UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
-------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 1-10211
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ESSEX INTERNATIONAL INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3496934
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 WALL STREET, FORT WAYNE, INDIANA 46802
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 461-4000
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None
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[X ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:<PAGE>
Number of Shares
Outstanding
Common Stock As of September 30,
1998
------------- -------------------
$.01 Par Value 27,767,939
2<PAGE>
ESSEX INTERNATIONAL INC.
FORM 10-Q INDEX
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . 3
Consolidated Statements of Income . . . . . . . . . . 5
Consolidated Statements of Cash Flows . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 24
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ESSEX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1998 December 31,
Dollars In Thousands, Except Per Share Data (Unaudited) 1997
--------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . $ 7,626 $ 2,843
Accounts receivable (net of allowance of
$5,084 and $5,583) . . . . . . . . . . . . . . . . . 204,871 191,737
Inventories . . . . . . . . . . . . . . . . . . . . . 268,377 233,020
Other current assets . . . . . . . . . . . . . . . . . 13,162 15,152
-------- --------
Total current assets . . . . . . . . . . . . . 494,036 442,752
Property, plant and equipment, (net of accumulated
depreciation of $157,660 and $136,365) . . . . . . . 298,377 287,832
Excess of cost over net assets acquired (net of
accumulated amortization of $24,791 and $21,610) . . 130,550 123,222
Other intangible assets and deferred costs (net of
accumulated amortization of $808 and $4,103) . . . . 1,427 5,478
Other assets . . . . . . . . . . . . . . . . . . . . . 4,934 4,468
-------- --------
$929,324 $863,752
======== ========
See Notes to Consolidated Financial Statements
3<PAGE>
ESSEX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS - Continued
September 30,
1998 December 31,
Dollars In Thousands, Except Per Share Data (Unaudited) 1997
--------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks . . . . . . . . . . . . . . . . $157,730 $ 34,752
Current portion of long-term debt . . . . . . . . . . 2,500 2,500
Accounts payable . . . . . . . . . . . . . . . . . . . 64,068 63,845
Accrued liabilities . . . . . . . . . . . . . . . . . 58,599 66,425
Deferred income taxes . . . . . . . . . . . . . . . . 16,060 15,796
Total current liabilities . . . . . . . . . . . 298,957 183,318
Long-term debt . . . . . . . . . . . . . . . . . . . . 258,892 316,250
Deferred income taxes . . . . . . . . . . . . . . . . 51,971 54,438
Other long-term liabilities . . . . . . . . . . . . . 20,510 15,650
Stockholders' equity:
Common stock, par value $.01 per share;
authorized 150,000,000 shares: 30,227,839 and
29,644,482 shares issued at September 30, 1998
and December 31, 1997, respectively . . . . . . . . . 302 296
Additional paid in capital . . . . . . . . . . . . . . 198,379 188,084
Retained earnings . . . . . . . . . . . . . . . . . . 154,434 105,716
-------- --------
353,115 294,096
Less common stock in treasury, at cost: 2,469,900
shares at September 30, 1998 54,121 -
-------- --------
Total stockholders' equity . . . . . . . . . . 298,994 294,096
-------- --------
$929,324 $863,752
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
4<PAGE>
ESSEX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, September 30,
------------------- --------------------
Dollars In Thousands, Except 1998 1997 1998 1997
Per Share Data
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . $387,335 $445,166 $1,142,354 $1,309,275
Cost of goods sold . . . . . . 310,634 362,976 913,169 1,059,504
-------- -------- ---------- ----------
Gross profit . . . . . . . . . 76,701 82,190 229,185 249,771
Selling and administrative
expenses . . . . . . . . . . 37,444 37,530 110,766 112,941
Other income, net . . . . . . . (790) (560) (1,546) (634)
Unusual charges . . . . . . . . 6,003 - 6,003 -
-------- -------- -------- --------
Income from operations . . . . 34,044 45,220 113,962 137,464
Interest expense . . . . . . . 6,202 8,562 20,166 29,836
-------- -------- -------- --------
Income before income taxes and
extraordinary charge . . . . 27,842 36,658 93,796 107,628
