DRAFT 10/21/04

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2004

 

or

 

o	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 0-50514

 

 

SUPERIOR ESSEX INC.

(Exact name of registrant as specified in its charter)

 

Delaware		20-0282396
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
150 Interstate North Parkway Atlanta, Georgia		30339
(Address of principal executive offices)		(Zip code)
770-657-6000
Registrant’s telephone number, including area code

 

 

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 ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý

 

As of November 5, 2004, the registrant had 17,020,307 shares of common stock, $0.01 par value, outstanding.

 

 

PART I.   FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and, therefore, do not include all disclosures required by generally accepted accounting principles. However, in the opinion of management, these statements reflect all adjustments (which consist only of normal recurring accruals) necessary for a fair presentation of the results of operations for the relevant periods. Results for the quarter and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the entire fiscal year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Superior Essex Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003, as amended April 29, 2004.

 

Superior TeleCom Inc. and certain of its U.S. subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code on March 3, 2003. Superior TeleCom’s plan of reorganization was confirmed by order of the Bankruptcy Court on October 22, 2003 and became effective on November 10, 2003. In accordance with the plan of reorganization, as of November 10, 2003, the Company acquired the business formerly conducted by Superior TeleCom and its subsidiaries and began operating its business under a new holding company and capital structure and adopted fresh-start reporting. Because of the emergence from bankruptcy and adoption of fresh-start reporting, the historical financial information for Superior TeleCom, the Company’s predecessor for financial reporting purposes, is not comparable to the Company’s financial information for periods after November 10, 2003. The historical consolidated statement of operations and statement of cash flows of Superior TeleCom are presented herein in accordance with the requirements of Form 10-Q. Such statements were prepared on a going concern basis, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business, and, for periods subsequent to March 3, 2003, in accordance with AICPA Statement of Position 90-7.

 

In this Form 10-Q, the following terms have the meanings indicated below:

 

•       unless the context otherwise requires, the terms “we,” “us” and “our,” as well as the terms “Superior Essex,” and the “Company,” refer to Superior Essex Inc. and its subsidiaries on and after November 10, 2003, the effective date of the plan of reorganization of Superior TeleCom Inc. and its subsidiaries.

 

•       “Superior TeleCom,” unless the context otherwise requires, refers to Superior TeleCom Inc. and its subsidiaries and the business carried on by them prior to November 10, 2003.

 

•       “Superior Essex Holding” refers to Superior Essex Holding Corp., Superior Essex’s wholly owned subsidiary.

 

•       “Superior Essex Communications” refers to Superior Essex Communications LP (formerly Superior Essex Communications LLC). On June 17, 2004, Superior Essex Communications LLC converted from a Delaware limited liability company into a Delaware limited partnership. Superior Essex Holding is the sole limited partner of Superior Essex Communications and SE Communications GP Inc., a wholly owned subsidiary of Superior Essex Holding, is the sole general partner of Superior Essex Communications.

 

•       “Essex International” refers to Essex International Inc., Superior Essex Holding’s wholly owned subsidiary.

 

•       “Essex Group” refers to Essex Group, Inc., Essex International’s wholly owned subsidiary.

 

 

SUPERIOR ESSEX INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)

 

		Superior Essex Inc.
		September 30, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents		$	4,076		$	10,606
Accounts receivable (less allowance for doubtful accounts of $2,061 and $2,140 at September 30, 2004 and December 31, 2003, respectively)		178,750			100,893
Inventories, net		168,028			119,787
Other current assets		17,756			23,316
Total current assets		368,610			254,602
Property, plant and equipment, net		239,927			223,318
Intangible and other long-term assets, net		44,035			9,005
Total assets		$	652,572		$	486,925
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings		$	58,505		$	42,755
Accounts payable		68,182			35,866
Accrued expenses		63,009			58,199
Total current liabilities		189,696			136,820
Long-term debt		262,285			157,000
Other long-term liabilities, primarily pension obligations		27,824			29,213
Total liabilities		479,805			323,033
Stockholders’ equity:
Common stock, $.01 par value; 33,000,000 shares authorized; 17,033,677 and 16,500,000 issued at September 30, 2004 and December 31, 2003, respectively		170			165
Capital in excess of par value		170,918			168,135
Accumulated other comprehensive income		2,299			1,221
Retained earnings (accumulated deficit)		4,496			(2,443		)
		177,883			167,078
Equity-based unearned compensation		(4,925		)	(3,186		)
Treasury stock, at cost (13,385 shares at September 30, 2004)		(191		)	—
Total stockholders’ equity		172,767			163,892
Total liabilities and stockholders’ equity		$	652,572		$	486,925

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2

 

SUPERIOR ESSEX INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

		Superior Essex Inc.			Superior TeleCom Inc.
		Three Months Ended September 30,
		2004			2003
Net sales		$	382,206		$	247,660
Cost of goods sold		345,145			219,650
Gross profit		37,061			28,010
Selling, general and administrative expenses		24,038			20,706
Restructuring and other charges		47			2,136
Operating income		12,976			5,168
Interest expense (contractual interest of $40,806 for the three months ended September 30, 2003)		(7,289		)	(2,151		)
Other income (expense), net		400			(269		)
Income before reorganization items and income taxes		6,087			2,748
Reorganization items		—			(7,338		)
Income tax benefit (expense)		(2,544		)	183
Net income (loss)		$	3,543		$	(4,407	)
Net income (loss) per share of common stock:
Basic		$	0.21		$	(0.20	)
Diluted		$	0.21		$	(0.20	)
Weighted average shares outstanding:
Basic		16,532			21,845
Diluted		16,645			21,845

