 4.57% and 6.30%; and expected life of
five years, four years, four years and four years. The weighted average per
share fair value of options granted at an exercise price equal to the fair
market value (using the Black-Scholes option-pricing model) during fiscal 1997
and 1998, the eight months ended December 31, 1998, and the year ended
December 31, 1999, was $4.92, $7.39, $11.05 and $7.99, respectively. The
weighted average per share fair value of options granted at an exercise price
above the fair market value during the year ended December 31, 1999 was $19.47.
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Since the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-21
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK BASED COMPENSATION PLANS (CONTINUED)
The following table summarizes stock option activity for fiscal 1998, the
eight months ended December 31, 1998, and the year ended December 31, 1999:
SHARES WEIGHTED-AVERAGE
OUTSTANDING EXERCISE PRICE
----------- ----------------
Outstanding at April 30, 1997............................... 1,203,415 $9.98
Exercised................................................. (4,989) 10.00
Canceled.................................................. (42,635) 9.99
Granted................................................... 77,250 20.47
---------
Outstanding at April 30, 1998............................... 1,233,041 10.64
Exercised................................................. (66,462) 10.08
Canceled.................................................. (8,692) 29.51
Granted................................................... 641,339 29.61
---------
Outstanding at December 31, 1998............................ 1,799,226 17.33
Exercised................................................. (18,644) 10.94
Canceled.................................................. (35,295) 30.19
Granted................................................... 1,197,567 17.78
---------
Outstanding at December 31, 1999............................ 2,942,854 17.54
=========
Information with respect to stock--based compensation plan stock options
outstanding at December 31, 1999, is as follows:
OPTIONS OUTSTANDING
----------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- -----------------------------
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
PRICES DECEMBER 31, 1999 LIFE (IN YEARS) PRICE DECEMBER 31, 1999 PRICE
-------- ----------------- --------------- --------- ----------------- ---------
$9.94....................... 1,030,358 6.77 $ 9.94 1,030,330 $9.94
$10.72-$16.99............... 131,305 8.46 13.05 55,266 11.41
$17.23...................... 1,011,706 9.23 17.23 1,608 17.23
$22.82-$28.22............... 137,997 8.88 25.70 32,184 24.54
$29.51...................... 581,661 8.42 29.51 193,683 29.51
$30.04-$30.78............... 49,827 8.79 30.76 16,092 30.78
--------- ---------
2,942,854 8.15 17.54 1,329,163 13.47
========= =========
13. EMPLOYEE BENEFITS
Superior provides for postretirement employee health care and life insurance
benefits for a limited number of its employees. Superior established a maximum
amount it will pay per employee for such benefits; therefore, health care cost
trends do not affect the calculation of the postretirement benefit obligation or
its net periodic benefit cost.
Superior sponsors several defined benefit pension plans and an unfunded
supplemental executive retirement plan (the "SERP"). The SERP provides
retirement benefits based on the same formula as in
F-22
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EMPLOYEE BENEFITS (CONTINUED)
effect under a certain salaried employees' plan, but only takes into account
compensation in excess of amounts that can be recognized under the salaried
employees' plan. The defined benefit pension plans and the SERP generally
provide for payment of benefits, commencing at retirement (between the ages of
55 and 65), based on the employee's length of service and earnings. Assets of
the plans consist principally of cash and cash equivalents, short-term
investments, equities and fixed income instruments.
