<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
/ / 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
</TABLE>
------------------------
SUPERIOR TELECOM INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 58-2248978
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1790 BROADWAY
NEW YORK, NEW YORK 10019-1412
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code 212-757-3333
------------------------
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
<TABLE>
<CAPTION>
Class Outstanding at November 9, 1999
- ---------------------------- -------------------------------
<S> <C>
Common Stock, $.01 Par Value 19,564,855
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements have been prepared
in accordance with the requirements of Form 10-Q and, therefore, do not include
all information and footnotes required by generally accepted accounting
principles. However, in the opinion of management, all adjustments (which,
except as disclosed elsewhere herein, consist only of normal recurring accruals)
necessary for a fair presentation of the results of operations for the relevant
periods have been made. Results for the interim periods are not necessarily
indicative of the results to be expected for the year. These financial
statements should be read in conjunction with the summary of significant
accounting policies and the notes to the consolidated financial statements
included in the Company's Annual Report on Form 10-K for the eight month period
ended December 31, 1998.
2
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 16,110 $ 15,508
Accounts receivable (less allowance for doubtful accounts
of $4,984 and $4,850 at December 1998 and September
1999, respectively)..................................... 222,568 283,017
Inventories............................................... 346,614 320,830
Other current assets...................................... 44,661 34,186
---------- ----------
Total current assets.................................... 629,953 653,541
Property, plant and equipment, net.......................... 513,433 518,168
Long-term investments and other assets...................... 48,505 61,049
Goodwill (less accumulated amortization of $8,893 and
$23,247 at December 1998 and September 1999,
respectively)............................................. 694,665 789,737
---------- ----------
Total assets............................................ $1,886,556 $2,022,495
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 110,737 $ 147,591
Accrued expenses.......................................... 104,107 103,209
Short-term borrowings..................................... 120,109 159,809
Current portion of long-term debt......................... 62,603 78,071
---------- ----------
Total current liabilities............................... 397,556 488,680
Long-term debt, less current portion........................ 1,215,594 1,157,536
Minority interest in subsidiary............................. 64,571 13,117
Other long-term liabilities................................. 117,455 119,425
---------- ----------
Total liabilities....................................... 1,795,176 1,778,758
---------- ----------
Company-obligated Mandatorily Redeemable Trust Convertible
Preferred Securities of Superior Trust I holding solely
convertible debentures, net of discount (Note 5).......... -- 133,729
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 25,000,000 and 35,000,000
shares authorized, and 20,287,274 and 20,336,302 shares
issued at December 1998 and September 1999,
respectively............................................ 203 203
Capital in excess of par value............................ 28,332 29,066
Accumulated other comprehensive deficit................... (6,081) (5,912)
Retained earnings......................................... 75,043 105,661
---------- ----------
97,497 129,018
Shares of common stock in treasury, at cost; December
1998, 210,875 shares; September 1999, 794,175 shares.... (6,117) (19,010)
---------- ----------
Total stockholders' equity.............................. 91,380 110,008
---------- ----------
Total liabilities and stockholders' equity............ $1,886,556 $2,022,495
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1999
-------- --------
<S> <C> <C>
Net sales................................................... $144,004 $522,450
Cost of goods sold.......................................... 112,582 426,032
-------- --------
Gross profit.............................................. 31,422 96,418
Selling, general and administrative expenses................ 8,158 36,061
Amortization of goodwill.................................... 439 5,173
-------- --------
Operating income.......................................... 22,825 55,184
Interest expense............................................ (2,033) (29,971)
Other income (expense), net................................. (89) (2,114)
-------- --------
Income before income taxes, distributions on preferred
securities of Superior Trust I and minority interest.... 20,703 23,099
Provision for income taxes.................................. (8,164) (9,436)
-------- --------
Income before distributions on preferred securities of
Superior Trust I and minority interest.................. 12,539 13,663
Distributions on preferred securities of Superior Trust I... -- (3,763)
-------- --------
Income before minority interest........................... 12,539 9,900
Minority interest in (earnings) losses of subsidiaries...... (264) 1,057
-------- --------
Net income................................................ $ 12,275 $ 10,957
======== ========
Net income per share of common stock:
Basic..................................................... $ 0.61 $ 0.56
======== ========
Diluted................................................... $ 0.59 $ 0.54
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1999
-------- ----------
<S> <C> <C>
Net sales................................................... $419,330 $1,543,977
Cost of goods sold.......................................... 329,214 1,246,089
-------- ----------
Gross profit.............................................. 90,116 297,888
Selling, general and administrative expenses................ 21,336 114,350
Amortization of goodwill.................................... 1,305 14,487
Unusual charges............................................. -- 4,552
-------- ----------
Operating income.......................................... 67,475 164,499