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

 

		Superior Essex Inc.				Superior TeleCom Inc.
		Nine Months Ended September 30,
		2004				2003
Net sales		$	1,041,408			$		745,978
Cost of goods sold		941,130				661,867
Gross profit		100,278				84,111
Selling, general and administrative expenses		67,220				62,407
Restructuring and other charges		1,533				6,971
Operating income		31,525				14,733
Interest expense (contractual interest of $108,598 for the nine months ended September 30, 2003)		(19,269			)	(25,172			)
Loss on early extinguishment of debt		(407			)	—
Other income (expense), net		214				(299			)
Income (loss) before reorganization items, income taxes and distributions on preferred securities of Superior Trust I		12,063				(10,738			)
Reorganization items		—				(40,306			)
Income tax (expense) benefit		(5,124			)	2,243
Income (loss) before distributions on preferred securities of Superior Trust I		6,939				(48,801			)
Distributions on preferred securities of Superior Trust I		—				(5,050			)
Net income (loss)		$	6,939			$	(53,851		)
Net income (loss) per share of common stock:
Basic		$		0.42		$	(2.47		)
Diluted		$		0.42		$	(2.47		)
Weighted average shares outstanding:
Basic		16,516				21,804
Diluted		16,620				21,804

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

 

SUPERIOR ESSEX INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 

		Superior Essex Inc.			Superior TeleCom Inc.
		Nine Months Ended September 30,
		2004			2003
Cash flows from operating activities:
Net income (loss)		$	6,939		$	(53,851	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization		15,662			21,959
Deferred distributions on Trust Convertible Preferred Securities		—			5,050
Amortization of deferred financing costs and discount		1,345			6,191
Write-down of idled and abandoned property, plant and equipment		—			3,083
Reorganization items		—			41,769
Change in operating assets and liabilities:
Accounts receivable, net		(77,765		)	(17,722		)
Inventories, net		(2,536		)	(10,760		)
Other current and non-current assets		4,848			46,412
Accounts payable, accrued expenses and other liabilities		39,469			44,469
Other, net		1,818			1,110
Cash flows provided by (used for) operating activities before reorganization items		(10,220		)	87,710
Reorganization items paid, net		(12,319		)	(9,893		)
Cash flows provided by (used for) operating activities		(22,539		)	77,817
Cash flows from investing activities:
Capital expenditures		(9,459		)	(1,987		)
Belden and Nexans asset acquisition, including related fees and expenses (note 6)		(90,698		)	—
Proceeds from asset sales		126			5,698
Other		—			143
Cash flows provided by (used for) investing activities		(100,031		)	3,854
Cash flows from financing activities:
Short-term borrowings (repayments), net		15,738			(23,489		)
Repayment of pre-petition revolving credit facilities, net		—			(28,330		)
Debt issuance costs		(4,583		)	(3,900		)
Long-term borrowings		250,004			—
Repayments of long-term borrowings		(145,000		)	(19,402		)
Cash flows provided by (used for) financing activities		116,159			(75,121		)
Effect of exchange rate changes on cash		(119		)	(536		)
Net increase (decrease) in cash and cash equivalents		(6,530		)	6,014
Cash and cash equivalents at beginning of period		10,606			7,101
Cash and cash equivalents at end of period		$	4,076		$	13,115
Supplemental disclosures:
Cash paid for interest		$	9,376		$	14,098
Cash paid (received) for income taxes, net		$	1,074		$	(58,230	)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

 

SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(unaudited)

 

1.   General

 

Basis of presentation

 

Superior Essex Inc., a Delaware holding company, and its operating subsidiaries were formed in 2003 to acquire and conduct the business formerly conducted by Superior TeleCom Inc., and its subsidiaries, pursuant to a plan of reorganization confirmed by the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) and implemented by Superior TeleCom effective November 10, 2003 as discussed below. As a result of the reorganization and the Company’s implementation of fresh-start reporting as described below, the consolidated financial statements of the Company (the successor entity for purposes of fresh-start reporting) for periods subsequent to November 10, 2003 reflect a new basis of accounting. Accordingly, the historical consolidated financial statements of Superior TeleCom, the Company’s predecessor for financial reporting purposes, are not comparable to the consolidated financial statements of the Company for periods subsequent to the effective date of the plan of reorganization.

 

The Company is a manufacturer and supplier of communications wire and cable products to telephone companies, CATV companies, distributors and systems integrators, and magnet wire and insulation materials to major original equipment manufacturers, or OEMs, and, through its distribution operations, to small OEMs and the motor maintenance, repair and overhaul industry. The Company also converts copper cathode to copper rod for sale to other wire and cable manufacturers. The Company operates manufacturing and distribution facilities in the United States, the United Kingdom and Mexico.

 

Chapter 11 Filing and Reorganization

 

On March 3, 2003, Superior TeleCom and certain of its U.S. subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code and continued to manage their properties and operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. Under the Bankruptcy Code, actions to collect pre-petition indebtedness, as well as most other pending litigation, were stayed and certain contractual provisions could not be enforced against Superior TeleCom. Absent an order of the Bankruptcy Court, substantially all pre-petition liabilities were subject to settlement under a plan of reorganization voted upon by certain classes of Superior TeleCom’s creditors and approved by the Bankruptcy Court. A plan of reorganization was confirmed by order of the Bankruptcy Court on October 22, 2003 and became effective on November 10, 2003.

