<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-2261
------------------------
SUPERIOR TELECOM INC.
(Exact name of registrant as specified in its charter)
DELAWARE 58-2248978
(State of incorporation) (IRS Employer Identification No.)
1790 BROADWAY 10019-1412
NEW YORK, NEW YORK (zip code)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code 212-757-3333
------------------------
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>
OUTSTANDING AT AUGUST 12,
CLASS 1999
- ----------------------------------- ----------------------------
<S> <C>
Common Stock, $.01 Par Value 19,669,002
</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, JUNE 30,
1998 1999
------------ ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 16,110 $ 7,772
Accounts receivable (less allowance for doubtful accounts of:
December 1998, $4,984; June 1999, $4,896)........................................ 222,568 283,006
Inventories........................................................................ 346,614 325,015
Other current assets............................................................... 44,661 45,279
------------ ------------
Total current assets........................................................... 629,953 661,072
Property, plant and equipment, net................................................... 513,433 514,683
Long-term investments and other assets............................................... 48,505 55,935
Goodwill (less accumulated amortization; December 1998, $8,893; June 1999,
$18,273)........................................................................... 694,665 790,411
------------ ------------
Total assets................................................................... $1,886,556 $ 2,022,101
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 110,737 $ 139,502
Accrued expenses................................................................... 104,107 102,111
Short-term borrowings.............................................................. 120,109 156,857
Current portion of long-term debt.................................................. 62,603 71,910
------------ ------------
Total current liabilities...................................................... 397,556 470,380
Long-term debt, less current portion................................................. 1,215,594 1,178,801
Minority interest in subsidiary...................................................... 64,571 14,771
Other long-term liabilities.......................................................... 117,455 122,935
------------ ------------
Total liabilities.............................................................. 1,795,176 1,786,887
------------ ------------
Company-obligated Mandatorily Redeemable Trust Convertible Preferred Securities of
Superior Trust I holding solely convertible debentures
(net of discount--Note 5).......................................................... -- 133,506
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 25,000,000 and 35,000,000 shares authorized, and
20,287,274 and 20,308,891 shares issued at December 1998 and June 1999,
respectively..................................................................... 203 203
Capital in excess of par value..................................................... 28,332 28,641
Accumulated other comprehensive deficit............................................ (6,081) (5,998)
Retained earnings.................................................................. 75,043 95,911
------------ ------------
97,497 118,757
Shares of common stock in treasury, at cost; December 1998, 210,875 shares; June
1999, 664,175 shares............................................................... (6,117) (17,049)
------------ ------------
Total stockholders' equity..................................................... 91,380 101,708
------------ ------------
Total liabilities and stockholders' equity................................... $1,886,556 $ 2,022,101
------------ ------------
------------ ------------
</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
JUNE 30,
----------------------
1998 1999
---------- ----------
<S> <C> <C>
Net sales................................................................................. $ 146,083 $ 514,691
Cost of goods sold........................................................................ 113,946 413,411
---------- ----------
Gross profit............................................................................ 32,137 101,280
Selling, general and administrative expenses.............................................. 7,316 36,577
Amortization of goodwill.................................................................. 439 5,077
Unusual charges........................................................................... -- 2,030
---------- ----------
Operating income........................................................................ 24,382 57,596
Interest expense.......................................................................... (2,108) (28,789)
Other income (expense), net............................................................... (278) 1,999
---------- ----------
Income before income taxes, distributions on preferred securities of Superior Trust I,
minority interest and extraordinary (loss)............................................ 21,996 30,806
Provision for income taxes................................................................ (8,614) (12,269)
---------- ----------
Income before distributions on preferred securities of Superior Trust I, minority
interest and extraordinary (loss)..................................................... 13,382 18,537
Distributions on preferred securities of Superior Trust I................................. -- (3,756)
---------- ----------
Income before minority interest and extraordinary (loss)................................ 13,382 14,781