Interest expense............................................ (5,804) (88,640)
Other income (expense), net................................. (398) 929
-------- ----------
Income before income taxes, distributions on preferred
securities of Superior Trust I, minority interest and
extraordinary (loss).................................... 61,273 76,788
Provision for income taxes.................................. (24,488) (32,117)
-------- ----------
Income before distributions on preferred securities of
Superior Trust I, minority interest and extraordinary
(loss).................................................. 36,785 44,671
Distributions on preferred securities of Superior Trust I... -- (7,519)
-------- ----------
Income before minority interest and extraordinary
(loss).................................................. 36,785 37,152
Minority interest in earnings of subsidiaries............... (504) (1,199)
-------- ----------
Income before extraordinary (loss)........................ 36,281 35,953
Extraordinary (loss) on early extinguishment of debt, net... -- (1,617)
-------- ----------
Net income................................................ $ 36,281 $ 34,336
======== ==========
Net income per share of common stock:
Basic:
Income before extraordinary (loss)...................... $ 1.80 $ 1.81
Extraordinary (loss) on early extinguishment of debt.... -- (0.08)
-------- ----------
Net income per basic share of common stock............ !1.80 $ 1.73
======== ==========
Diluted:
Income before extraordinary (loss)...................... $ 1.75 $ 1.76
Extraordinary (loss) on early extinguishment of debt.... -- (0.08)
-------- ----------
Net income per diluted share of common stock.......... $ 1.75 $ 1.68
======== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK CAPITAL IN OTHER TREASURY STOCK
--------------------- EXCESS COMPREHENSIVE RETAINED --------------------
SHARES AMOUNT OF PAR DEFICIT EARNINGS SHARES AMOUNT TOTAL
---------- -------- ---------- ------------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998.... 20,287,274 $203 $28,332 $(6,081) $ 75,043 (210,875) $ (6,117) $ 91,380
Exercise of stock options....... 18,101 231 231
Employee stock purchase plan.... 30,927 503 503
Purchase of treasury stock...... (583,300) (12,893) (12,893)
Cash dividends declared ($0.1875
per share).................... (3,718) (3,718)
Total comprehensive income (Note
3)............................ 169 34,336 34,505
---------- ---- ------- ------- -------- -------- --------- --------
Balance at September 30, 1999... 20,336,302 $203 $29,066 $(5,912) $105,661 (794,175) $ (19,010) $110,008
========== ==== ======= ======= ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1999
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Income before extraordinary (loss)........................ $ 36,281 $ 35,953
Adjustments to reconcile income before extraordinary
(loss) to net cash provided by operating activities:
Depreciation and amortization........................... 8,724 42,916
Amortization of deferred financing costs................ 463 4,081
Provision for deferred taxes............................ (1,726) 3,468
Foreign exchange gain................................... -- (1,412)
Minority interest in earnings of subsidiary............. 504 1,199
Changes in assets and liabilities net of effects of
businesses acquired:
Accounts receivable................................... 4,279 (62,255)
Inventories........................................... 844 18,007
Other current and non current assets.................. (1,700) 20,587
Accounts payable and accrued expenses................. 9,227 21,329
Other, net............................................ 759 1,573
-------- ---------
Cash flows provided by operating activities................. 57,655 85,446
-------- ---------
Cash flows from investing activities:
Acquisitions, net of cash aquired......................... (22,625) (908)
Capital expenditures...................................... (20,555) (46,418)
Net proceeds from sale of assets.......................... 2,464 2,741
Customer loans............................................ -- (21,473)
Other..................................................... (351) --
-------- ---------
Cash flows used for investing activities.................... (41,067) (66,058)
-------- ---------
Cash flows from financing activities:
Short-term borrowings, net................................ -- 39,700
Borrowings (repayments) under revolving credit facilities,
net..................................................... (1,453) (11,281)
Repayments of long-term borrowings........................ (737) (247,636)
Long-term borrowings...................................... -- 219,455
Debt issuance costs....................................... -- (6,294)
Dividends on common stock................................. (3,031) (3,718)
Purchase of treasury stock................................ (5,349) (12,893)
Other, net................................................ 3,086 2,677
-------- ---------
Cash flows used for financing activities.................... (7,484) (19,990)
-------- ---------
Net increase (decrease) in cash and cash equivalents........ 9,104 (602)
Cash and cash equivalents at beginning of period............ 1,794 16,110
-------- ---------
Cash and cash equivalents at end of period.................. $ 10,898 $ 15,508
======== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1999
-------- --------
<S> <C> <C>
Supplemental disclosures:
Cash paid for interest, net of amount capitalized......... $ 4,614 $ 79,453
======== ========
Cash paid (received) for income taxes, net of refunds..... $ 26,225 $ (1,290)
======== ========
Non-cash investing and financing activities:
Acquisition of Essex minority interest:
Net assets acquired including $82.2 million of
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
========
Acquisition of businesses:
Assets, net of cash acquired.............................. $ 83,636
Liabilities assumed....................................... (44,728)
Minority interest in subsidiaries......................... (16,283)
--------
Net cash paid............................................. $ 22,625
========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
8
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Superior TeleCom Inc. and its majority owned
subsidiaries ("Superior" or the "Company"). Certain reclassifications have been
made to the prior period presentation to conform to the current period
presentation.