Provision for income taxes . . 11,000 14,600 37,591 42,900
-------- -------- -------- --------
Income before extraordinary
charge . . . . . . . . . . . 16,842 22,058 56,205 64,728
Extraordinary charge-debt
retirement, net of income
tax benefit . . . . . . . . . - - 7,487 -
-------- -------- -------- -------
Net income . . . . . . . . . . $ 16,842 $ 22,058 $ 48,718 $ 64,728
======== ======== ======== ========
Earnings per common share:
Income before extraordinary
charge . . . . . . . . . . $ .59 $.76 $1.90 $2.39
Extraordinary charge . . . . - - (.25) -
Net income . . . . . . . . . ----- ----- ----- -----
$ .59 $ .76 $1.65 $2.39
===== ===== ===== =====
5<PAGE>
Three Months Ended Nine Months Ended
June 30, September 30,
------------------- --------------------
Dollars In Thousands, Except 1998 1997 1998 1997
Per Share Data
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . $387,335 $445,166 $1,142,354 $1,309,275
Cost of goods sold . . . . . . 310,634 362,976 913,169 1,059,504
-------- -------- ---------- ----------
Earnings per common share --
assuming dilution:
Income before extraordinary
charge . . . . . . . . . . $ .57 $ .72 $1.85 $2.21
Extraordinary charge . . . . - - (.25) -
Net income . . . . . . . . . ----- ----- ----- -----
$ .57 $ .72 $1.60 $2.21
===== ===== ===== =====
</TABLE>
See Notes to Consolidated Financial Statements
6<PAGE>
ESSEX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
Dollars In Thousands 1998 1997
-------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . $ 48,718 $ 64,728
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . 26,549 25,308
Non cash interest expense . . . . . . . . . . . . . 575 1,500
Non cash pension expense . . . . . . . . . . . . . 3,113 2,774
Loss on repurchase of debt . . . . . . . . . . . . 12,478 -
Provision for losses on accounts receivable . . . . (191) 1,192
Benefit for deferred income taxes . . . . . . . . . (2,767) (6,718)
Loss on disposal of property, plant
and equipment . . . . . . . . . . . . . . . . . . 666 1,217
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable . . . . (7,562) (40,480)
Increase in inventories . . . . . . . . . . . . . (20,524) (7,650)
Decrease in accounts payable and
accrued liabilities . . . . . . . . . . . . . . . (6,334) 20,974
Net decrease in other assets and
liabilities . . . . . . . . . . . . . . . . . . . 3,384 312
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . 58,105 63,157
-------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment . . . . . (22,917) (22,981)
Proceeds from disposal of property, plant
and equipment . . . . . . . . . . . . . . . . . . . 216 3,328
Acquisitions . . . . . . . . . . . . . . . . . . . . (28,450) -
Other investments . . . . . . . . . . . . . . . . . (26) (900)
-------- --------
NET CASH USED FOR INVESTING ACTIVITIES . . . . . . (51,177) (20,553)
-------- --------
See Notes to Consolidated Financial Statements
7<PAGE>
ESSEX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)
Nine Months Ended
September 30,
------------------------
Dollars In Thousands 1998 1997
-------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from long-term debt . . . . . . . . . . . . 232,945 328,600
Repayment of long-term debt . . . . . . . . . . . . (297,875) (427,941)
Proceeds from notes payable to banks . . . . . . . . 784,788 543,898
Repayment of notes payable to banks . . . . . . . . (661,810) (531,860)
Common stock repurchase . . . . . . . . . . . . . . 54,121 (500)
Proceeds from issuance of common stock . . . . . . . - 46,022
Debt issuance costs . . . . . . . . . . . . . . . . (1,578) -
Proceeds from exercise of stock options . . . . . . 3,006 315
Senior Notes redemption premium . . . . . . . . . . (7,500) -
-------- --------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES . . . . . . . . . . . . . . (2,145) 41,466
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . 4,783 1,138
Cash and cash equivalents at beginning of period . . 2,843 4,429
-------- --------
Cash and cash equivalents at end of period . . . . . $ 7,626 $ 5,567
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
8<PAGE>
ESSEX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Dollars In Thousands, Except Per Share Data
-------------------------------------------
NOTE 1 ORGANIZATION
Unless the context otherwise indicates, the term "Company" refers to
Essex International Inc. ("Essex International") and its consolidated
subsidiaries, including its wholly owned subsidiary, Essex Group, Inc.