Minority interest in earnings of subsidiaries............................................. (240) (244)
---------- ----------
Income before extraordinary (loss)...................................................... 13,142 14,537
Extraordinary (loss) on early extinguishment of debt, net................................. -- (1,617)
---------- ----------
Net income.............................................................................. $ 13,142 $ 12,920
---------- ----------
---------- ----------
Net income per share of common stock:
Basic:
Income before extraordinary (loss).................................................... $ 0.65 $ 0.73
Extraordinary (loss) on early extinguishment of debt.................................. -- (0.08)
---------- ----------
Net income per basic share of common stock.......................................... $ 0.65 $ 0.65
---------- ----------
---------- ----------
Diluted:
Income before extraordinary (loss)...................................................... $ 0.63 $ 0.70
Extraordinary (loss) on early extinguishment of debt.................................... -- (0.07)
---------- ----------
Net income per diluted share of common stock........................................ $ 0.63 $ 0.63
---------- ----------
---------- ----------
</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>
SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1999
---------- ------------
<S> <C> <C>
Net sales............................................................................... $ 275,326 $ 1,021,527
Cost of goods sold...................................................................... 216,632 820,057
---------- ------------
Gross profit.......................................................................... 58,694 201,470
Selling, general and administrative expenses............................................ 13,178 78,289
Amortization of goodwill................................................................ 866 9,314
Unusual charges......................................................................... -- 4,552
---------- ------------
Operating income...................................................................... 44,650 109,315
Interest expense........................................................................ (3,771) (58,669)
Other income (expense), net............................................................. (309) 3,043
---------- ------------
Income before income taxes, distributions on preferred securities of
Superior Trust I, minority interest and extraordinary (loss)........................ 40,570 53,689
Provision for income taxes.............................................................. (16,324) (22,681)
---------- ------------
Income before distributions on preferred securities of Superior Trust I, minority
interest and extraordinary (loss)................................................... 24,246 31,008
Distributions on preferred securities of Superior Trust I............................... -- (3,756)
---------- ------------
Income before minority interest and extraordinary (loss).............................. 24,246 27,252
Minority interest in earnings of subsidiaries........................................... (240) (2,256)
---------- ------------
Income before extraordinary (loss).................................................... 24,006 24,996
Extraordinary (loss) on early extinguishment of debt, net............................... -- (1,617)
---------- ------------
Net income............................................................................ $ 24,006 $ 23,379
---------- ------------
---------- ------------
Net income per share of common stock:
Basic:
Income before extraordinary (loss).................................................. $ 1.19 $ 1.25
Extraordinary (loss) on early extinguishment of debt................................ -- (0.08)
---------- ------------
Net income per basic share of common stock........................................ $ 1.19 $ 1.17
---------- ------------
---------- ------------
Diluted:
Income before extraordinary (loss).................................................... $ 1.15 $ 1.22
Extraordinary (loss) on early extinguishment of debt.................................. -- (0.08)
---------- ------------
Net income per diluted share of common stock...................................... $ 1.15 $ 1.14
---------- ------------
---------- ------------
</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 SIX MONTHS ENDED JUNE 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
-------------- ----------- ----------- --------------- ----------- --------- ---------
<S> <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)
Exercise of stock options..... 14,976 194
Employee stock purchase
plan........................ 6,641 115
Purchase of treasury stock.... (453,300) (10,932)
Cash dividends declared
($0.125 per share).......... (2,511)
Total comprehensive income
(Note 3).................... 83 23,379
-------------- ----- ----------- ------- ----------- --------- ---------
Balance at June 30, 1999...... 20,308,891 $ 203 $ 28,641 $ (5,998) $ 95,911 (664,175) $ (17,049)
-------------- ----- ----------- ------- ----------- --------- ---------
-------------- ----- ----------- ------- ----------- --------- ---------
<CAPTION>
TOTAL
---------
<S> <C>
Balance at December 31,
1998........................ $ 91,380
Exercise of stock options..... 194
Employee stock purchase
plan........................ 115
Purchase of treasury stock.... (10,932)
Cash dividends declared
($0.125 per share).......... (2,511)
Total comprehensive income
(Note 3).................... 23,462
---------
Balance at June 30, 1999...... $ 101,708
---------
---------
</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>
SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Income before extraordinary (loss)........................................................... $ 24,006 $ 24,996
Adjustments to reconcile income before extraordinary (loss) to net cash provided by operating
activities:
Depreciation and amortization............................................................ 5,598 27,870
Amortization of deferred financing costs................................................. 452 2,667
Deferred tax benefit..................................................................... (1,288) (668)
Foreign exchange gain.................................................................... -- (3,277)
Minority interest in earnings of subsidiary.............................................. 240 2,256
Change in assets and liabilities net of effects of businesses acquired:
Accounts receivable.................................................................... (3,354) (60,366)
Inventories............................................................................ 9,407 15,062
Other current and non current assets................................................... (279) 13,626
Accounts payable and accrued expenses.................................................. 6,396 16,596
Other, net............................................................................. 199 1,949
--------- ---------
Cash flows provided by operating activities.................................................... 41,377 40,711
--------- ---------
Cash flows from investing activities:
Acquisitions, net of cash aquired............................................................ (22,625) (908)
Capital expenditures......................................................................... (13,380) (28,043)
Net proceeds from sale of assets............................................................. 639 503
Customer loans............................................................................... -- (14,377)
Other........................................................................................ (150) (2)
--------- ---------
Cash flows used for investing activities....................................................... (35,516) (42,827)
--------- ---------
Cash flows from financing activities:
Short-term borrowings, net................................................................... -- 36,910
Borrowings (repayments) under revolving credit facilities, net............................... 3,573 (1,728)
Repayments of long-term borrowings........................................................... (703) (235,808)
Long-term borrowings......................................................................... -- 213,053
Debt issuance costs.......................................................................... -- (6,294)
Dividends on common stock.................................................................... (2,021) (2,511)
Purchase of treasury stock................................................................... -- (10,932)
Other, net................................................................................... 1,707 1,088
--------- ---------
Cash flows provided by (used for) financing activities......................................... 2,556 (6,222)
--------- ---------
Net increase (decrease) in cash and cash equivalents........................................... 8,417 (8,338)
Cash and cash equivalents at beginning of period............................................... 1,794 16,110
--------- ---------
Cash and cash equivalents at end of period..................................................... $ 10,211 $ 7,772
--------- ---------
--------- ---------
Supplemental disclosures:
Cash paid for interest, net of amount capitalized............................................ $ 3,007 $ 59,664
--------- ---------
Cash paid for income taxes, net of refunds................................................... $ 4,280 $ 7,526
--------- ---------
--------- ---------
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.
7
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 June 30, 1999, the components of inventories were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ----------
<S> <C> <C>
(IN THOUSANDS)
Raw materials...................................................... $ 47,519 $ 45,940
Work in process.................................................... 45,661 46,553
Finished goods..................................................... 254,099 224,059
------------ ----------
347,279 316,552
LIFO reserve....................................................... (665) 8,463
------------ ----------
$ 346,614 $ 325,015
------------ ----------
------------ ----------
</TABLE>
Inventories valued using the LIFO method amounted to $220.9 million and
$215.4 million at December 31, 1998 and June 30, 1999, respectively.
3. COMPREHENSIVE INCOME
The components of comprehensive income for the three and six months ended
June 30, 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Net income........................................ $ 13,142 $ 12,920 $ 24,006 $ 23,379
Foreign currency translation adjustment........... (806) 444 (566) 1,423
Additional minimum pension liability.............. -- (1,340) -- (1,340)
--------- --------- --------- ---------
Total comprehensive income........................ $ 12,336 $ 12,024 $ 23,440 $ 23,462
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
8
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 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 Essex Acquisition 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 date of
acquisition. The purchase price was allocated based upon preliminary assessments
of the fair values of assets and liabilities at the date 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 was $2.2 million and
is being amortized on a straight-line basis over 30 years.