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. An
eight month transition period of May 1, 1998 through December 31, 1998 preceded
the start of this current fiscal year. The interim financial statements included
herein are presented on a December 31 fiscal year basis.
2. INVENTORIES
At December 31, 1998 and September 30, 1999, the components of inventories
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials....................................... $ 47,519 $ 46,979
Work in process..................................... 45,661 50,989
Finished goods...................................... 254,099 234,735
-------- --------
347,279 332,703
LIFO reserve........................................ (665) (11,873)
-------- --------
$346,614 $320,830
======== ========
</TABLE>
During the quarter ended September 30, 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 quarter ended September 30, 1999 resulted in net income being
$0.6 million or ($0.03 per diluted share) greater than net income under the LIFO
method. The impact on previously reported earnings in the prior quarters of 1999
was not material.
Inventories valued using the LIFO method amounted to $220.9 million and
$178.6 million at December 31, 1998 and September 30, 1999, respectively.
3. COMPREHENSIVE INCOME
The components of comprehensive income for the three and nine months ended
September 30, 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
1998 1999 1998 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income.......................................... $12,275 $10,957 $36,281 $34,336
Foreign currency translation adjustment............. (1,657) 86 (2,223) 1,509
Additional minimum pension liability................ -- -- -- (1,340)
------- ------- ------- -------
Total comprehensive income.......................... $10,618 $11,043 $34,058 $34,505
======= ======= ======= =======
</TABLE>
9
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
4. ACQUISITIONS
ESSEX ACQUISITION
On November 27, 1998, the Company completed a cash tender offer for 81% of
the outstanding common stock of Essex International Inc. ("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 subordinated note
facility (the "Credit Facilities"). Proceeds from the Credit Facilities were
used to (i) pay the cash portion of the purchase price, (ii) repay approximately
$275 million of 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 Mandatorily Redeemable Trust Convertible Preferred Securities
of Superior Trust I holding solely convertible debentures of the Company (see
Note 5).
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 preliminary assessments
of the fair values of assets and liabilities at the dates of acquisition, which
include accruals for planned consolidations, overhead rationalization and loss
contingencies. The allocation and related accruals are subject to adjustment.
The excess of the purchase price over the net assets acquired is being amortized
on a straight-line basis over 40 years.
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 Cvalim 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").
The acquisitions of Cables of Zion and Cvalim were accounted for using the
purchase method and, accordingly, the results of operations of Cables of Zion
and Cvalim 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 the acquisitions and is subject to adjustment. The
excess of the purchase price over the net assets acquired is being amortized on
a straight-line basis over 30 years.
10
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
4. ACQUISITIONS (CONTINUED)
PRO FORMA FINANCIAL DATA
Unaudited condensed pro forma results of operations for the nine months
ended September 30, 1998 and September 30, 1999, which give effect to the
acquisition of Essex and the acquisitions of Cables of Zion and Cvalim as if the
transactions had occurred on January 1, 1998, are presented below. 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 occurred if the transactions
had taken place at the beginning of the period presented or of the future
results of operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
1998 1999
------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net sales............................................. $1,669,377 $1,543,977
Income before income taxes, minority interest and
extraordinary (loss)................................ 76,053 64,491
Income before extraordinary (loss).................... 38,931 34,407
Extraordinary (loss) on early extinguishment of debt,
net................................................. -- (1,617)
---------- ----------
Net income applicable to common stock................. $ 38,931 $ 32,790
========== ==========
Net income (loss) per diluted share of common stock:
Income before extraordinary (loss).................. $ 1.87 $ 1.68
Extraordinary (loss) on early extinguishment of
debt.............................................. -- (.08)
---------- ----------
Net income per diluted share of common stock...... $ 1.87 $ 1.60
========== ==========
</TABLE>
5. 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 1.1161 shares of the Company's common stock for each
Trust Convertible Preferred Security (equivalent to a conversion price of $44.80
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 Preferred 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 at a per share redemption price
of $52.55, periodically
11
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
5. TRUST CONVERTIBLE PREFERRED SECURITIES (CONTINUED)
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 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 of the Company's common
stock. The Company has reserved 3,719,211 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.
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.
6. EXTRAORDINARY ITEM
On May 26, 1999, the Company refinanced its $200 million senior subordinated
notes. In connection with the refinancing, 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 nine months
ended September 30, 1999. 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%. Interest on the term loan B for the first 270 days ranges from LIBOR plus
3.625% to LIBOR plus 4.0%. After the nine month anniversary of the borrowing
date through maturity, interest on term loans A and B is LIBOR plus 5.0%.