 

6

 

In accordance with the plan of reorganization, on November 10, 2003 the Company acquired the business formerly conducted by Superior TeleCom and its subsidiaries, and Superior TeleCom and certain of its dormant subsidiaries were deemed dissolved and ceased to have continuing corporate existences, subject only to obligations under the plan of reorganization to satisfy allowed claims. Except as otherwise provided in the plan of reorganization, the Company’s senior secured revolving credit facility, the Company’s senior notes or any agreement, instrument or indenture relating thereto, on and after the effective date of the plan, all property of Superior TeleCom and its subsidiaries vested in the Company, free and clear of all liens, claims, charges or other encumbrances. On and after the effective date of the plan of reorganization, the Company began operating its business without supervision or approval by the Bankruptcy Court.

 

Fresh-Start Reporting

 

Upon implementation of the plan of reorganization, fresh-start reporting was adopted in accordance with AICPA Statement of Position 90-7, or SOP 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code. Under fresh-start reporting, the reorganization value was allocated to the Company’s net assets based on their relative fair values in a manner similar to the accounting provisions applied to business combinations under Statement of Financial Accounting Standards No. 141, Business Combinations (“SFAS No. 141”). The Company’s reorganization value was less than the fair value of the net assets acquired pursuant to the plan of reorganization. In accordance with SFAS No. 141, the excess of the fair value of the net assets over the reorganization value was used to reduce the value of property, plant and equipment. Liabilities existing at the effective date of the plan of reorganization were stated at the present value of amounts to be paid discounted at appropriate current rates. Debt issued in connection with the plan of reorganization was recorded at the stated value, which approximated fair value.

 

7

 

Stock-Based Compensation Plans

 

The Company and Superior TeleCom applied the intrinsic-value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in March 2000, to account for stock-based compensation plans. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Compensation expense attributable to fixed awards is recognized on a straight-line basis over the related vesting period. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair-value based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company and Superior TeleCom elected to continue to apply the intrinsic-value based method of accounting described above, and adopted only the disclosure requirements of SFAS No. 123. The following table illustrates the effect on net income (loss) if the fair-value based method had been applied to all outstanding and unvested awards in each period.

 

		Superior Essex Inc.				Superior TeleCom Inc.
		Three Months Ended September 30,
		2004				2003
Net income (loss), as reported		$	3,543			$		(4,407	)
Add stock-based employee compensation expense included in reported net income (loss), net of tax		469				138
Deduct total stock-based employee compensation expense determined under fair-value based method for all awards, net of tax		(584			)	(315			)
Pro forma net income (loss)		$		3,428		$		(4,584	)
Net income (loss) per share:
As reported:
Basic		$		0.21		$	(0.20		)
Diluted		0.21				(0.20			)
Pro forma:
Basic		0.21				(0.21			)
Diluted		0.21				(0.21			)

 

8

 

		Superior Essex Inc.				Superior TeleCom Inc.
		Nine Months Ended September 30,
		2004					2003
Net income (loss), as reported		$	6,939				$		(53,851	)
Add stock-based employee compensation expense included in reported net income (loss), net of tax		1,015					850
Deduct total stock-based employee compensation expense determined under fair-value based method for all awards, net of tax		(1,264			)		(1,407			)
Pro forma net income (loss)		$	6,690				$	(54,408		)
Net income (loss) per share:
As reported:
Basic		$		0.42			$	(2.47		)
Diluted		0.42					(2.50			)
Pro forma:
Basic		0.41					(2.47			)
Diluted		0.40					(2.50			)

 

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 stock options is amortized to expense over the vesting period and additional options may be granted in future years. Options to purchase 750,500 shares of common stock with a weighted average fair value per option of $6.21 were granted during the nine months ended September 30, 2004 at an exercise price below the fair value of the underlying common stock at the date of grant in accordance with the terms of the 2003 Stock Incentive Plan. The 2003 Stock Incentive Plan provides that the exercise price would be the initial value of the Company’s stock on the effective date of the plan of reorganization ($10 per share) for options granted prior to May 10, 2004 to individuals who were members of management as of the effective date of the plan of reorganization. Options to purchase 115,000 shares of common stock with a weighted average fair value per option of $3.82 were granted during the nine months ended September 30, 2004 at an exercise price equal to the fair value of the underlying common stock at the date of grant. 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: dividend yield of 0%; expected volatility of 41%, risk-free interest rate of 2.5%, and expected life of three years. No options were granted during the nine months ended September 30, 2003.

 

During the first quarter of 2004, the Company awarded 150,000 shares of restricted stock with a weighted average per share value at the date of award of $13.25 to certain members of senior management. These restricted stock awards vest after 7 years with earlier vesting after 3 years if the Company’s stock price exceeds certain specified levels for a period of 20 consecutive trading days. An additional 40,000 shares of restricted stock with a weighted average per share value at the date of award of $15.25 were granted during the first quarter of 2004 to other members of management. These shares vest 50% after three years and 50% after five years. A total of 13,677 shares of restricted stock with a weighted average per share value of $13.75 were awarded to certain employees on August 9, 2004.  These shares were fully vested as of  September 30, 2004.