9
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
4. ACQUISITIONS (CONTINUED)
PRO FORMA FINANCIAL DATA (UNAUDITED)
Unaudited condensed pro forma results of operations for the six months ended
June 30, 1998 and June 30, 1999, which give effect to the Essex Acquisition 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>
SIX MONTHS ENDED JUNE 30,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net sales......................................................... $ 1,085,271 $ 1,021,527
Income before income taxes, minority interest and extraordinary
(loss).......................................................... 49,918 45,153
Income before extraordinary (loss)................................ 25,837 23,446
Extraordinary (loss) on early extinguishment of debt, net......... -- (1,617)
Net income applicable to common stock............................. $ 25,837 $ 21,829
------------ ------------
------------ ------------
Net income per diluted share of common stock:
Income before extraordinary (loss).............................. $ 1.24 $ 1.14
Extraordinary (loss) on early extinguishment of debt............ -- (0.08)
------------ ------------
Net income per diluted share of common stock................ $ 1.24 $ 1.06
------------ ------------
------------ ------------
</TABLE>
5. TRUST CONVERTIBLE PREFERRED SECURITIES
On March 31, 1999, Superior Trust I (the "Trust"), a trust 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. After six months from the issuance
date, the Trust Convertible Preferred Securities are 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. The Trust
Convertible Preferred Securities are not redeemable before April 1, 2003. At any
time on and after that date, the Trust
10
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
5. TRUST CONVERTIBLE PREFERRED SECURITIES (CONTINUED)
Convertible Preferred Securities may be redeemed at a per share redemption price
of $52.55, periodically declining to $50.00 in April 2008 and thereafter. In
addition, the Company has the option to call the Trust Convertible Preferred
Securities during the one-year period commencing on March 31, 2002, at a per
share 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 $0.07 and $0.08 per diluted share for the
three and six months ended June 30, 1999, respectively. 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 loan
A and B is LIBOR plus 5.0%.
11
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
7. EARNINGS PER SHARE
The computation of basic and diluted earnings per share for the three and
six months ended June 30, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------------------
1998 1999
--------------------------------- ---------------------------------
PER PER
NET SHARE NET SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Basic earnings per common share before extraordinary (loss)... $ 13,142 20,214 $ 0.65 $ 14,537 19,734 $ 0.73
--------- ----- -----
Dilutive impact of stock options.............................. 581 771
---------
Impact of assumed conversion of preferred securities of
Superior Trust I............................................ 2,346 3,719
--------- ---------
Diluted earnings per common share before extraordinary
(loss)...................................................... $ 13,142 20,795 $ 0.63 $ 16,883 24,224 $ 0.70
--------- --------- ----- --------- --------- -----
--------- --------- ----- --------- --------- -----
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------
1998 1999
--------------------------------- ---------------------------------
PER PER
NET SHARE NET SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Basic earnings per common share before extraordinary (loss)... $ 24,006 20,213 $ 1.19 $ 24,996 19,910 $ 1.25
--------- ----- --------- -----
--------- ----- --------- -----
Dilutive impact of stock options.............................. 583 635
--------- ---------
Diluted earnings per common share before extraordinary
(loss)...................................................... $ 24,006 20,796 $ 1.15 $ 24,996 20,545 $ 1.22
--------- --------- ----- --------- --------- -----
--------- --------- ----- --------- --------- -----
</TABLE>
Superior Israel has certain stock options outstanding pursuant to stock
option plans in existence prior to its acquisition by the Company. At June 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
12
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
receives 50% of the annual retainer in either restricted common stock or
non-qualified stock options, as elected by the director. In addition, each
non-employee director may 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 June 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. This Statement, 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 six months ended June 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 have 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 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.
As of June 30, 1999, $5.8 million, $0.1 million and $1.5 million have been
incurred and paid related to employee termination and relocation costs, facility
consolidation 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 severence 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 contains
estimates of costs under current plans, which, although continually being
refined, are expected to be completed within one year of the acquisition date.
13
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 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 June 30,
1999, approximately $1.0 million has been incurred and paid and 66 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 June 30, 1999, $0.9 million has been
incurred related to employee termination and severance 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 44 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.