12
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
7. EARNINGS PER SHARE
The computation of basic and diluted earnings per share for the three and
nine months ended September 30, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------
1998 1999
------------------------------ ------------------------------
PER PER
NET SHARE NET SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per common share.................. $12,275 20,086 $0.61 $10,957 19,650 $ .56
------- ----- =====
Dilutive impact of stock options................. 590 676
------ ------
Diluted earnings per common share................ $12,275 20,676 $0.59 $10,957 20,326 $ .54
======= ====== ===== ======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------
1998 1999
------------------------------ ------------------------------
PER PER
NET SHARE NET SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per common share before
extraordinary (loss)........................... $36,281 20,170 $1.80 $35,953 19,823 $1.81
------- ===== ======= =====
Dilutive impact of stock options................. 586 649
------ ------
Diluted earnings per common share before
extraordinary (loss)........................... $36,281 20,756 $1.75 $35,953 20,472 $1.76
------- ------ ----- ------- ------ -----
</TABLE>
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 for the three and nine months ended September 30, 1999.
Superior Israel has certain stock options outstanding pursuant to stock
option plans in existence prior to its acquisition by the Company. At September
30, 1999, the dilutive impact of such stock options to the Company's earnings
per share calculation was immaterial.
8. STOCKHOLDERS' EQUITY
Pursuant to a stockholders' meeting on March 31, 1999, the Company increased
the number of authorized shares of common stock from 25.0 million shares to
35.0 million shares and increased the number of authorized shares of preferred
stock from one million to five million shares. In addition, the Company
increased the number of shares of common stock available for issuance under the
Superior TeleCom Inc. 1996 Stock Option Plan from 1,953,125 shares to 3,078,125
shares.
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
13
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
elected by the director. In addition, each non-employee director may elect to
receive all or a portion of the remaining amount of the annual retainer (in
excess of 50% 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.
9. NEW ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In July 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 statement 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.
10. RESTRUCTURING AND UNUSUAL CHARGES
ESSEX
During the nine months ended September 30, 1999, the Company recorded
unusual charges of $4.6 million, which were primarily associated with the
evaluation of a management information system at Essex. As of June 30, 1999, all
of these charges had been paid, and the project has been discontinued.
Since the completion of the Essex Aquisition, 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 costs, $11.9 million of facility consolidation costs, $4.4 million of
management information system project termination costs, and $1.6 million of
other miscellaneous costs. During the quarter ended September 30, 1999, the
Company revised its estimate and, as a result, increased the provision for
employee termination and relocation costs by $5.7 million. As of September 30,
1999, $13.6 million, $0.1 million, $3.1 million and $1.5 million have been
incurred and paid related to employee termination and relocation costs, facility
consolidation costs, management information system project costs and other
miscellaneous costs, respectively. The provision for employee termination and
relocation costs was primarily associated with selling, general and
administrative functions within Essex. The provision for facility consolidation
costs included both manufacturing and distribution facility rationalization and
the related costs associated with the severance of approximately 140 employees.
The aforementioned liabilities were established in accordance with the
provision of the Emerging Issues Task Force ("EITF") No. 95-3 "Recognition of
Liabilities in Connection with a Purchase Business Combination," and contain
estimates of costs under current plans, which, although continually being
refined, are expected to be completed within one year of the acquisition date.
14
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
10. RESTRUCTURING AND UNUSUAL CHARGES (CONTINUED)
In addition to the amounts discussed above, the Company wrote off $10.4
million of previously capitalized costs related to a discontinued management
information system project at Essex. These costs have been reflected as an
increase to goodwill.
SUPERIOR ISRAEL
During 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. Management
expects to complete all parts of the restructuring plan during the year 2000.
The restructuring actions will result in the elimination of approximately 200
positions, most of which are manufacturing related employees. As of September
30, 1999, approximately $1.7 million has been incurred and paid and 112
positions have been eliminated related to the restructuring plan.
CVALIM
On December 31, 1998, Superior Israel purchased Cvalim. Included in the
allocated purchase price was a $3.5 million provision for the consolidation and
integration of Cvalim's manufacturing and corporate functions. The provision
included $2.6 million of employee termination and severance costs and $0.9
million of other miscellaneous costs. As of September 30, 1999, $1.3 million has
been incurred related to employee termination and severance costs and $0.7
million has been incurred related to other miscellaneous costs. The provision
for employee termination and severance costs was primarily associated with
manufacturing, selling, general and administrative functions within Cvalim, and
included the elimination of approximately 46 positions.
The liability was established in accordance with the provision of the EITF
No. 95-3 and contains estimates of costs under the current plan, which although
continually being refined, is expected to be completed within one year of the
acquisition date.