The change in the projected benefit obligation, the change in plan assets
and the funded status of the defined benefit pension plans and the
post-retirement health care benefits plans during fiscal 1998, the eight months
ended December 31, 1998, and the year ended December 31,1999, are presented
below, along with amounts recognized in the respective consolidated balance
sheets and consolidated statements of operations:
POST-RETIREMENT
DEFINED BENEFIT PENSION PLANS HEALTH CARE BENEFITS
--------------------------------------- ---------------------------------------
APRIL 30, DECEMBER 31, DECEMBER 31, APRIL 30, DECEMBER 31, DECEMBER 31,
1998 1998 1999 1998 1998 1999
--------- ------------ ------------ --------- ------------ ------------
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning
of year....................... $3,772 $ 4,927 $105,005 $ 1,265 $ 1,994 $ 2,174
Impact of acquisitions.......... -- 99,364 -- -- -- --
Service cost.................... 134 550 5,423 52 44 72
Interest cost................... 300 792 7,164 129 91 152
Actuarial (gain) loss........... 858 41 (20,223) 607 87 (228)
Impact of foreign currency
exchange...................... -- (339) 300 -- -- --
Benefits paid................... (137) (330) (4,282) (59) (42) (85)
------ -------- -------- ------- ------- -------
Benefit obligation at end of
year.......................... $4,927 $105,005 $ 93,387 $ 1,994 $ 2,174 $ 2,085
====== ======== ======== ======= ======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at
beginning of year............. $3,568 $ 4,360 $ 82,965 $ -- $ -- $ --
Impact of acquisitions.......... -- 77,060 -- -- -- --
Actual return on plan assets.... 751 1,802 6,900 -- -- --
Employer contributions.......... 178 357 2,353 59 42 85
Impact of foreign currency
exchange...................... -- (284) 212 -- -- --
Benefits paid................... (137) (330) (4,282) (59) (42) (85)
------ -------- -------- ------- ------- -------
Fair value of plan assets at end
of year....................... $4,360 $ 82,965 $ 88,148 $ -- $ -- $ --
====== ======== ======== ======= ======= =======
Funded status..................... $ (567) $(22,040) $ (5,239) $(1,994) $(2,174) $(2,085)
Unrecognized actuarial (gain)
loss............................ 247 (711) (20,569) 424 502 250
Unrecognized prior service cost... 351 322 299 -- -- --
------ -------- -------- ------- ------- -------
Prepaid (accrued) benefit cost.... $ 31 $(22,429) $(25,509) $(1,570) $(1,672) $(1,835)
====== ======== ======== ======= ======= =======
F-23
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EMPLOYEE BENEFITS (CONTINUED)
POST-RETIREMENT
DEFINED BENEFIT PENSION PLANS HEALTH CARE BENEFITS
--------------------------------------- ---------------------------------------
APRIL 30, DECEMBER 31, DECEMBER 31, APRIL 30, DECEMBER 31, DECEMBER 31,
1998 1998 1999 1998 1998 1999
--------- ------------ ------------ --------- ------------ ------------
(IN THOUSANDS)
AMOUNTS RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEETS:
Prepaid benefit cost........... $ 35 $ 258 $ -- $ -- $ -- $ --
Accrued benefit liability...... (4) (22,728) (25,464) (1,570) (1,672) (1,835)
Additional minimum liability... (296) (322) (1,165) -- -- --
Intangible asset............... 296 322 299 -- -- --
Accumulated other comprehensive
Income....................... -- -- 866 -- -- --
Impact of foreign currency
exchange..................... -- 41 (45) -- -- --
-------- -------- -------- ------- ------- -------
Prepaid (accrued) benefit
cost......................... $ 31 $(22,429) $(25,509) $(1,570) $(1,672) $(1,835)
======== ======== ======== ======= ======= =======
COMPONENTS OF NET PERIODIC
BENEFIT COST:
Service cost................... $ 134 $ 550 $ 5,423 $ 52 $ 44 $ 72
Interest cost.................. 300 792 7,164 129 91 152
Expected return on plan
assets....................... (281) (819) (7,354) -- -- --
Amortization of prior service
cost......................... 23 17 22 5 9 24
Actuarial loss................. -- 10 84 -- -- --
-------- -------- -------- ------- ------- -------
Net periodic benefit cost...... $ 176 $ 550 $ 5,339 $ 186 $ 144 $ 248
======== ======== ======== ======= ======= =======
The actuarial present value of the projected pension benefit obligation and
the postretirement health care benefits obligation at April 30 and December 31,
1998 and December 31, 1999 were determined based upon the following assumptions:
POST-RETIREMENT
DEFINED BENEFIT PENSION PLANS HEALTH CARE BENEFITS
--------------------------------------- ---------------------------------------
APRIL 30, DECEMBER 31, DECEMBER 31, APRIL 30, DECEMBER 31, DECEMBER 31,
1998 1998 1999 1998 1998 1999
--------- ------------ ------------ --------- ------------ ------------
Discount rate..................... 6.5% 6.5% 8.0% 7.00% 6.75% 8.00%
Expected return on plan assets.... 8.0% 8.0% 9.0% N/A N/A N/A
Increase in future compensation... 5.0% 5.0% 5.0% N/A N/A N/A
The Company and its subsidiaries sponsor several defined contribution plans
covering substantially all U.S. and Israeli employees. The plans provide for
limited company matching of participants' contributions. The Company's
contributions during fiscal 1997 and 1998, the eight months ended December 31,
1998, and the year ended December 31, 1999, were $0.5 million, $0.8 million,
$1.5 million and $4.7 million, respectively.