("Essex"). The principal asset of Essex International is all of the
outstanding common stock of Essex.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited interim consolidated financial statements contain all
adjustments, consisting of normal recurring adjustments, which are, in the
opinion of the management of the Company necessary to present fairly the
consolidated financial position of the Company as of September 30, 1998,
and the consolidated results of operations and cash flows of the Company
for the three and nine-month periods ended September 30, 1998 and 1997,
respectively. Results of operations for the periods presented are not
necessarily indicative of the results for the full fiscal year. These
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1997.
Recently Issued Accounting Standards
In 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" ("FAS 130"), and Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131"), which are required to be adopted on December 31, 1998. It is
management's belief that the disclosure provisions of FAS 130 are not
material to its consolidated financial statements. With respect to FAS
131, the Company will be required to report certain information about its
operating segments in annual and interim financial statements issued to
stockholders. FAS 131 also requires the reporting of certain information
about products and services, geographic areas in which the Company
operates and major customers. The Company has not yet completed its
analysis to determine the manner in which operating segment disclosures
will be made in the Company's annual and interim financial statements.
However, the disclosure of additional operating information may result
upon the adoption of FAS 131.
9<PAGE>
ESSEX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Dollars In Thousands, Except Per Share Data
-------------------------------------------
NOTE 3 INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Finished goods . . . . . . . . . . . . $188,093 $162,570
Raw materials and work in process . . 56,534 54,146
-------- --------
244,627 216,716
LIFO reserve . . . . . . . . . . . . . 23,750 16,304
-------- --------
$268,377 $233,020
======== ========
</TABLE>
The Company values a major portion of its inventories at the lower of
cost or market based on a last-in, first-out ("LIFO") method. Principal
elements of cost included in the Company's inventories are copper, other
purchased materials, direct labor and manufacturing overhead. Inventories
valued using the LIFO method amounted to $246,198 and $222,957 at
September 30, 1998 and December 31, 1997, respectively.
An actual valuation of inventory under the LIFO method can be made only
at the end of each year based on the inventory levels and costs at that
time. Accordingly, interim LIFO calculations must necessarily be based on
management's estimates of expected year-end inventory levels and costs.
Because these are subject to many forces beyond management's control,
interim results are subject to the final year-end LIFO inventory
valuation.
NOTE 4 LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Revolving loan . . . . . . . . . . . . . $244,108 $100,000
Lease obligation . . . . . . . . . . . . 16,875 18,750
Other . . . . . . . . . . . . . . . . . . 409 -
10<PAGE>
10% Senior Notes . . . . . . . . . . . . - 200,000
-------- --------
261,392 318,750
Less current portion . . . . . . 2,500 2,500
-------- --------
$258,892 $316,250
======== ========
</TABLE>
11<PAGE>
ESSEX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Dollars In Thousands, Except Per Share Data
-------------------------------------------
On May 1, 1998, the Company redeemed its outstanding 10% Senior Notes
due 2003 (the "Notes") (the "Redemption"). The Notes were redeemed at
103.75% of the principal amount then outstanding plus accrued and unpaid
interest to the redemption date. The aggregate principal, premium and
accrued interest paid upon the Redemption totaled $217,500 and was
financed by the Company through a combination of borrowings under the
Company's revolving credit facility, which was amended and restated in
connection with the Redemption, and a new accounts receivable
securitization program. During the second quarter 1998, the Company
recorded extraordinary charges totaling $7,487 ($12,478 before applicable
tax benefit), or $.25 per share on a diluted basis, representing the
redemption premium and the write-off of unamortized deferred debt costs
associated with the Notes and the Company's prior revolving credit
facility.
The amended and restated revolving credit agreement was entered into
among Essex, Essex International, the Lenders named therein, and The Chase
Manhattan Bank, as administrative agent (the "Revolving Credit
Agreement"). The Revolving Credit Agreement, which terminates October 31,
2001, provides for up to $370,000 in revolving loans reduced by borrowings
under the Company's Canadian credit facility and unsecured lines of credit
in excess of $100,000. The Revolving Credit Agreement also provides a
$25,000 letter of credit subfacility. Outstanding borrowings bear
floating rates of interest, at the Company's option, at bank prime plus
0.50% or a reserve adjusted Eurodollar rate ("LIBOR") plus 1.50%. The
spreads over the prime and LIBOR rates can be reduced to 0% and .375%,
respectively, if a specified leverage ratio is achieved. The average
commitment fees during the revolving loan period are between 0.125% to
0.375% of the average daily unused portion of the available credit based
upon a specific leverage ratio. Indebtedness under the Revolving Credit
Agreement is guaranteed by Essex International and all of Essex'
subsidiaries, and is secured by a pledge of the capital stock of Essex and
its subsidiaries and by a first lien on substantially all assets of the
Company and its subsidiaries except for those assets secured under the
accounts receivable securitization program. The Company's ability to
borrow under the Revolving Credit Agreement is restricted by the financial
covenants contained therein.