11. BUSINESS SEGMENTS
The Company's reportable segments are strategic businesses that manufacture
and sell different lines of wire and cable products to different customer bases.
These segments are communications, original equipment manufacturer ("OEM") and
electrical. The communications segment includes (i) outside plant ("OSP") 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 ("LANs"), Internet
connectivity and other applications. The communications segment includes the
Company's North American and Israeli operations. The OEM segment is involved
principally in the production and sale of magnet and automotive wire products.
The electrical segment includes the production and sale of building and
industrial wire and cable products.
The accounting policies of these businesses are the same as those described
in the summary of significant accounting policies included in Note 2 of the
Company's Annual Report on Form 10-K for the eight month transition period ended
December 31, 1998. The Company evaluates segment performance based on a number
of factors, with operating income and return on net assets being the most
critical factors. Intersegment sales are generally recorded at cost, and are not
significant.
15
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
11. BUSINESS SEGMENTS (CONTINUED)
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 condensed consolidated statements of operations and balance
sheets.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ------------------------
1998 1999 1998 1999
-------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales:
Communications.............................. $144,044 $182,743 $419,330 $ 574,629
OEM......................................... -- 169,849 -- 499,451
Electrical.................................. -- 169,858 -- 469,897
-------- -------- -------- ----------
$144,044 $522,450 $419,330 $1,543,977
======== ======== ======== ==========
Operating income (loss):
Communications.............................. $ 24,530 $ 32,029 $ 72,233 $ 104,671
OEM......................................... -- 22,406 -- 67,615
Electrical.................................. -- 9,718 -- 26,410
Corporate and other......................... (1,266) (3,796) (3,453) (15,158)
Amortization of goodwill.................... (439) (5,173) (1,305) (14,487)
Unusual charges............................. -- -- -- (4,552)
-------- -------- -------- ----------
$ 22,825 $ 55,184 $ 67,475 $ 164,499
======== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
<S> <C> <C>
Total assets:
Communications............................ $ 407,754 $ 466,578
OEM....................................... 316,676 319,746
Electrical................................ 322,622 327,426
Corporate and other....................... 839,504 908,745
---------- ----------
$1,886,556 $2,022,495
========== ==========
</TABLE>
Total assets under the caption "Corporate and other" include net goodwill
and deferred financing fees totaling $725.3 million and $820.2 million as of
December 31, 1998 and September 30, 1999, respectively.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Superior TeleCom Inc. ("Superior" or the "Company") manufactures a broad
portfolio of wire and cable products. The Company's operations are conducted
through three operating groups covering the following primary industry segments:
(i) communications; (ii) original equipment manufacturer ("OEM"); and
(iii) electrical. The communications segment includes communications wire and
cable products sold to telephone companies, distributors and systems
integrators, principally in North America. In addition, the Company (through its
51% owned subsidiary, Superior Cables Limited) manufactures a broad range of
wire and cable products in Israel, including communications cable, power cable
and other industrial and electronic wire and cable products. The OEM segment
includes magnet wire and insulation materials for motors, transformers and
electrical controls sold primarily to OEMs, as well as automotive and specialty
wiring assemblies for automobiles and trucks. The electrical segment includes
building and industrial wire for applications in commercial and residential
construction and industrial facilities.
Prior to the acquisitions of Essex and Superior Cables Limited ("Superior
Israel") (see Note 4 to the condensed 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 segment 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 December 31, 1998
acquisition of its major Israeli competitor, Cvalim, resulted in the addition to
the Company's operating results of its Israeli operations.
The aforementioned 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. Accordingly, the statements of operations for the
three and nine months ended September 30, 1999 include the operating results of
Essex and Superior Israel for such periods, whereas the statements of operations
for the three and nine months ended September 30, 1998 do not include the
operating results of Essex, and include the operating results of Superior Israel
only for the six months ended September 30, 1998.
RESULTS OF OPERATIONS
The following provides summary financial information for each business
segment for the three and nine months ended September 30, 1998 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1999 1998 1999
-------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales:
Communications Group................ $144.0 $182.7 $419.3 $ 574.6
OEM Group........................... -- 169.9 -- 499.5
Electrical Group.................... -- 169.9 -- 469.9
------ ------ ------ --------
$144.0 $522.5 $419.3 $1,544.0
====== ====== ====== ========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1999 1998 1999
-------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Operating income (loss):
Communications Group.................... $24.5 $32.1 $72.2 $104.7
OEM Group............................... -- 22.4 -- 67.6
Electrical Group........................ -- 9.7 -- 26.4
Corporate and other..................... (1.3) (3.8) (3.4) (15.1)
Amortization of goodwill................ (0.4) (5.2) (1.3) (14.5)
Unusual charges......................... -- -- -- (4.6)
----- ----- ----- ------
$22.8 $55.2 $67.5 $164.5
===== ===== ===== ======
</TABLE>
Copper is one of the principal raw materials used in manufacturing the
Company's wire and cable products. Fluctuations in the price of copper affect
per unit product pricing and related revenues. However, the cost of copper has
not had a material impact on profitability due to the ability of the Company, in
most cases, to adjust prices billed for its products in order to match the
copper cost component of its inventory shipped.