Essex also sponsored an unfunded, nonqualified deferred compensation plan
which permitted certain key management employees to annually elect to defer a
portion of their compensation and earn a guaranteed interest rate on the
deferred amounts. The total amount of participant deferrals and accrued
interest, which is reflected in other long-term liabilities, was $5.4 million
and $6.4 million at December 31, 1998 and 1999, respectively.
F-24
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INCOME TAXES
The Company's provision for income tax expense (benefit) for fiscal 1997,
1998, the eight months ended December 31, 1998, and the year ended December 31,
1999, is comprised of the following:
YEARS ENDED EIGHT
--------------------- MONTHS ENDED YEAR ENDED
APRIL 30, APRIL 30, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
--------- --------- ------------ ------------
(IN THOUSANDS)
Current:
Federal........................................ $15,121 $21,586 $11,713 $16,400
State.......................................... 2,128 3,261 1,193 6,040
Foreign........................................ 321 2,484 2,464 1,757
------- ------- ------- -------
Total current................................ 17,570 27,331 15,370 24,197
------- ------- ------- -------
Deferred:
Federal........................................ 72 (900) 624 16,952
State.......................................... 4 (100) 50 (3,915)
Foreign........................................ 1,343 455 (500) (501)
------- ------- ------- -------
Total deferred............................... 1,419 (545) 174 12,536
------- ------- ------- -------
Total income tax expense................... $18,989 $26,786 $15,544 $36,733
======= ======= ======= =======
The provision for income taxes differs from the amount computed by applying
the U.S. federal income tax rate of 35% for fiscal 1997 and 1998, the eight
months ended December 31, 1998, and the year ended December 31, 1999, because of
the effect of the following items:
YEARS ENDED EIGHT
--------------------- MONTHS ENDED YEAR ENDED
APRIL 30, APRIL 30, DECEMBER 31 DECEMBER 31,
1997 1998 1998 1999
--------- --------- ------------ ------------
(IN THOUSANDS)
Expected income tax expense at U.S. federal
statutory tax rate............................. $16,613 $23,611 $13,197 $30,591
State income tax expense, net of U.S. federal
income tax benefit............................. 1,386 2,195 930 2,340
Taxes on foreign income at rates which differ
from the U.S. federal statutory rate........... 343 288 36 725
Distributions on preferred securities of Superior
Trust I........................................ -- -- -- (3,760)
Nondeductible goodwill amortization.............. 382 435 856 6,649
Change in valuation allowance.................... -- (1,100) -- --
Other, net....................................... 265 1,357 525 188
------- ------- ------- -------
Provision for income taxes....................... $18,989 $26,786 $15,544 $36,733
======= ======= ======= =======
At December 31, 1999, the Company's foreign subsidiaries had $9 million in
distributable earnings, exclusive of amounts that if remitted in the future,
would result in little or no tax under current laws. The Company's earnings from
foreign subsidiaries are considered to be indefinitely reinvested and,
accordingly, no provision for U.S. federal and state income taxes has been made
for these earnings. Upon distribution
F-25
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (CONTINUED)
14. INCOME TAXES (CONTINUED)
of foreign subsidiary earnings in the form of dividends or otherwise, the
Company would be subject to both U.S. income taxes (subject to an adjustment for
foreign tax credits) and withholding taxes payable to the various foreign
countries.
The Company accounts for income taxes under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax impact of temporary differences arising from assets and
liabilities whose tax bases are different from financial statement amounts. A
valuation allowance is established if it is more likely than not that all or a
portion of deferred tax assets will not be realized. Realization of the future
tax benefits of deferred tax assets is dependent on the Company's ability to
generate taxable income within the carryforward period and the periods in which
net temporary differences reverse.