14
<PAGE>
SUPERIOR TELECOM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ------------------------
1998 1999 1998 1999
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Net sales:
Communications........................... $ 146,083 $ 197,823 $ 275,326 $ 391,886
OEM...................................... -- 164,941 -- 329,602
Electrical............................... -- 151,927 -- 300,039
---------- ---------- ---------- ------------
$ 146,083 $ 514,691 $ 275,326 $ 1,021,527
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
Operating income (loss):
Communications........................... $ 25,854 $ 38,463 $ 47,703 $ 72,642
OEM...................................... -- 24,573 -- 45,209
Electrical............................... -- 6,981 -- 16,692
Corporate and other...................... (1,033) (5,314) (2,187) (11,362)
Amortization of goodwill................. (439) (5,077) (866) (9,314)
Unusual charges.......................... -- (2,030) -- (4,552)
---------- ---------- ---------- ------------
$ 24,382 $ 57,596 $ 44,650 $ 109,315
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
<S> <C> <C>
Total assets:
Communications................................................. $ 407,754 $ 472,544
OEM............................................................ 316,676 321,199
Electrical..................................................... 322,622 313,415
Corporate and other............................................ 839,504 914,943
------------ ------------
$1,886,556 $ 2,022,101
------------ ------------
------------ ------------
</TABLE>
Total assets under the caption "corporate and other" include net goodwill
and deferred financing fees totaling $725.3 million and $822.3 million as of
December 31, 1998 and June 30, 1999, respectively.
12. SUBSEQUENT EVENT
On July 28, 1999, the Company announced that it had terminated its planned
acquisition of ABB Norsk Kabel due to certain contractual conditions not being
met.
15
<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 six months ended June 30, 1999 include the operating results for such
periods of Essex and Superior Israel, whereas the statements of operations for
the three and six months ended June 30, 1998 do not include the operating
results of Essex, and include the operating results of Superior Israel only for
the three months ended June 30, 1998.
RESULTS OF OPERATIONS
The following provides summary financial information for each business
segment for the three and six months ended June 30, 1998 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------- ----------------
1998 1999 1998 1999
------ ------ ------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales:
Communications Group...................................... $146.1 $197.8 $275.3 $ 391.9
OEM Group................................................. -- 165.0 -- 329.6
Electrical Group.......................................... -- 151.9 -- 300.0
------ ------ ------ --------
$146.1 $514.7 $275.3 $1,021.5
------ ------ ------ --------
------ ------ ------ --------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN MILLIONS)
Operating income (loss):
Communications Group..................................... $ 25.8 $ 38.4 $ 47.7 $ 72.6
OEM Group................................................ -- 24.6 -- 45.2
Electrical Group......................................... -- 7.0 -- 16.7
Corporate and other...................................... (1.0) (5.3) (2.2) (11.4)
Amortization of goodwill................................. (0.4) (5.1) (0.8) (9.3)
Unusual charges.......................................... -- (2.0) -- (4.5)
--------- --------- --------- ---------
$ 24.4 $ 57.6 $ 44.7 $ 109.3
--------- --------- --------- ---------
--------- --------- --------- ---------
</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 June 30, 1999 were $514.7 million,
representing an increase of $368.6 million, or 252%, as compared to net sales of
$146.1 million for the quarter ended June 30, 1998. For the six months ended
June 30, 1999, net sales were $1,021.5 million, representing an increase of
$746.2 million, or 271%, as compared to the same period in the prior year. The
comparative growth in net sales for the quarter and six months ended June 30,
1999 was largely attributable to the acquisition of Essex. The aforementioned
acquisitions have also resulted in a more diversified product offering and
customer base with the addition of the OEM (principally magnet wire) and
electrical wire business segments.
The Company's Communications Group generated net sales growth of
approximately 35% and 42% for the three and six months ended June 30, 1999,
respectively, as compared to the prior year. This increase in net sales included
(i) the incremental impact of communications wire and cable related revenues
from the Essex and Superior Israel acquisitions (ii) growth in sales of fiber
optic and datacom/premise wire and cable products and (iii) comparative net
sales increase of outside plant wire and cable products to major local telephone
exchange carrier customers (including the regional Bell operating companies, GTE
and Sprint), who continue to experience strong access line growth in their
markets. Many of these customers are implementing commercial deployment of
Digital Subscriber Line technology to upgrade their networks and expand the
availability of high-speed voice and data communications over the existing
copper wire line-based infrastructure, which is a core market for the
Communications Group.