The accounts receivable securitization program, dated April 28, 1998,
was entered into among Essex, certain of Essex' subsidiaries, Essex
Funding Inc. ("Essex Funding") and Three Rivers Funding Corporation
("TRFCO") (the "Receivable Securitization Program"). The Receivable
Securitization Program provides for the sale of certain trade receivables
of Essex and certain of its subsidiaries, up to $150,000, to a wholly
owned, limited purpose subsidiary of Essex, Essex Funding. Essex Funding
finances its purchases of receivables through secured borrowings from
TRFCO. TRFCO generally obtains its financing through proceeds received
upon the issuance of commercial paper.
12<PAGE>
Under the Receivable Securitization Program, Essex Funding has
granted a security interest in all its trade accounts receivable to TRFCO.
Essex Funding's outstanding borrowings generally bear interest at TRFCO's
commercial paper rate (approximately 5.7% per annum, including certain
fees and expenses, at September 30, 1998). The Receivable Securitization
Program expires April 28, 1999, although it may be extended for successive
one-year periods subject to agreement between Essex Funding and TRFCO.
Essex Funding's outstanding borrowings are denoted as notes payable to
banks in the Consolidated Balance Sheets.
Through September 30, 1998, the Company fully complied with all of the
financial ratios and covenants under the agreements governing its
outstanding indebtedness.
13<PAGE>
ESSEX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Dollars In Thousands, Except Per Share Data
-------------------------------------------
NOTE 5 CONTINGENT LIABILITIES
There are various claims and pending legal proceedings against Essex
including environmental matters and other matters arising out of the
ordinary course of its business. Pursuant to the 1988 acquisition of Essex
by Essex International from United Technologies Corporation ("UTC"), UTC
agreed to indemnify Essex against all losses (as defined) resulting from
or in connection with damage or pollution to the environment and arising
from events, operations, or activities of Essex prior to February 29, 1988
or from conditions or circumstances existing at February 29, 1988. Except
for certain matters relating to permit compliance, Essex is fully
indemnified with respect to conditions, events or circumstances known to
UTC prior to February 29, 1988. The sites covered by this indemnity are
handled directly by UTC and all payments required to be made are paid
directly by UTC. The amounts related to this environmental contingency are
not material to the Company's consolidated financial statements. UTC also
provided a second environmental indemnity which deals with losses related
to environmental events, conditions or circumstances existing at or prior
to February 29, 1988, which only became known in the five-year period
commencing February 29, 1988. As to any such losses, Essex is responsible
for the first $4,000 incurred. Management and its legal counsel
periodically review the probable outcome of pending proceedings and the
costs reasonably expected to be incurred. Essex accrues for these costs
when it is probable that a liability has been incurred and the amount of
the loss can be reasonably estimated. After consultation with counsel, in
the opinion of management, the ultimate cost to Essex, exceeding amounts
provided, will not materially affect its consolidated financial position,
cash flows or results of operations. There can be no assurance, however,
that future developments will not alter this conclusion.
Since approximately 1990, Essex has been named as a defendant in a
number of product liability lawsuits brought by electricians and other
skilled tradesmen claiming injury from exposure to asbestos found in
electrical wire products produced a number of years ago. At September 30,
1998, the number of cases filed against Essex was 64 involving
approximately 235 claims. Essex' strategy is to defend these cases
vigorously. Essex believes that its liability, if any, in these matters
and the related defense costs will not have a material adverse effect
either individually or in the aggregate upon its business or financial
condition, cash flows or results of operations. There can be no assurance,
however, that future developments will not alter this conclusion.