Items that result in deferred tax assets and liabilities at April 30, 1998,
and December 31, 1998 and 1999 are as follows:
APRIL 30, DECEMBER 31, DECEMBER 31,
1998 1998 1999
--------- ------------ ------------
(IN THOUSANDS)
Deferred tax assets:
Sale leaseback........................... $1,930 $ 1,930 $ 1,875
Accruals not currently deductible for
tax.................................... 1,386 16,988 17,801
Pension and post retirement benefits..... 650 6,536 12,630
Inventory reserves....................... 3,276 -- --
Net operating losses..................... -- -- 5,164
Other.................................... 1,532 4,193 5,810
------ ------- -------
Total deferred tax assets.............. 8,774 29,647 43,280
------ ------- -------
Deferred tax liabilities:
Inventory reserves....................... -- 9,420 10,830
Depreciation and amortization............ 10,988 86,703 88,227
Other.................................... 1,261 8,710 6,920
------ ------- -------
Total deferred tax liabilities......... 12,249 104,833 105,977
------ ------- -------
Net deferred income tax liability...... $3,475 $75,186 $62,697
====== ======= =======
15. RESTRUCTURING AND UNUSUAL CHARGES
During the eight months ended December 31, 1998 the Company recorded
nonrecurring and unusual charges of $13.5 million, consisting of (i) a
$10.0 million investment advisory fee paid to Alpine in connection with the
acquisition of Essex, (ii) a $2.9 million restructuring charge recorded by
Superior Israel relating to planned manufacturing plant consolidations and
overhead rationalization associated with the acquisition of Cvalim and
(iii) $0.6 million in charges associated with the evaluation of management
information systems at Essex. During the year ended December 31, 1999, the
Company recorded unusual charges of $8.4 million, which included
(i) $4.4 million in charges associated with the evaluation of management
information systems at Essex, (ii) a $1.3 million charge related to
restructuring activities at Superior Israel, (iii) $2.2 million in charges
primarily associated with the rationalization of certain Essex
F-26
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (CONTINUED)
15. RESTRUCTURING AND UNUSUAL CHARGES (CONTINUED)
manufacturing facilities and (iv) $0.5 million of start-up costs for the
Company's Torreon, Mexico magnet wire facility.
ESSEX
Since the completion of the acquisition of Essex, the Company has been
involved in the consolidation and integration of manufacturing, corporate and
distribution functions of Essex into Superior. As a result, the Company
initially accrued as part of the Essex Acquisition purchase price a
$29.7 million provision, which included $11.8 million of employee termination
and relocation cost, $11.9 million of facility consolidation cost, $4.4 million
of management information system project termination costs, and $1.6 million of
other exit costs. During 1999, the Company revised its estimate and, as a
result, increased the provision for employee termination and relocation costs,
facility consolidation costs, and other exit costs by $6.1 million,
$0.2 million and $1.3 million, respectively, and decreased the provision for
management information system project termination by $1.4 million. The net
increase to the accrual of $6.2 million has been reflected as an increase in
goodwill. As of December 31, 1999, $14.7 million, $4.3 million, $3.0 million and
$1.4 million have been incurred and paid related to employee termination and
relocation costs, facility consolidation costs, management information system
project costs and other exit costs, respectively. The provision for employee
termination and relocation costs was primarily associated with selling, general
and administrative functions within Essex. The provisions for facility
consolidation costs included both manufacturing and distribution facility
rationalization and the related costs associated with employee severance. The
restructuring will result in the severance of approximately 1,100 employees, of
which four have yet to be terminated at December 31, 1999. All significant
aspects of the plan are expected to be completed by June 2000.
During 1999, the Company also wrote off $10.4 million of previously
capitalized costs related to a discontinued management information system
project at Essex. In addition, the Company adjusted the carrying value of
certain fixed assets by $17.3 million to reflect their net realizable value.
These adjustments have been reflected as increases to goodwill.
SUPERIOR ISRAEL
On December 31, 1998, Superior Israel purchased Cvalim. Included in the
allocated purchase price was a $3.5 million provision for the restructuring of
Cvalim's manufacturing and corporate functions. The provisions included
$2.6 million of employee termination and severance costs and $0.9 million of
other miscellaneous costs. Additionally during the eight months ended
December 31, 1998, Superior Israel recorded a $2.9 million restructuring charge,
which included a provision for the consolidation of seven manufacturing
facilities into five and two headquarters facilities into one. All aspects of
the restructuring plan have been completed. As of December 31, 1999,
approximately $5.1 million has been incurred and paid related to employee
termination and severance costs and $0.9 million has been incurred and paid
related to other miscellaneous costs. The provision for employee termination and
severance costs was primarily associated with manufacturing, selling, general
and administrative functions, and approximately 146 positions have been
eliminated.