 

9

 

2.  Inventories, net

 

At September 30, 2004 and December 31, 2003, the components of inventories were as follows:

 

		Superior Essex Inc.
		September 30, 2004				December 31, 2003
		(in thousands)
Raw materials		$		21,803		$	10,407
Work in process		25,825				18,977
Finished goods		135,766				92,944
		183,394				122,328
LIFO reserve		(15,366			)	(2,541			)
		$	168,028			$		119,787

 

Inventories valued using the LIFO method amounted to $88 million and $69 million at September 30, 2004 and December 31, 2003, respectively.

 

3.   Comprehensive income (loss)

 

The components of comprehensive income (loss) for the three and nine months ended September 30, 2004 and 2003 were as follows:

 

		Superior Essex Inc.				Superior TeleCom Inc.
		Three Months Ended September 30,
		2004				2003
		(in thousands)
Net income (loss)		$	3,543			$		(4,407	)
Foreign currency translation adjustment		169				(2,242			)
Change in unrealized gains on derivatives, net of income tax of $575 for the three months ended September 30, 2004		899				1,067
Additional minimum pension liability		—				2,003
Other		5				(35			)
Comprehensive income (loss)		$		4,616		$	(3,614		)

 

		Superior Essex Inc.				Superior TeleCom Inc.
		Nine Months Ended September 30,
		2004				2003
		(in thousands)
Net income (loss)		$	6,939			$		(53,851	)
Foreign currency translation adjustment		116				(530			)
Change in unrealized gains on derivatives, net of income tax of $565 for the nine months ended September 30, 2004		892				2,250
Additional minimum pension liability		—				1,712
Other		70				(24			)
Comprehensive income (loss)		$		8,017		$	(50,443		)

 

10

 

The components of accumulated other comprehensive income at September 30, 2004 and December 31, 2003 were as follows:

 

		Superior Essex Inc.
		September 30, 2004			December 31, 2003
		(in thousands)
Foreign currency translation adjustment		$	992		$	876
Unrealized gain on derivatives, net of deferred tax of $815 and $250 at September 30, 2004 and December 31, 2003, respectively		1,272			380
Other		35			(35		)
		$	2,299		$	1,221

 

4.   Reorganization items

 

Reorganization items represent amounts incurred by Superior TeleCom as a result of its Chapter 11 filings and are summarized as follows for the three and nine months ended September 30, 2003:

 

		Three Months Ended September 30, 2003			Nine Months Ended September 30, 2003
		(in thousands)
Professional fees		$	4,410		$	11,200
Adjustments to pre-petition liabilities		—			27,006
Deferred debt issue costs		—			3,452
Settlement of pre-petition liabilities		(177		)	(5,187		)
Employee retention and severance		3,105			3,835
		$	7,338		$	40,306

 

Adjustments to pre-petition liabilities represent amounts to adjust the carrying value of Superior TeleCom’s Trust Convertible Preferred Securities (which were exchanged for Convertible Debentures as a result of the liquidation of the Trust on or about April 30, 2003) to the estimated amount of the allowed claim including accrued and unpaid distributions.

 

5.   Restructuring and other charges

 

During the nine months ended September 30, 2003, Superior TeleCom recorded restructuring and other charges of $1.8 million primarily related to ongoing closure activities and subsequent sale of the communication cable segment’s facilities in Elizabethtown, Kentucky and Winnipeg, Manitoba which were closed in 2002. Restructuring and other charges for the nine months ended September 30, 2003 also included pre-petition professional fees of $3.6 million incurred in connection with preparation for Superior TeleCom’s Chapter 11 filings, $2.3 million of asset impairments from the closure of one of Superior TeleCom’s continuous casting facilities and $0.8 million of asset impairments resulting from the write-off of abandoned equipment offset by foreign currency transaction gains of $1.5 million related to Superior TeleCom’s Canadian subsidiary. Restructuring and other charges for the nine months ended September 30, 2004 were $1.5 million consisting primarily of ongoing professional fees related to implementation of the plan of reorganization and employee retention and severance payments under plans established by Superior TeleCom in connection with its bankruptcy proceedings.

 

11

 

6.   Asset acquisitions

 

Belden Asset Acquisition

 

On June 1, 2004, Superior Essex Communications acquired certain assets from operating subsidiaries of Belden Inc. (“Belden”) related to their North American copper OSP communications wire and cable business (the “Belden Asset Acquisition”). Under the terms of the asset purchase agreement, Superior Essex Communications acquired certain inventories, selected machinery and equipment and certain customer contracts related to a portion of Belden’s communications business for total consideration not to exceed $95 million (including a contingent payment of up to $10 million to be made nine months after closing based on business relationships successfully transitioned to Superior Essex Communications). Superior Essex Communications intends to use the equipment acquired from Belden in its communications wire and cable business. Belden retained its manufacturing facilities and employees together with all of the associated liabilities, including, among others, accounts payable, any employee-related obligations, plant shutdown costs and environmental obligations. The Company paid an initial cash price of $82.2 million on June 1, 2004. Based on preliminary inventory adjustments, $5.2 million of the initial purchase price was refunded to the Company in August 2004. The final purchase price is subject to further adjustment based on a final accounting of the inventories acquired. Additionally, the Company has accrued the full contingent payment of $10 million as of September 30, 2004 as the Company believes the payment of this amount is probable based on customers transitioned to date. The allocation of the purchase price has not been finalized and is subject to adjustment pending a final accounting for the inventories acquired. The preliminary allocation of the purchase price is summarized as follows (in thousands):