14<PAGE>
ESSEX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Dollars In Thousands, Except Per Share Data
-------------------------------------------
NOTE 6 UNUSUAL CHARGES
During the third quarter 1998, the Company recorded unusual charges of
$3,600 ($6,003 before tax) or $.12 per share on a diluted basis, with
respect to an early retirement program offered to certain senior
executives of the Company and plant closing costs. The early retirement
program, of approximately $2,300 after tax, consists primarily of
severance, pension and health insurance payments. The severance benefits
are to be paid over a period of five years beginning December 31, 1998
while the pension benefits will be paid over the remaining lives of the
executives, but not less than ten years. The plant closing costs
approximated $1,300 after tax, and consisted of non-cash asset write-offs
of $800 and cash charges of $500 for employee severance and other plant
closure expenses. The majority of the cash payments are to be made in
1998.
NOTE 7 EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Numerator:
Income before extraordinary
charge . . . . . . . . . . . $ 16,842 $ 22,058 $ 56,205 $ 64,728
Extraordinary charge-debt
retirement, net of income - - 7,487 -
tax benefit . . . . . . . . ---------- ---------- ---------- ----------
Net income applicable to $ 16,842 $ 22,058 $ 48,718 $ 64,728
common stock . . . . . . .
15<PAGE>
Denominator:
Denominator for basic
earnings per share--
weighted-average shares . . 28,751,040 29,154,127 29,603,035 27,056,384
Effect of dilutive
securities:
Stock options . . . . . . . 714,174 1,224,131 838,327 1,204,156
Warrants . . . . . . . . . - 301,653 - 970,540
Dilutive potential ---------- ---------- ---------- ----------
common shares . . . . . . 714,174 1,525,784 838,327 2,174,696
Denominator for diluted ---------- ---------- ---------- ----------
earnings per share--adjusted
weighted-average shares . . 29,465,214 30,679,911 30,441,362 29,231,080
========== ========== ========== ==========
Earnings per common share:
Income before extraordinary
charge . . . . . . . . . . $ .59 $ .76 $1.90 $2.39
Extraordinary charge . . . . - - (.25) -
----- ----- ----- -----
Net income . . . . . . . . . $ .59 $ .76 $1.65 $2.39
===== ===== ===== =====
Earnings per common share-
assuming dilution:
Income before extraordinary
charge . . . . . . . . . . $ .57 $ .72 $1.85 $2.21
Extraordinary charge . . . . - - (.25) -
----- ----- ----- -----
Net income . . . . . . . . . $ .57 $ .72 $1.60 $2.21
===== ===== ===== =====
</TABLE>
NOTE 8 COMMON STOCK REPURCHASE
The Company announced on June 15, 1998 that its Board of Directors
had approved the repurchase of up to an aggregate of 3,000,000 shares of
its common stock. The share repurchases would be made from time to time
in the open market at prevailing prices or in negotiated transactions of
the market. At September 30, 1998, the Company had repurchased 2,469,900
shares at a cost of $54,121.
NOTE 9 SUBSEQUENT EVENT
Essex International and Superior TeleCom Inc. ("Superior") jointly
announced on October 22, 1998 that they have entered into a definitive
merger agreement (the "Merger Agreement") whereby Superior, through a
wholly owned acquisition subsidiary, will purchase up to 22, 562, 135
shares of common stock of Essex International (approximately 81% of
outstanding Essex International common stock) in a cash tender offer (the
"Offer"), and subsequently acquire the remaining shares of common stock of
Essex International in a second step merger. In a separate arrangement,
Bessemer Holdings L.P. ("Bessemer"), Essex International's largest
stockholder, and certain of Bessemer's affiliates have agreed with
Superior to tender their shares of Essex International common stock into
the Offer and otherwise to support the transaction with Superior.
Bessemer and its affiliates own approximately 48% of the outstanding Essex
International common stock.
16<PAGE>
Pursuant to the Merger Agreement, on October 28, 1998 Superior commenced
the Offer for up to 22,562,135 shares of Essex International common stock
for $32.00 per share in cash. The Offer is conditioned on the tender of a
majority of the outstanding shares of Essex International common stock, on
a fully diluted basis, receipt of financing, expiration or termination of
the applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 and certain other conditions. Upon a successful
completion of the Offer, the Merger Agreement requires Superior to
consummate a merger between its acquisition subsidiary and Essex
International in which the remaining shares of Essex International common
stock (other than dissenting shares) will be acquired in exchange for .64
shares of series A cumulative convertible exchangeable preferred stock,
liquidation preference $50.00 per share, of Superior ("Superior Preferred
Stock"), or to the extent the offer is not fully subscribed, a mix of cash
and Superior Preferred Stock. The Superior Preferred Stock will be
convertible into Superior common stock at $56.00 per share. The merger is
subject to the approval of Essex International's stockholders and certain
other conditions.