Net sales for the Company's OEM Group (which was acquired in the Essex
Acquisition) amounted to $165.0 million and $329.6 million for the three and six
months ended June 30, 1999, respectively. Sales of magnet wire, which comprise
nearly two-thirds of the OEM Group's revenues, achieved record shipment levels
during the quarter ended June 30, 1999, 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 $151.9 million and $300.0 million for the three
and six months ended June 30, 1999, respectively. While overall demand levels
for electrical wire and cable products was generally strong during the three and
six months ended June 30, 1999, net sales were negatively impacted by lower
pricing levels resulting from extremely competitive market conditions.
Gross profit increased by $69.1 million, or 215%, during the quarter ended
June 30, 1999 as compared to the quarter ended June 30, 1998. For the six months
ended June 30, 1999, gross profit increased by
17
<PAGE>
$142.8 million, or 243%, as compared to the prior year period. The consolidated
gross margin was 19.7% for both the quarter and six months ended June 30, 1999,
as compared to 22.0% and 21.3%, respectively, for the same periods in the prior
year. The reduction in gross margin percentage for the three and six months
ended June 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 were negatively impacted by the aforementioned
competitive pricing pressures) and lower margin product sales of Superior
Israel.
Selling, general and administrative expenses increased to $36.6 million
during the quarter ended June 30, 1999 as compared to $7.3 million during the
quarter ended June 30, 1998. For the six months ended June 30, 1999, selling,
general and administrative expenses were $78.3 million as compared to $13.2
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 $15.0-$20.0 million in Essex
general and administrative expenses. For the quarter ended June 30, 1999, the
impact of such restructuring was a reduction in general and administrative
expenses of approximately $4.0 million.
Goodwill amortization increased to $5.1 million and $9.3 million during the
three and six months ended June 30, 1999, respectively, as compared to $0.4
million and $0.9 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 three and six months ended June 30, 1999, the Company incurred
unusual charges of $2.0 million ($0.05 per diluted share, after tax) and $4.6
million ($0.12 per diluted share, after tax), respectively, 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 related charges in the future.
Operating income for the quarter ended June 30, 1999 was $57.6 million
($59.6 million before unusual charges), an increase of $33.2 million ($35.2
million before unusual charges) as compared to the quarter ended June 30, 1998.
For the six months ended June 30, 1999, operating income was $109.3 million
($113.9 million before unusual charges), an increase of $64.7 million ($69.2
million before unusual charges) as compared to the same period in the prior
year. The increase in operating income was attributable to the impact of the
acquired Essex and Superior Israel operations, internal growth in sales and
operating income contribution from the Company's existing communications wire
and cable operations (including growth in communications wire and cable product
sales to major local telephone exchange carrier customers), and the
aforementioned general and administrative overhead cost reductions.
Consolidated interest expense increased from $2.1 million and $3.8 million
during the three and six months ended June 30, 1998, respectively, to $28.8
million and $58.7 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.
A charge for minority interest in earnings of subsidiaries of $0.2 million
was recorded during the quarter ended June 30, 1999. This charge represented the
49% minority interest in the net income of Superior Israel for the quarter ended
June 30, 1999. For the six months ended June 30, 1999, the Company recorded a
charge for minority interest in earnings of subsidiaries of $2.3 million, the
majority of 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).
18
<PAGE>
Net income before extraordinary loss for the quarter ended June 30, 1999 was
$14.5 million, or $0.70 per diluted share. Excluding the impact of unusual
charges, net income was $15.8 million, or $0.75 per diluted share, which
represented a comparative increase (based on per share earnings) of 19% over net
income of $13.1 million, or $0.63 per diluted share, recorded in the quarter
ended June 30, 1998. For the six months ended June 30, 1999, net income before
extraordinary loss was $25.0 million, or $1.22 per diluted share. Excluding the
impact of unusual charges, net income was $27.5 million, or $1.34 per diluted
share, which represented a comparative increase (based on per share earnings) of
17% over net income of $24.0 million, or $1.15 per diluted share, recorded in
the same period of the prior year.