During 1999, Superior Israel recorded a $1.3 million restructuring charge,
which included a provision for the consolidation of manufacturing facilities.
The restructuring actions will result in the elimination of approximately 35
positions, most of which are manufacturing related employees. All aspects of the
restructuring plan are expected to be completed during the year 2000.
F-27
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (CONTINUED)
16. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE INFORMATION
The Company, to a limited extent, uses forward fixed price contracts and
derivative financial instruments to manage foreign currency exchange and
commodity price risks. The Company does not hold or issue financial instruments
for investment or trading purposes. The Company is exposed to credit risk in the
event of nonperformance by counterparties for foreign exchange forward
contracts, metal forward price contracts and metals futures contracts but the
Company does not anticipate nonperformance by any of these counterparties. The
amount of such exposure is generally the unrealized gains or losses within the
underlying contracts.
FOREIGN EXCHANGE RISK MANAGEMENT
The Company engages in the sale and purchase of goods and services which
periodically require payment or receipt of amounts denominated in foreign
currencies. To protect the Company's related anticipated cash flows from the
risk of adverse foreign currency exchange fluctuations for firm sales and
purchase commitments, the Company enters into foreign currency forward exchange
contracts. At December 31, 1999, the Company had no forward exchange sales
contracts, but did have $1.9 million of purchase contracts whose fair value
approximated the contract amount. Foreign currency gains or losses resulting
from the Company's operating and hedging activities are recognized in earnings
in the period in which the hedged currency is collected or paid. The related
amounts due to or from counterparties are included in other liabilities or other
assets.
COMMODITY PRICE RISK MANAGEMENT
The cost of copper, the Company's most significant raw material, has been
subject to considerable volatility over the past several years. So that the
Company may manage the matching of the copper component of customer product
pricing with the copper cost component of the inventory shipped, the Company
enters into futures contracts as qualifying hedges. At December 31, 1999, the
Company had sales contracts for 12.5 million copper pounds, or $10.1 million,
with an estimated fair value of $10.8 million. Unrealized gains and losses on
the qualified hedges, as appropriate, are included in other assets and are
recognized when the related underlying copper is purchased or sold or when a
sale is no longer expected to occur.
17. COMMITMENTS AND CONTINGENCIES
Total rent expense under cancelable and noncancelable operating leases was
$0.9 million, $1.4 million, $2.6 million and $13.7 for fiscal 1997 and 1998, the
eight months ended December 31, 1998, and the year ended December 31, 1999,
respectively.
F-28
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (CONTINUED)
17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At December 31, 1999, future minimum lease payments under noncancelable
operating leases are as follows:
YEAR AMOUNT
- - ------------------------------------------------------------ --------------
(IN THOUSANDS)
2000........................................................ $10,468
2001........................................................ 7,387
2002........................................................ 6,018
2003........................................................ 5,181
2004........................................................ 4,615
Thereafter.................................................. 8,256
-------
$41,925
=======
Approximately 35% of the Company's total labor force is covered by
collective bargaining agreements.
The Company is subject to routine lawsuits incidental to its business. In
the opinion of management, based on its examination of such matters and
discussions with counsel, the ultimate resolution of all pending or threatened
litigation, claims and assessments will have no material adverse effect upon the
Company's financial position, liquidity or results of operations.
In connection with Essex's 1988 acquisition of Essex Group, Inc., United
Technologies Corporation ("UTC"), Essex's former parent, has indemnified Essex
against all losses resulting from or in connection with damage or pollution to
the environment and arising from events, operations, or activities of Essex
prior to February 29, 1988, or from conditions or circumstances existing at
February 29, 1988, known to UTC prior to February 29, 1988. The sites covered by
the indemnity are handled directly by UTC and all payments required to be made
are paid directly by UTC. UTC also provided an additional environmental
indemnity which deals with liabilities related to environmental events,
conditions or circumstances existing at or prior to February 29, 1988, which
became known prior to February 28, 1993. As to such liabilities, the Company is
responsible for the first $4 million incurred. The Company accrues for these
costs when it is probable that a liability has been incurred and the amount of
the loss can be reasonably estimated.