Net sales for the quarter ended September 30, 1999 were $522.5 million,
representing an increase of $378.5 million, or 263%, as compared to net sales of
$144.0 million for the quarter ended September 30, 1998. For the nine months
ended September 30, 1999, net sales were $1,544.0 million, representing an
increase of $1,124.7 million, or 268%, as compared to the same period in the
prior year. The comparative growth in net sales for the quarter and nine months
ended September 30, 1999 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.
The Company's Communications Group generated net sales growth of
approximately 27% and 37% for the three and nine months ended September 30,
1999, respectively, as compared to the prior year. 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 revenue growth was a reduction of sales in outside plant wire and
cable products to certain of the regional Bell operating companies ("RBOCs") and
other major telephone exchange carrier customers during the three month period
ended September 30, 1999. The Company believes this slowdown is related
principally to a reduction in customer inventory levels and current year capital
budget constraints enacted by certain customers and associated with pending or
recently completed mergers among certain of the RBOCs and other major telephone
exchange carrier customers. The Company believes this slowdown in outside plant
wire and cable sales is likely to continue through the remainder of 1999.
Net sales for the Company's OEM Group (which was acquired in the Essex
Acquisition) amounted to $169.9 million and $499.5 million for the three and
nine months ended September 30, 1999, respectively. Sales of magnet wire, which
comprise nearly two-thirds of the OEM Group's revenues, have reached record
shipment levels in the current year reflecting strong year over year demand from
major OEM customers.
Net sales for the Company's Electrical Group (which was also acquired in the
Essex Acquisition) amounted to $169.9 million and $469.9 million for the three
and nine months ended September 30, 1999, respectively. While overall demand
levels for electrical wire and cable products have been generally strong during
the current year, net sales have been impacted by lower pricing levels resulting
from competitive market conditions. Copper adjusted pricing reached its lowest
level in June and July of 1999; however,
18
<PAGE>
since such time pricing has strengthened resulting in improving operating
margins during the latter part of the September 1999 quarter as compared to the
previous quarter ended June 30, 1999.
Gross profit increased by $65.0 million, or 207%, during the quarter ended
September 30, 1999 as compared to the quarter ended September 30, 1998. For the
nine months ended September 30, 1999, gross profit increased by $207.8 million,
or 231%, as compared to the prior year period. The consolidated gross margin was
18.5% and 19.3% for the quarter and nine months ended September 30, 1999,
respectively, as compared to 21.8% and 21.5%, respectively, for the same periods
in the prior year. The reduction in gross margin percentage for the three and
nine months ended September 30, 1999 was attributable to a 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
competitive pricing pressures) and lower margin product sales of Superior
Israel.
Selling, general and administrative expenses increased to $36.1 million
during the quarter ended September 30, 1999 as compared to $8.2 million during
the quarter ended September 30, 1998. For the nine months ended September 30,
1999, selling, general and administrative expenses were $114.4 million as
compared to $21.3 million for the same period in the prior year. These increases
were directly related to incremental expenses associated with the acquired Essex
and Superior Israel operations. 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 is
expected to result in annual reductions of approximately $20.0 million in
corporate and other general and administrative expenses. For the quarter ended
September 30, 1999, the impact of such restructuring was a reduction in general
and administrative expenses of approximately $4-$5 million.
Goodwill amortization increased to $5.2 million and $14.5 million during the
three and nine months ended September 30, 1999, respectively, as compared to
$0.4 million and $1.3 million for the same periods in the prior year,
respectively. The comparative increases in goodwill amortization were primarily
associated with the Essex Acquisition.
During the nine months ended September 30, 1999, the Company incurred
unusual charges of $4.6 million ($.12 per diluted share, after tax), which were
primarily associated with evaluation of management information systems at Essex.
This project has been discontinued and the Company does not anticipate to incur
any more future charges related to this project.
Operating income for the quarter ended September 30, 1999 was $55.2 million,
an increase of $32.4 million as compared to the quarter ended September 30,
1998. For the nine months ended September 30, 1999, operating income was $164.5
million ($169.1 million before unusual charges), an increase of $97.0 million
($101.6 million before unusual charges) as compared to the same period in the
prior year. The increase in operating income was primarily attributable to the
impact of the acquired Essex and Superior Israel operations, and the
aforementioned general and administrative overhead cost reductions.
Consolidated interest expense increased from $2.0 million and $5.8 million
during the three and nine months ended September 30, 1998, respectively, to
$30.0 million and $88.6 million during the same periods in 1999, respectively.