 

Initial purchase price, as adjusted		$	76,977
Acquisition costs		2,100
Contingent payment		10,000
		$	89,077
Allocated to:
Inventory and amounts due from seller		38,462
Machinery and equipment		22,209
Intangible asset-customer base		28,406
		$	89,077

 

The customer base intangible asset is being amortized on a straight-line basis over 17 ½ years. The Company intends to install the machinery and equipment acquired in the Belden Asset Acquisition in certain of its manufacturing plants to replace certain existing machinery and equipment. As a result, machinery and equipment with a net book value of approximately $2.2 million at June 1, 2004 is expected to be taken out of service through the second quarter of 2005. Accordingly, the Company has revised the estimated depreciable lives of the machinery and equipment to be replaced resulting in additional depreciation charges included in cost of goods sold of $0.9 million and $1.2 million, respectively, during the three and nine months ended September 30, 2004. Additionally, the Company incurred approximately $1.0 million and $1.6 million, respectively, of plant employee training costs for acquisition-related production capacity expansion which have been included in cost of goods sold in the accompanying statement of operations for the three and nine months ended September 30, 2004.

 

12

 

Nexans Asset Acquisition

 

On September 7, 2004, Essex Group acquired certain assets from Nexans Magnet Wire USA Inc., a wholly-owned subsidiary of Nexans S.A. Company.  Under the terms of the purchase agreement, Essex Group acquired substantially all inventory associated with Nexans’ U.S. magnet wire operations and assumed certain U.S. customer contractual arrangements.  The Company intends to use the assets acquired in its magnet wire and distribution business.  The total purchase price for the acquisition was $11.6 million and is subject to adjustment based on a final accounting of the inventories acquired. The allocation of the purchase price, including the method and period of amortization for acquired intangibles, based on the relative fair values of the assets acquired, has not been finalized and is subject to adjustment. The preliminary allocation of the purchase price is summarized as follows (in thousands):

 

Initial purchase price		$	11,568
Acquisition costs		763
		$	12,331
Allocated to:
Inventory		10,504
Intangible asset		1,827
		$	12,331

 

7.   Debt

 

At September 30, 2004 and December 31, 2003, short-term borrowings and long-term debt consisted of the following:

 

		Superior Essex Inc.
		September 30, 2004				December 31, 2003
		(in thousands)
Short-term borrowings:
Senior secured revolving credit facility		$		57,536		$	41,910
Other		969				845
		$		58,505		$	42,755
Long-term debt:
9% senior notes (net of discount of $6,815)		$		250,285		$	—
91/2 % senior notes		—				145,000
Series A redeemable preferred stock		5,000				5,000
Other		7,000				7,000
Total long-term debt		$	262,285			$		157,000

 

In 2004 the senior secured revolving credit facility was amended to (i) increase the total facility by $55 million to $175 million, (ii) increase the maximum amount of eligible inventory for purposes of computing availability from $60 million to $70 million, and (iii) increase the minimum availability threshold requiring the maintenance of a specified EBITDA ratio from $10 million to $15 million. Undrawn availability under the senior secured revolving credit facility (after considering outstanding letters of credit) on September 30, 2004 amounted to $112.8 million.

 

13

 

On April 14, 2004, the Company completed a Rule 144A private placement offering of $257.1 million of 9% unsecured senior notes due April 2012. Interest on the 9% senior notes is payable April 15 and October 15 of each year beginning on October 15, 2004. The 9% senior notes were issued at an original issue discount of $7.1 million. The proceeds from the offering were primarily used to redeem the existing $145 million of 91¤2% senior notes and fund the Belden Asset Acquisition.

 

The 9% senior notes were issued by Superior Essex Communications and Essex Group and are fully and unconditionally guaranteed by the Company and each of the Company’s existing and future domestic restricted subsidiaries. The Company may redeem some or all of the 9% senior notes at any time on or after April 15, 2008 at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on April 15 of the year set forth below:

 

Year:		Percentage
2008		104.50	%
2009		102.25	%
2010 and after		100.00	%

 

The Company may also redeem up to 40% of the aggregate principal amount of the 9% senior notes at a redemption price of 109% of the principal amount thereof using the proceeds of one or more equity offerings completed before April 15, 2007. Additionally, upon the occurrence of specific kinds of changes in control of the Company, as specified in the indenture governing the 9% senior notes, holders of the 9% senior notes will have the right to require the Company to purchase all or a portion of the outstanding 9% senior notes at a purchase price equal to 101% of the principal amount thereof plus accrued interest.

 

The Company entered into a registration rights agreement with the initial purchasers of the 9% senior notes requiring the Company to use its reasonable best efforts to file with the Securities and Exchange Commission (the “SEC”) and cause to become effective a registration statement relating to an offer to exchange the 9% senior notes for an issue of notes registered under the Securities Act of 1933, as amended, with terms substantially identical to the 9% senior notes. On October 5, 2004, the exchange offer was completed and the entire $257.1 million principal amount of the 9% senior notes was exchanged for an equal amount of registered notes with substantially identical terms.

 

The indenture governing the 9% senior notes contains covenants which restrict the ability of the Company and certain of its subsidiaries to, among other things: incur additional debt and issue preferred stock; make certain distributions, investments and other restricted payments; create certain liens; enter into transactions with affiliates; and merge, consolidate or sell substantially all of the Company’s assets.