Essex has been named as a defendant in a limited number of product liability
lawsuits brought by electricians and other skilled tradesmen claiming injury
from exposure to asbestos found in electrical wire products produced many years
ago. Litigation against various past insurers of Essex who had previously
refused to defend and indemnify Essex against these lawsuits was settled during
1999. Pursuant to the settlement, Essex was reimbursed for substantially all of
its costs and expenses incurred in defense of these lawsuits, and the insurers
have undertaken and are currently defending and, if it should become necessary,
indemnifying Essex against such asbestos lawsuits, subject to the express terms
and limits of their respective policies.
The Company accepts certain customer orders for future delivery at fixed
prices. As copper is the most significant raw material used in the manufacturing
process, the Company enters into forward purchase fixed price commitments for
copper to properly match its cost to the value of the copper to be billed to the
customers. At December 31, 1999, the Company had forward fixed price purchase
commitments for 46.4 million copper pounds.
F-29
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (CONTINUED)
17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At December 31, 1999, the Company had committed $23.1 million to outside
vendors for certain capital projects, primarily for the Company's Torreon,
Mexico magnet wire facility.
Certain executives of the Company have employment contracts which generally
provide minimum base salaries, cash bonuses based on the Company's achievement
of certain performance objectives, stock options and restricted stock grants,
and certain retirement and other employee benefits. Further, in the event of
termination or voluntary resignation for "good reason" accompanied by a change
in control, as defined, such employment agreements provide for severance
payments not in excess of two times annual cash compensation and bonus and the
continuation for stipulated periods of other benefits, as defined.
18. RELATED PARTY TRANSACTIONS
The Company and Alpine are parties to a services agreement (the "Services
Agreement") whereby Alpine agrees to provide certain financial, audit and
accounting, corporate finance and strategic planning, legal, treasury, insurance
and administrative services in return for an annual fee in addition to
reimbursement of incidental costs and expenses incurred in connection with
Alpine's provision of such services. Under the Services Agreement, Superior
TeleCom paid Alpine $0.6 million during fiscal 1997, $2.7 million during fiscal
1998, $1.8 million during the eight months ended December 31, 1998, and
$2.7 million during the year ended December 31, 1999.
In addition to amounts paid pursuant to the aforementioned Service
Agreement, the Company paid Alpine a $10.0 million investment advisory fee in
connection with the Essex Acquisition, which fee has been included in
nonrecurring and unusual charges (see Note 15).
The Company had amounts due to Alpine of $0.4 million, $1.1 million, and
$0.6 million, respectively, at April 30, 1998, and December 31, 1998 and 1999,
which are included in accrued expenses in the consolidated balance sheets.
The Company's unaudited results of operations for the eight months ended
December 31, 1997, are summarized as follows:
EIGHT MONTHS ENDED
DECEMBER 31, 1997
------------------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
Net sales.................................................. $347,447
Gross profit............................................... 64,202
Operating income........................................... 48,554
Provision for income taxes................................. 16,878
Net income................................................. 25,959
Net income per basic share of common stock................. $ 1.25
========
Net income per diluted share of common stock............... $ 1.22
========
20. BUSINESS SEGMENTS AND FOREIGN OPERATIONS
The Company's reportable segments are strategic businesses that offer
different products and services to different customers. These segments are
communications, OEM and electrical. The communications
F-30
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (CONTINUED)
20. BUSINESS SEGMENTS AND FOREIGN OPERATIONS (CONTINUED)
segment includes (i) outside plant wire and cable for voice and data
transmission in the local loop portion of the telecommunications infrastructure
and (ii) datacom or premise wire and cable for use within homes and offices for
local area networks, Internet connectivity and other applications. The OEM
segment includes magnet wire, automotive wire, and related products. The
electrical segment includes building and industrial wire and cable.
The Company evaluates segment performance based on a number of factors with
operating income being the most critical. Intersegment sales are generally
recorded at cost, are not significant and, therefore, have been eliminated
below.
Operating results for each of the Company's three reportable segments are
presented below. Corporate and other items shown below are provided to reconcile
to the Company's consolidated statements of operations, cash flows and balance
sheets.