In connection with the transactions contemplated under the Merger
Agreement, loans outstanding under Essex International's Revolving Credit
Agreement would become due upon completion of the Offer. Superior is
currently in the process of securing a new credit facility to repay loans
outstanding under the Revolving Credit Agreement and to provide for
working capital and other traditional liquidity needs. Essex
International would incur an extraordinary charge of approximately $800
($1,300 before tax) for the write-off of unamortized deferred debt costs
associated with the termination of the Revolving Credit Agreement. Based
upon discussions with Mellon Leasing Corporation with regard to the Sale
and Leaseback Agreement and with Three Rivers Funding Corporation with
regard to the Receivable Securitization Program, the Company expects that
both the Sale and Leaseback Agreement and the Receivable Securitization
Program will remain in place following the transactions contemplated under
the Merger Agreement.
Superior, through its wholly owned subsidiary, Superior
Telecommunications Inc., is a leading manufacturer and supplier of
telecommunications cable and wire products to telephone companies,
distributors and system integrators. It also develops and manufactures
voice and data multiplexers and other electronics and signal processing
components and systems.
17<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
Unless the context otherwise indicates, the term "Company" refers to
Essex International Inc. ("Essex International") and its consolidated
subsidiaries, including its wholly owned subsidiary, Essex Group, Inc.
("Essex"). The principal asset of Essex International is all of the
outstanding common stock of Essex.
In October 1992, the Company was acquired by Bessemer Holdings, L.P.
("BHLP") (an affiliate and successor in interest to Bessemer Capital
Partners, L.P.), certain present and former employees of the Company and
other investors. In May 1997, the Company completed its initial public
offering of common stock (the "Offering") and began trading on the New
York Stock Exchange (SXC).
The Company, founded in 1930, is a leading North American developer,
manufacturer and distributor of electrical wire and cable and insulation
products serving over 11,000 customers in a wide range of industrial
markets primarily in the United States, Canada and the United Kingdom.
The Company's products include building wire for commercial and
residential construction applications; magnet wire and insulation
materials for electromechanical devices such as motors, transformers and
electrical controls; copper communication wire and cable for voice and
high bandwidth data transmissions both inside and outside the home or
office; industrial wire for applications in construction, appliances,
recreational vehicles and industrial facilities; and automotive wire and
specialty wiring assemblies for automobiles and trucks. The Company has
approximately 5,100 employees.
Results of Operations
Three Months Ended September 30, 1998
Net sales for the third quarter 1998 were $387.3 million compared to
$445.2 million in the third quarter 1997. On a copper price adjusted
basis, net sales for the third quarter 1998 declined approximately 2% from
the third quarter 1997. During the third quarter 1998, the average price
per pound of copper, the Company's principal raw material, on the New York
Commodity Exchange, Inc. (COMEX) was $.75 versus $1.02 for the comparable
period last year. Copper costs are generally passed through to customers
through product pricing. The decline in third quarter copper-adjusted
sales was primarily attributable to the Company's building wire product
line which experienced reduced selling prices and an approximate 6%
decline in sales volume from the third quarter 1997. Although demand for
building wire products remains strong, the Company's sales volume declined
due to selective market participation during certain periods in the third
quarter 1998. The Company reduced its participation in an effort to
support higher building wire prices. Copper-adjusted net sales of the
Company's magnet wire products in the third quarter 1998 exceeded the
third quarter 1997 by 17% due to the June 1998 acquisition of BICC's UK
magnet wire and distribution operations and favorable domestic market
conditions. Communication wire sales, on a copper price adjusted basis,
were down slightly from the third quarter 1997 reflecting primarily
manufacturing capacity constraints resulting in diminished inventory
levels of outside plant cable (OSP) and, to a lesser extent, elevated
18<PAGE>
availability of high-end category 5 datacom wire products in the industry.
The market environment for both OSP cable and datacom wire, with the
exception of pricing pressure in certain high-end category 5 datacom wire
products, remained robust. Third quarter 1998 copper price adjusted sales
of the Company's automotive wire declined 16% from the third quarter 1997
due primarily to reduced sales to a major customer who placed a larger
portion of its requirements with another wire producer earlier this year.