These comparative increases were directly attributable to acquisition-related
debt associated with the acquisition of Essex and, to a lesser degree, Superior
Israel.
Other expense for the three months ended September 30, 1999 of $2.1 million
related principally to foreign currency conversion associated with certain debt
of Superior Israel which is linked to nonfunctional (principally euro-based)
currency.
A benefit for minority interest in loss of subsidiaries of $1.1 million was
recorded during the quarter ended September 30, 1999. This benefit represented
the 49% minority interest in the net loss of Superior Israel for the quarter
ended September 30, 1999. For the nine months ended September 30, 1999, the
Company recorded a charge for minority interest in earnings of subsidiaries of
$1.2 million, the majority of
19
<PAGE>
which related to the 19% minority interest in the net income of Essex for the
period January 1 through March 31, 1999 (the date on which the Company acquired
the remaining 19% minority equity ownership interest of Essex).
Net income for the quarter ended September 30, 1999 was $11.0 million, or
$.54 per diluted share, as compared to net income of $12.3 million, or $.59 per
diluted share, recorded in the quarter ended September 30, 1998. For the nine
months ended September 30, 1999, net income before extraordinary loss was $36.0
million, or $1.76 per diluted share. Excluding the impact of unusual charges,
net income for the September 30, 1999 period was $38.5 million, or $1.88 per
diluted share, which represents a comparative increase (based on per share
earnings) of 8% over net income of $36.3 million, or $1.75 per diluted share,
recorded in the same period of the prior year.
During the nine months ended September 30, 1999, the Company recognized an
extraordinary charge of $1.6 million, or $.08 per diluted share (after the
impact of income taxes), in connection with refinancing the Company's $200.0
million senior subordinated notes.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1999, the Company generated $85.4
million in cash flows from operating activities consisting of $86.2 million in
cash flows generated from operations (net income plus non-cash charges) less
$0.8 million in cash flows used for increases in net working capital. Cash used
for investing activities during the nine months ended September 30, 1999
amounted to $65.7 million and consisted principally of capital expenditures and
pre-arranged long-term loans made to one of Superior Israel's principal
customers. Cash used for financing activities amounted to $20.0 million during
the nine months ended September 30, 1999 with the major components consisting of
$3.7 million in common stock dividend payments, $12.9 million of treasury stock
purchases and $6.3 million of debt issuance cost. Net borrowings amounted to
$0.2 million for the September 30, 1999 nine month period.
As discussed in Note 4 to the condensed consolidated financial statements,
on March 31, 1999, the Company completed the acquisition of the remaining 19%
common share ownership of Essex through the issuance of $133.3 million ($166.7
million face amount) of Trust Convertible Preferred Securities. The Company's
capital structure at September 30, 1999 consisted of $1,395.4 million in debt,
$133.7 million in Trust Convertible Preferred Securities and $110.0 million in
total stockholders' equity. Included in the Company's debt balance was $47.0
million outstanding under the Company's $225.0 million revolving credit
facility. Undrawn availability under the revolving credit facility amounted to
$172.4 million at September 30, 1999.
The Company's principal debt service commitments for the next 12 months
amount to approximately $72 million and capital expenditures are expected to
approximate $70--$80 million. Management anticipates cash flows from operating
activities along with funds available under its revolving credit facility will
provide sufficient liquidity to meet these annual principal debt service and
capital expenditure commitments.
20
<PAGE>
YEAR 2000 OVERVIEW
The Year 2000 problem is the result of computer programs having been written
using two digits (rather than four) to define the applicable year, thus not
properly recognizing dates after December 31, 1999. The six-digit date (YYMMDD)
has become the standard for date representations and is embedded in a multitude
of computer programs and computer chips. Information Technology (IT) hardware,
"embedded" technology, such as microprocessors, or software that is
date-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000, which could result in miscalculations or system and mechanical
failures. The Company does not manufacture or sell products with embedded
technology.
During fiscal 1998 and 1997, the Company established project teams
responsible for identifying and resolving Year 2000 issues. Included in the
teams' assessment were the readiness of service providers, major vendors and
internal operating systems and applications. Based upon the efforts taken to
date, the Company does not expect any serious disruptions in its business
operations and, therefore, does not anticipate any material negative effect upon
its revenues or earnings as a result of the Year 2000 issue. Remediation costs
for problems identified thus far are not expected to be material to the
Company's consolidated financial position, liquidity or results of operations.
The Company has established a timetable for resolving Year 2000 issues so as not
to interrupt ongoing operations.