 

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8.   Income (loss) per share

 

The computation of basic and diluted income (loss) per share for the three and nine months ended September 30, 2004 and 2003 is as follows:

 

		Superior Essex Inc.								Superior TeleCom Inc.
		Three Months Ended September 30,
		2004								2003
		Net Income			Shares		Per Share Amount			Net Loss			Shares		Per Share Amount
		(in thousands, except per share amounts)
Basic income (loss) per common share		$	3,543		16,532		$	0.21		$	(4,407	)	21,845		$	(0.20	)
Effect of dilutive securities:
Restricted stock awards		—			78					—			—
Stock options		—			35					—			—
Diluted income per common share		$	3,543		16,645		$	0.21		$	(4,407	)	21,845		$	(0.20	)

 

		Superior Essex Inc.								Superior TeleCom Inc.
		Nine Months Ended September 30,
		2004								2003
		Net Income			Shares		Per Share Amount			Net Loss			Shares		Per Share Amount
		(in thousands, except per share amounts)
Basic income (loss) per common share		$	6,939		16,516		$	0.42		$	(53,851	)	21,804		$	(2.47	)
Effect of dilutive securities:
Restricted stock awards		—			81					—			—
Stock options		—			23					—			—
Diluted income (loss) per common share		$	6,939		16,620		$	0.42		$	(53,851	)	21,804		$	(2.47	)

 

The assumed conversion of Superior TeleCom’s Trust Convertible Preferred Securities has been excluded from the loss per share calculation for the three and nine months ended September 30, 2003 as the impact would be anti-dilutive. Stock options outstanding at September 30, 2003 with respect to 4.2 million shares of Superior TeleCom common stock have not been included in the computation of diluted loss per share for the three and nine months ended September 30, 2003 because to do so would be anti-dilutive. A total of 386,098 and 301,184 anti-dilutive weighted average shares with respect to outstanding stock options and restricted stock awards have been excluded from the computation of diluted income per share for the three and nine months ended September 30, 2004, respectively.

 

9.   Employee benefits

 

Superior TeleCom sponsored several defined benefit pension plans which were assumed by the Company pursuant to the plan of reorganization. In July 2004, the Company’s board of directors approved the adoption of an unfunded supplemental executive retirement plan (the “SERP”). The SERP is designed to provide benefits to certain specified members of management commencing at retirement (between the ages of 55 and 65) based on the employee’s length of service and compensation.

 

15

 

The components of net periodic benefit cost of the defined benefit pension plans for the three and nine months ended September 30, 2004 and 2003 are presented below.

 

		Superior Essex Inc.			Superior TeleCom Inc.
		Three Months Ended September 30,
		2004			2003
		(in thousands)
Components of net periodic benefit cost:
Service cost		$	310		$	800
Interest cost		1,577			1,592
Expected return on plan assets		(1,527		)	(1,330		)
Actuarial loss		—			(202		)
		$	360		$	860

 

		Superior Essex Inc.			Superior TeleCom Inc.
		Nine Months Ended September 30,
		2004			2003
		(in thousands)
Components of net periodic benefit cost:
Service cost		$	522		$	2,400
Interest cost		4,713			4,776
Expected return on plan assets		(4,605		)	(3,990		)
Actuarial loss		—			53
		$	630		$	3,239

 

The Company’s cash contributions to the defined benefit plans amounted to $11.2 million during the nine months ended September 30, 2004. The Company expects to make additional cash contributions of $0.7 million for the remainder of 2004.

 

10.   Derivative financial instruments

 

The Company, to a limited extent, uses forward fixed price contracts and derivative financial instruments to manage commodity price, foreign currency exchange and interest rate 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 limited to any unrealized gains within the underlying contracts.

 

Commodity price risk management

 

The cost of copper, the Company’s most significant raw material, and aluminum have historically been subject to considerable volatility. To manage the risk associated with such volatility, the Company enters into futures contracts to match the metal component of customer product pricing with the cost component of the inventory shipped. At September 30, 2004, the Company had futures purchase contracts for 13.2 million pounds of copper expiring through March 2006 and 1.3 million pounds of aluminum expiring through December 2004 related to certain future customer firm sales commitments. These futures contracts have been designated as cash flow hedges with unrealized gains and losses recorded in other comprehensive income until the hedged sales transactions are reflected in the income statement which are generally expected to occur in the next twenty-four months. Hedge ineffectiveness, which is not significant, is immediately recognized in earnings. At September 30, 2004, the Company had an unrealized gain of $2.1 million on these futures contracts which is recorded in accumulated other comprehensive income net of deferred income taxes of $0.8 million.

 

16

 

Foreign currency exchange risk management

 

The Company engages, to a limited extent, in the sale of products which result in accounts receivable denominated in foreign currencies.  The Company enters into foreign currency forward exchange contracts to hedge against fluctuations in the value of these receivables. Changes in the fair value of these contracts are reflected in current earnings.  At September 30, 2004, the Company had outstanding forward contracts with a notional amount of $6.3 million expiring in October 2004. The fair value of the forward exchange contracts was insignificant at September 30, 2004.