YEARS ENDED EIGHT MONTHS
--------------------- ENDED YEAR ENDED
APRIL 30, APRIL 30, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
--------- --------- ------------ ------------
(IN THOUSANDS)
Net sales (a):
Communications................................ $463,840 $516,599 $ 384,323 $ 750,208
OEM........................................... -- -- 48,572 653,941
Electrical.................................... -- -- 53,206 623,380
-------- -------- ---------- ----------
$463,840 $516,599 $ 486,101 $2,027,529
======== ======== ========== ==========
Depreciation and amortization expense:
Communications................................ $ 7,569 $ 8,330 $ 7,776 $ 18,036
OEM........................................... -- -- 987 10,333
Electrical.................................... -- -- 716 6,534
Corporate and other........................... 1,726 1,715 2,447 23,910
-------- -------- ---------- ----------
$ 9,295 $ 10,045 $ 11,926 $ 58,813
======== ======== ========== ==========
Operating income (loss):
Communications................................ $ 63,440 $ 80,975 $ 68,222 $ 131,675
OEM........................................... -- -- 4,030 86,658
Electrical.................................... -- -- 4,426 32,937
Corporate and other........................... (1,037) (3,915) (6,016) (18,210)
Nonrecurring and unusual charges.............. -- -- (13,511) (8,431)
Amortization of goodwill...................... (1,726) (1,715) (2,447) (19,629)
-------- -------- ---------- ----------
$ 60,677 $ 75,345 $ 54,704 $ 205,000
======== ======== ========== ==========
Total assets:
Communications................................ $193,259 $186,217 $ 407,754 $ 510,537
OEM........................................... -- -- 316,676 307,908
Electrical.................................... -- -- 322,622 289,349
Corporate and other........................... 44,849 46,026 839,504 892,560
-------- -------- ---------- ----------
$238,108 $232,243 $1,886,556 $2,000,354
======== ======== ========== ==========
F-31
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (CONTINUED)
20. BUSINESS SEGMENTS AND FOREIGN OPERATIONS (CONTINUED)
YEARS ENDED EIGHT MONTHS
--------------------- ENDED YEAR ENDED
APRIL 30, APRIL 30, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
--------- --------- ------------ ------------
(IN THOUSANDS)
Capital expenditures:
Communications................................ $ 9,807 $ 18,488 $ 19,029 $ 25,644
OEM........................................... -- -- 3,085 24,114
Electrical.................................... -- -- 3,853 10,038
Corporate and other........................... -- -- 2,047 12,441
-------- -------- ---------- ----------
$ 9,807 $ 18,488 $ 28,014 $ 72,237
======== ======== ========== ==========
- - ------------------------
(a) Five customers accounted for 19%, 17%, 16%, 14% and 14% of net sales in
fiscal 1997; five customers accounted for 19%, 19%, 17%, 16% and 13% of
net sales in fiscal 1998; and three customers accounted for 14%, 13%, and
11% of net sales during the eight months ended December 31, 1998. No
customer accounted for more than 10% of net sales for the year ended
December 31, 1999.
The following provides information about domestic and foreign operations for
fiscal 1997, 1998, the eight months ended December 31, 1998, and the year ended
December 31, 1999:
YEARS ENDED EIGHT MONTHS
--------------------- ENDED YEAR ENDED
APRIL 30, APRIL 30, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
--------- --------- ------------ ------------
(IN THOUSANDS)
Net sales:
United States................................. $421,126 $472,019 $408,020 $1,816,506
Canada........................................ 42,714 44,580 30,749 36,990
Israel........................................ -- -- 43,482 128,380
United Kingdom................................ -- -- 3,850 45,653
-------- -------- -------- ----------
$463,840 $516,599 $486,101 $2,027,529
======== ======== ======== ==========
Long--lived assets:
United States................................. $ 72,348 $428,245 $ 397,595
Canada........................................ 10,773 11,894 13,431
Israel........................................ -- 64,184 74,093
United Kingdom................................ -- 9,110 14,093
Mexico........................................ -- -- 14,702
-------- -------- ----------
$ 83,121 $513,433 $ 513,914
======== ======== ==========
F-32
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (CONTINUED)
21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Net income per share of common stock is provided for each of the quarters in
the fiscal year ended April 30, 1998, for the fiscal quarters ended July 31,
1998, and October 31, 1998, for the two months ended December 31,1998, and for
each of the quarters in the year ended December 31, 1999.