THE COMPANY'S STATE OF READINESS
The Year 2000 project plan included assessment, remediation, testing and
implementation. Assessment of the Year 2000 compliance of third parties with
whom the Company has material relationships is complete. Inquiries were sent to
the following:
(a) Raw material vendors: all mission critical raw material vendors have
responded to the Year 2000 readiness inquiries;
(b) Equipment vendors: all equipment vendors, including all embedded chip
equipment vendors, have responded to the Year 2000 readiness inquiries;
(c) Service providers: all third party service providers, including
utilities, phone service and all other facility related service
providers, have responded to the Year 2000 readiness inquiries;
(d) Software vendors: all software vendors have responded to the Year 2000
readiness inquiries.
Based upon the responses received from the Company's software vendors, the
Company has upgraded all purchased software to Year 2000 compliant versions. The
software has been installed and is in production. All other third party vendors
and service providers indicate compliance.
The assessment of internal operating systems and applications (IT and
non-IT) is complete. Non-compliant items have been remediated. Based on the
assessment, remediation and testing performed to date, the Company does not
believe independent verification or validation processes will be necessary.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
The Year 2000 project cost is estimated to be between $5.0 million and
$5.6 million, and is summarized below. Of that amount, approximately 90% has
been incurred to date. The remaining project cost will be incurred for
additional testing and implementation.
<TABLE>
<S> <C>
- - Code modification and testing: $ 4.1M--$4.6M
- - Personal computer, software and other upgrades $ 0.9M--$1.0M
</TABLE>
Approximately 12% of the IT budget for 1999 has been allocated for code
modification. Such costs are funded through cash flows from operations and are
expensed as incurred. The personal computer and
21
<PAGE>
purchased software upgrades are costs incurred in the ordinary course of
business and are, therefore, typically capitalized costs.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES AND THE COMPANY'S CONTINGENCY PLANS
While a most reasonably likely worst case Year 2000 scenario is not known at
this time, a contingency plan is being developed to ensure that: (i) adequate
levels of inventory will be on hand to mitigate the impact of any potential
short-term disruptions in production; (ii) adequate supply of raw materials will
be available from alternate sources; and (iii) the necessary backup measures for
computer processing are identified. The contingency plan will be in place by
year-end. The shipment of product to customers is expected to continue with
minimal interruption and no material loss of revenues is anticipated.
The Year 2000 project has had minimal impact on the schedule of other major
IT projects.
- ------------------------
EXCEPT FOR THE HISTORICAL INFORMATION HEREIN, THE MATTERS DISCUSSED IN THIS
FORM 10-Q 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 CURRENCY FLUCTUATIONS, AND OTHER RISK FACTORS DETAILED IN THE
COMPANY'S MOST RECENT ANNUAL REPORT AND OTHER FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk primarily relates to interest rates on
long-term debt. There have been no material changes in market risk since
December 31, 1998.
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(A) EXHIBITS
<C> <S> <C>
18* Letter re change in accounting principles
27* Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
</TABLE>
- ------------------------
* Filed herewith
23
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
<TABLE>
<S> <C> <C>
SUPERIOR TELECOM INC.
Date: November 15, 1999 By: /s/ DAVID S. ALDRIDGE
-----------------------------------------
David S. Aldridge
CHIEF FINANCIAL OFFICER
</TABLE>
24
<PAGE>
Exhibit 18
Superior TeleCom Inc.
Re: Form 10-Q Report for the Quarter ended September 30, 1999
Ladies and Gentlemen:
This letter is written to meet the requirements of Regulation S-K calling for
a letter from a registrant's independent accountants whenever there has been
a change in accounting principle or practice.
We have been informed that, as of July 1, 1999, the Company changed from the
LIFO method of accounting for the communications segment of the acquired
operations of Essex International Inc. (""Essex'') to the FIFO method.
According to the management of the Company, this change was made to conform
the operational and accounting policies of this business segment. Such
conformity was desired due to the Company's integration of the manufacturing
operations of the previously separate Essex communications business into
Superior TeleCom's existing communications operations.
A complete coordinated set of financial and reporting standards for
determining the preferability of accounting principles among acceptable
alternative principles has not been established by the accounting profession.
Thus, we cannot make an objective determination of whether the change in
accounting described in the preceding paragraph is to a preferable method.
However, we have reviewed the pertinent factors, including those related to
financial reporting, in this particular case on a subjective basis, and our
opinion stated below is based on our determination made in this manner.
We are of the opinion that the Company's change in method of accounting is to
an acceptable alternative method of accounting, which, based upon the reasons
stated for the change and our discussions with you, is also preferable under
the circumstances in this particular case. In arriving at this opinion, we
have relied on the business judgment and business planning of your management.
We have not audited the application of this change to the financial
statements of any period subsequent to December 31, 1998. Further, we have
not examined and do not express any opinion with respect to your financial
statements for the nine-months ended September 30, 1999.
Very truly yours,
/s/ Arthur Andersen
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<S> <C>
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<PERIOD-END> SEP-30-1999
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133,729
0
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