 

Interest rate risk management

 

In order to limit its exposure to rising interest rates with respect to borrowings under its variable rate senior secured revolving credit facility, the Company has entered into interest rate cap agreements. The following interest rate cap agreements were outstanding as of September 30, 2004:

 

Type		Notional Amount			Interest Rate		Cap Rate		Expiration Date		Fair Value
		(in thousands)									(in thousands)
Interest rate cap		$	30,000		30-day LIBOR		1.75	%	December 2005		$	278
Interest rate cap		30,000			30-day LIBOR		5.0	%	December 2004		—
Interest rate cap		15,000			30-day LIBOR		5.0	%	April 2005		—
Interest rate cap		12,500			3-month LIBOR		7.0	%	May 2005		—

 

11.   Commitments and contingencies

 

The Company’s operations are subject to environmental laws and regulations in each of the jurisdictions in which it owns or operates facilities 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 past and current facilities and at off-site disposal locations. On-site contamination at certain of the Company’s facilities is the result of historic activities, including certain activities attributable to Superior TeleCom’s and the Company’s operations and those occurring prior to the use of a facility by Superior TeleCom or the Company. Off-site liability includes clean-up responsibilities and response costs incurred by others at various sites, under federal or state statutes, for which Superior TeleCom has been identified by the United States Environmental Protection Agency, or state environmental agency, as a Potentially Responsible Party, or “PRP,” or the equivalent. At the effective date of the plan of reorganization, Superior TeleCom or one of its subsidiaries was named as a PRP with respect to seven sites. Certain PRP representatives filed claims in connection with Superior TeleCom’s Chapter 11 proceedings. These claims are being negotiated, and allowed claims will receive a portion of the $3.0 million amount that the plan of reorganization allocated to holders of general unsecured claims.

 

17

 

Essex International (including subsidiaries thereof), which Superior TeleCom acquired in 1998 and 1999, has been named as a PRP at a number of sites. Many of the sites for which Essex International 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 Group by United Technologies to Essex International. Pursuant to the indemnity, United Technologies agreed to indemnify Essex International 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 Group 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, and United Technologies must have received notice of the indemnity claim during the five-year period commencing on, February 29, 1988. The sites covered by this indemnity historically have been handled directly by United Technologies and required payments generally have been made directly by United Technologies. Most of these sites are mature sites where allocations of liability have been settled and remediation is well underway or has been completed.

 

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 of which United Technologies received notice during the five-year period commencing on February 29, 1988. As to such liabilities, Essex International is responsible for the first $4.0 million incurred. Thereafter, United Technologies has agreed to indemnify Essex International fully for any liabilities in excess of $4.0 million. Essex International has not incurred any liabilities covered by this indemnity.

 

Apart from the indemnified sites, Essex International has been named as a PRP or a defendant in a civil lawsuit at, or has received inquiries from regulatory agencies involving, a number of off-site or formerly owned sites. Operations of Superior Telecommunications Inc. and DNE, which were subsidiaries of Superior TeleCom, have resulted in releases of hazardous substances or wastes at sites currently or formerly owned or operated by such companies.

 

Except for the air quality matters involving two Indiana facilities, none of the sites or matters mentioned above involves the imposition of sanctions, fines or administrative penalties on the Company. The Company believes that any of the environmental proceedings in which it is involved have been or will be addressed in Superior TeleCom’s bankruptcy claims resolution process or 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 that future developments will not alter this conclusion.

 

Since approximately 1990, Essex International 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 International who had previously refused to defend and indemnify Essex International against these lawsuits was settled during 1999. Under the settlement, Essex International 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 International against those asbestos lawsuits, subject to the terms and limits of the respective policies. Under the plan of reorganization, certain of the claimants in these actions will be able to assert claims under applicable insurance coverage and other similar arrangements. The Company believes that Essex International’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.

 

18

 

On January 18, 2002, United Technologies brought a third party claim against Essex International in a civil action in Massachusetts. United Technologies had been sued by an insurer for, among other things, approximately $3.1 million in compensatory damages for retrospective premiums for 1999, 2000 and 2001 relating to certain events that allegedly occurred while Essex Group was a subsidiary of United Technologies. United Technologies’ third party complaint against Essex International contended, among other things, that Essex International had agreed, in the stock purchase agreement dated January 15, 1998, to pay such premiums and sought a declaratory judgment, contribution and indemnification for any such retrospective premiums that United Technologies might have to pay the insurer. On January 13, 2003, the court granted the insurer’s motion for summary judgment against United Technologies and Essex International’s motion to dismiss with prejudice United Technologies’ claim against it. United Technologies thereafter indicated an intention to appeal the ruling dismissing the action against Essex International. However, before Essex International’s time to respond, those proceedings were stayed by the filing of Superior TeleCom’s bankruptcy proceedings. United Technologies and the insurer filed proofs of claim in connection with Superior TeleCom’s bankruptcy. The Company believes that these claims will be addressed in Superior TeleCom’s bankruptcy claims resolution process or 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 that future developments will not alter this conclusion.

 

The Company’s collective bargaining agreement covering approximately 225 workers at its Vincennes, Indiana magnet wire facility expired on October 1, 2004. The Company has signed an extension which provides that the collective bargaining agreement will remain in effect unless either party gives ten days prior notice of its intent to terminate the agreement. The Company and union representatives have been negotiating to reach a new collective bargaining agreement.  The initial proposal was not accepted by the union membership. The parties are continuing to negotiate to reach a mutually acceptable agreement.

 

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 September 30, 2004, the Company had forward fixed price copper purchase commitments for $45.1 million.