FISCAL 1998
-----------------------------------------------------------
QUARTER ENDED
--------------------------------------------- YEAR ENDED
JULY 31 OCTOBER 31 JANUARY 31 APRIL 30 APRIL 30
-------- ---------- ---------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales.............................................. $131,233 $139,212 $113,661 $132,493 $516,599
Gross profit........................................... 24,342 25,342 21,680 27,877 99,241
Operating income....................................... 18,541 19,429 15,684 21,691 75,345
Net income............................................. $ 9,728 $ 10,502 $ 8,440 $ 12,005 $ 40,675
======== ======== ======== ======== ========
Net income per basic share of Common stock............. $ 0.47 $ 0.50 $ .41 $ 0.57 $ 1.95
======== ======== ======== ======== ========
Net income per diluted share of common stock........... $ 0.46 $ 0.50 $ .39 $ 0.56 $ 1.91
======== ======== ======== ======== ========
1998
----------------------------------------------------
FISCAL QUARTER ENDED TWO MONTHS EIGHT MONTHS
--------------------- ENDED ENDED
JULY 31 OCTOBER 31 DECEMBER 31 DECEMBER 31
-------- ---------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales................................................... $156,874 $146,097 $183,130 $486,101
Gross profit................................................ 34,296 33,472 35,227 102,995
Nonrecurring and unusual charges............................ -- -- 13,511 13,511
Operating income............................................ 25,393 25,123 4,188 54,704
Net income (loss)........................................... $ 13,159 $ 13,742 $ (5,888) $ 21,013
======== ======== ======== ========
Net income (loss) per basic share of common stock........... $ 0.63 $ 0.66 $ (0.28) $ 1.01
======== ======== ======== ========
Net income (loss) per diluted share of common stock......... $ 0.61 $ 0.64 $ (0.27) $ 0.98
======== ======== ======== ========
1999
-----------------------------------------------------------------
QUARTER ENDED
-------------------------------------------------- YEAR ENDED
MARCH 31 JUNE 31 SEPTEMBER 30 DECEMBER 31 DECEMBER 31
--------- -------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales........................................ $506,836 $514,691 $522,450 $483,552 $2,027,529
Gross profit..................................... 100,190 101,280 96,418 86,005 383,893
Nonrecurring and unusual charges................. 2,522 2,030 -- 3,879 8,431
Operating income................................. 51,719 57,596 55,184 40,501 205,000
Net income....................................... 10,459 12,920 10,957 2,832 37,168
Net income per basic share of common stock....... $ 0.51 $ 0.64 $ 0.54 $ 0.14 $ 1.83
======== ======== ======== ======== ==========
Net income per diluted share of common
stock(a)....................................... $ 0.49 $ 0.61 $ 0.52 $ 0.14 $ 1.78
======== ======== ======== ======== ==========
- - ------------------------------
(a) Net income per share of common stock is determined by computing a
year-to-date weighted average of the incremental shares included in each
quarterly net income per share calculation. As a result, the sum of the
net income for the four quarters may not equal the net income per share
for the twelve--month period.
F-33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Superior TeleCom Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States, the financial statements of Superior TeleCom Inc. and
subsidiaries included in this annual report on Form 10-K and have issued our
report thereon dated March 3, 2000. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
Schedule II listed in the index to financial statements is the responsibility of
the Company's management and are presented for purposes of complying with the
Securities and Exchange Commissions rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Atlanta, GA
March 3, 2000
F-34
SUPERIOR TELECOM INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
EIGHT MONTHS ENDED DECEMBER 31, 1998 AND
THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
ADDITIONS
----------------------
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(A) END OF PERIOD
- - ----------- ---------- ---------- --------- ------------- -------------
1998:
Allowance for restructuring
activities......................... $ -- $2,881 $33,088(b) $ -- $35,969
1999:
Allowance for restructuring
activities......................... 35,969 1,321 6,231(b) (29,195) 14,326
- - ------------------------
(a) Payments for restructuring liabilities
(b) Accrued as a component of acquisition purchase price
F-35