During the quarter ended June 30, 1999, the Company recognized an
extraordinary charge of $1.6 million, or $0.07 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 six months ended June 30, 1999, the Company generated $40.7 million
in cash flows from operating activities consisting of $53.8 million in cash
flows generated from operations (net income plus non-cash charges) less $13.1
million in cash flows used for increases in net working capital. The increase in
net working capital was primarily the result of the December 31, 1998
acquisition of Cvalim by Superior Israel. Cash used for investing activities
during the six months ended June 30, 1999 amounted to $42.8 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 $6.2 million during the six months ended June 30, 1999
and included net borrowings of $12.4 million, offset by the payment of $2.5
million of dividends on common stock and by $10.9 million of treasury stock
purchases.
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 June 30, 1999 consisted of $1,407.6 million in debt, $133.5
million in Trust Convertible Preferred Securities and $101.7 million in total
stockholders' equity. Included in the Company's debt balance was $58.8 million
outstanding under the Company's revolving credit facility. Undrawn availability
under the revolving credit facility amounted to $166.2 million at June 30, 1999.
The Company's principal debt service commitments for the next 12 months
amount to $71.9 million and capital expenditures are expected to approximate
$70.0--$80.0 million. Management anticipates that the Company will generate
sufficient cash flows from its operating activities to meet its annual principal
debt service and capital expenditure commitments. However, should any shortfall
arise due to working capital fluctuations or other factors, excess funds
available under the Company's revolving credit facility should be sufficient to
cover such shortfall.
YEAR 2000
OVERVIEW
The year 2000 ("Y2K") 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.
19
<PAGE>
During fiscal 1998 and 1997, the Company established project teams
responsible for identifying and resolving Year 2000 issues. These efforts
include identification and review of internal operating systems and
applications, and customer projects and services, as well as discussions with
information providers and other key suppliers to the business. At this time,
based upon the efforts taken to date and those yet to be taken, 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, including assessment, improvement, testing and
implementation, has been established. The assessment phase is 99% complete and
should be completed by August 1999 upon receipt of all remaining vendor and
supplier Year 2000 readiness inquiries.
Assessment of the Year 2000 compliance of third parties with whom the
Company has material relationships is in process. The Company's material third
party relationships include the following:
(a) Raw material vendors: The Company's raw material purchases are through
third party raw material vendors. All mission critical raw material
vendors have responded favorably to the Company's Year 2000 readiness
inquiry;
(b) Equipment vendors: The response to the Year 2000 readiness inquiries
from equipment vendors, which includes all embedded chip equipment, is
at 95%;
(c) Service providers: The response to the Year 2000 readiness inquiries
from third; party service providers, which includes utilities, phone
service and all facility related services, is at 95%;
(d) Software vendors: The Company has upgraded all purchased software to
Year 2000 compliant version and is in the testing phase.
The responses received, thus far, from the Company's third party vendors and
suppliers indicate compliance on or before August 1999. The preliminary
assessment of internal IT and non-IT systems has been completed. Internal
non-compliant items have been identified and prioritization of internal
non-compliant items is in process. A system for tracking remediation has been
established and non-compliant items identified are expected to be complete by
August 1999. Based on the findings of the planning and assessment phases
completed 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 current estimate of the cost of remediation and equipment and software
replacement ranges between $7 million and $7.25 million, of which approximately
50% has been incurred to date, and is summarized below. Approximately one-half
of the remaining $3.5 million is to be paid to external parties for purchases of
new systems and equipment.
<TABLE>
<S> <C> <C>
- - Code modification and testing:..................... $ 5.95M--$6.16M
- - Personal computer, software and other upgrades:.... $ 1.05M--$1.09M
</TABLE>
Approximately 12% of the IT budget for 1998 and 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 purchased software upgrades
are costs incurred in the ordinary course of business and are, therefore,
typically capitalized costs.
20
<PAGE>
RISKS OF THE COMPANY'S YEAR 2000 ISSUES AND THE COMPANY'S CONTINGENCY PLANS
A most reasonably worst case Year 2000 scenario is not known at this time.