 

12.   Business segments

 

Reportable segments are strategic businesses that offer different products and services to different customers. These segments are communications cable, magnet wire and distribution and copper rod. The communications cable segment manufactures communications wire and cable products sold to telephone companies, CATV companies, distributors and systems integrators, principally in North America. The magnet wire and distribution segment manufactures and supplies magnet wire, fabricated insulation and accessory products for motors, transformers and electrical controls sold primarily to original equipment manufacturers. The copper rod segment includes sales of copper rod produced by the Company’s continuous casting units to external customers. Copper rod produced for internal processing is recorded by the consuming segment at cost as a component of cost of goods sold.

 

The Company evaluates segment performance based on a number of factors, with operating income, excluding restructuring and other charges, being the most critical.

 

19

 

Financial information with respect to reportable segments is presented below. Corporate and other items shown below are provided to reconcile to the accompanying consolidated statements of operations.

 

		Superior Essex Inc.			Superior TeleCom Inc.			Superior Essex Inc.			Superior TeleCom Inc.
		Three Months Ended September 30						Nine Months Ended September 30,
		2004			2003			2004			2003
					(in thousands)
Net sales:
Communications cable		$	157,793		$	90,785		$	379,419		$	258,909
Magnet wire and distribution		153,507			116,806			453,023			360,885
Copper rod		70,906			40,069			208,966			126,184
		$	382,206		$	247,660		$	1,041,408		$	745,978
Operating income (loss):
Communications cable		$	9,688		$	5,483		$	19,629		$	14,595
Magnet wire and distribution		7,223			5,555			23,194			20,334
Copper rod		34			(897		)	853			(3,642		)
Corporate and other		(3,922		)	(2,837		)	(10,618		)	(9,583		)
Restructuring and other charges		(47		)	(2,136		)	(1,533		)	(6,971		)
		$	12,976		$	5,168		$	31,525		$	14,733

 

		Superior Essex Inc.
		September 30, 2004			December 31, 2003
		(in thousands)
Total assets:
Communications Cable		$	302,509		$	180,262
Magnet Wire and Distribution		280,617			239,468
Copper Rod		48,300			46,625
Corporate and other		21,146			20,570
		$	652,572		$	486,925

 

20

 

13.          Supplemental guarantor information

 

The 9% senior unsecured notes were issued by Superior Essex Communications and Essex Group as joint and several obligors. The notes are fully and unconditionally guaranteed by the Company and each of its existing and future domestic restricted subsidiaries (as defined in the indenture governing the notes).  All of the Company’s current domestic subsidiaries, other than IP Licensing LLP, are restricted subsidiaries.  The following consolidating information presents information about the Company (the “Parent”), the issuers, guarantor subsidiaries and non-guarantor subsidiaries. As a result of the plan of reorganization and the Company’s implementation of fresh-start reporting, the consolidating financial information for periods subsequent to November 10, 2003 reflects a new organizational structure and basis of accounting and is not comparable to the historical consolidating financial information of Superior TeleCom for periods prior to the effective date of the plan of reorganization.  For purposes of this presentation for the three and nine months ended September 30, 2003 the parent is Superior TeleCom, Inc., the issuers are Superior Telecommunications Inc. and Essex Group Inc., the guarantor subsidiaries are all direct and indirect domestic subsidiaries of Superior TeleCom, and the non-guarantor subsidiaries are all direct and indirect non-domestic subsidiaries of Superior TeleCom together with Superior Trust I.  Investments in subsidiaries are presented on the equity method.  Intercompany transactions are eliminated in consolidation.

 

Superior Essex Inc.

September 30, 2004

(in thousands)

 

		Parent			Issuers				Guarantor Subsidiaries				Non- Guarantor Subsidiaries			Eliminations				Total
ASSETS
Current assets:
Cash and cash equivalents		$	(61	)	$		3,543		$	109			$	485		—				$	4,076
Accounts receivable, net		—			169,315				1,889				7,546			—				178,750
Inventories, net		—			154,630				10,798				2,600			—				168,028
Other current assets		1,366			13,829				73				2,488			—				17,756
Total current assets		1,305			341,317				12,869				13,119			—				368,610
Property, plant and equipment, net		170			208,848				16,638				14,271			—				239,927
Intangible and other long-term assets, net		3,478			40,556				1				—			—				44,035
Investment in subsidiaries		184,478			36,337				321,979				—			(542,794			)	—
Intercompany accounts		1,776			15,174				—				—			(16,950			)	—
Total assets		191,207			$		642,232		$	351,487			$	27,390		$	(559,744		)	$	652,572
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings		—			57,536				—				969			—				58,505
Accounts payable		3,000			62,605				781				1,796			—				68,182
Accrued expenses		14,637			48,057				233				82			—				63,009
Total current liabilities		17,637			168,198				1,014				2,847			—				189,696
Long term-debt, less current portion		—			257,285				5,000				—			—				262,285
Other long-term liabilities		803			26,992				—				29			—				27,824
Intercompany accounts		—			—				2,452				14,498			(16,950			)	—
Total liabilities		18,440			452,475				8,466				17,374			(16,950			)	479,805
Stockholders’ equity		172,767			189,757				343,021				10,016			(542,794			)	172,767
Total liabilities and stockholders’ equity		$	191,207		$	642,232			$		351,487		$	27,390		$		(559,744	)	$		652,572

 

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