This determination will be made after the receipt of the remaining material
third party questionnaires. However, 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.
The Company has not completed a contingency plan, however, will, by August
31, 1999. Each manufacturing facility will incorporate Year 2000 into its
existing disaster contingency plan. The contingency plan will 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.
- ------------------------
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,
THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING, AND CHANGING ECONOMIC
CONDITIONS, INCLUDING CHANGES IN SHORT TERM INTEREST RATES AND OTHER RISK
FACTORS DETAILED IN THE COMPANY'S MOST RECENT 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.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
SPECIAL MEETING
On March 31, 1999, the Company held a Special Meeting of Stockholders
regarding (1) the issuance of Trust Convertible Preferred Securities of Superior
Trust I in the Company's acquisition of the remaining 19% of the common stock of
Essex, (2) an amendment to the Company's certificate of incorporation to
increase the number of authorized shares of preferred stock and common stock of
the Company and (3) an amendment to the Company's 1996 Stock Option Plan.
The following votes were cast with respect to Proposal 1:
<TABLE>
<S> <C>
For..................................................... 16,986,074
Against................................................. 573,040
Abstained............................................... 5,046
</TABLE>
The following votes were cast with respect to Proposal 2:
<TABLE>
<S> <C>
For..................................................... 16,986,074
Against................................................. 573,040
Abstained............................................... 5,046
</TABLE>
The following votes were cast with respect to Proposal 3:
<TABLE>
<S> <C>
For..................................................... 13,333,120
Against................................................. 4,224,301
Abstained............................................... 6,739
</TABLE>
21
<PAGE>
ANNUAL MEETING
On May 26, 1999, the Company held its Annual Meeting of Stockholders. In
addition to the election of all of the directors to serve for a one-year term,
the stockholders ratified the appointment of Arthur Andersen LLP as the
Company's independent auditors for the year ending December 31, 1999.
The following votes were cast for each of the following directors:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED
------------ --------- ---------------
<S> <C> <C> <C>
Steven S. Elbaum........................................... 16,249,909 29,633 0
Eugene P. Connell.......................................... 16,249,909 29,633 0
Robert J. Levenson......................................... 16,249,909 29,633 0
Bragi F. Schut............................................. 16,249,909 29,633 0
Charles Y.C. Tse........................................... 16,249,909 29,633 0
</TABLE>
The following votes were cast with respect to the proposal to ratify the
appointment of Arthur Andersen LLP as the Company's independent auditors:
<TABLE>
<S> <C>
For..................................................... 16,276,503
Against................................................. 2,939
Abstained............................................... 100
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27* Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
- ------------------------
* Filed herewith
22
<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.
SUPERIOR TELECOM INC.
Date: August 16, 1999 By: /s/ DAVID S. ALDRIDGE
-----------------------------------------
David S. Aldridge
CHIEF FINANCIAL OFFICER
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.$
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 7,772
<SECURITIES> 0
<RECEIVABLES> 287,902
<ALLOWANCES> 4,896
<INVENTORY> 325,015
<CURRENT-ASSETS> 661,072
<PP&E> 575,090
<DEPRECIATION> 60,407
<TOTAL-ASSETS> 2,022,101
<CURRENT-LIABILITIES> 470,380
<BONDS> 0
133,506
0
<COMMON> 203
<OTHER-SE> 101,505
<TOTAL-LIABILITY-AND-EQUITY> 2,022,101
<SALES> 1,021,527
<TOTAL-REVENUES> 1,021,527
<CGS> 820,057
<TOTAL-COSTS> 820,057
<OTHER-EXPENSES> (3,043)
<LOSS-PROVISION> 35
<INTEREST-EXPENSE> 58,669
<INCOME-PRETAX> 53,689
<INCOME-TAX> 22,681
<INCOME-CONTINUING> 24,996
<DISCONTINUED> 0
<EXTRAORDINARY> (1,617)
<CHANGES> 0
<NET-INCOME> 23,379
<EPS-BASIC> 1.17
<EPS-DILUTED> 1.14
</TABLE>