Cost of goods sold for the third quarter 1998 was 14% below the
comparable period last year due primarily to lower copper prices and
reduced building wire sales volume, partially offset by the recently
acquired UK magnet wire and distribution operations. The Company's cost
of goods sold as a percentage of net sales were 80.2% and 81.5% in the
third quarter 1998 and 1997, respectively. On a copper price adjusted
basis, third quarter 1998 gross margins declined to 19.8% compared with
20.9% for the third quarter 1997. The decline in gross margin was due
primarily to a lower spread (average selling price less average COMEX
copper price ("Spread")), between selling prices of building wire and the
Company's cost of copper. However, building wire Spreads improved
approximately 2.5% from the second quarter 1998.
Selling and administrative expenses for the third quarter 1998
approximated those of the comparable period last year. Lower selling
expenses attributable to reduced building wire sales volume essentially
offset incremental selling and administrative expenses associated with the
acquired UK magnet wire and distribution operations. Selling and
administrative expenses as a percentage of net copper-adjusted sales were
9.7% for the third quarter 1998 compared with approximately 9.5% for the
same period last year.
Interest expense for the third quarter 1998 was $6.2 million compared
with $8.6 million in the same period last year reflecting a $2.4 million
or 28% reduction. Lower interest costs were attributable to a significant
decline in the Company's average cost of borrowed funds resulting
primarily from the May 1, 1998 redemption and refinancing of the Company's
10% Senior Notes due 2003 (the "Notes") (the "Redemption").
During the third quarter 1998, the Company recorded unusual charges of
$6.0 million ($3.6 million after tax or $.12 per share) with respect to an
early retirement program offered to certain senior executives of the
Company and plant closing costs. The early retirement program, of
approximately $2.3 million after tax, consists primarily of severance,
pension and health insurance payments. The severance benefits are to be
paid over a period of five years beginning December 31, 1998 while the
pension benefits will be paid over the remaining lives of the executives,
but not less than ten years. The plant closing costs approximated $1.3
million after tax, and consisted of non-cash asset write-offs of $.8
million and cash charges of $.5 million for employee severance and other
plant closure expenses. The majority of the cash payments are to be made
in 1998.
Income tax expense for the third quarter 1998 was 39.5% of pretax income
compared with 39.8% for the third quarter 1997.
Nine Months Ended September 30, 1998
Net sales for the nine months ended September 30, 1998 were $1,142.4
million compared with $1,309.3 million for the same period last year. On
19<PAGE>
a copper price adjusted basis, net year-to-date sales for 1998 were 1%
below the same period last year. The year-to-date average COMEX price of
copper was $.77 per pound versus $1.09 through September of last year.
The decline in copper adjusted sales was primarily attributable to a 7%
and 4% reduction in building wire and automotive wire sales from 1997,
respectively. Sales of the Company's building wire products were below
1997 levels due to selective market participation in an effort to support
improved pricing. The Company's remaining product lines, principally
magnet wire, communication wire and cables, industrial wire and
distribution products, all experienced year-over-year copper price
adjusted sales improvements reflecting continued long-term growth trends
in the Company's primary served markets and the June 1998 acquisition of
BICC's UK magnet wire and distribution operations.
The building wire market, consisting of residential, non-residential and
renovation construction activity, continues to grow through a combination
of low interest rates, high employment levels and continued growth within
the domestic economy. It is currently projected that the 1998 building
wire segment of the wire and cable market will marginally exceed 1997 on a
copper pounds sold basis. The domestic magnet wire segment of the wire
and cable market continues to demonstrate long-term growth trends fueled
by increasing demand for electrical convenience items in homes, offices
and vehicles and greater use of energy efficient electric motors which
require significantly more magnet wire. Outside plant copper cable (OSP)
demand, both domestically and internationally, remains strong while the
market for high-bandwidth datacom wire is experiencing double digit growth
rates. The Company believes OSP demand has continued to strengthen due,
in part, to the large installed base and low cost of copper cable, ease of
installation and recent enhancements in copper electronics which have
improved its transmission capacities. High-bandwidth datacom wire demand
has been driven by the recent proliferation of personal computers,
internet usage, and the development of local and wide area networks.
Cost of goods sold for the first nine months of 1998 was 14% below the
comparable period last year due primarily to lower copper prices,
partially offset by the recently acquired UK magnet wire and distribution
operations. The Company's cost of goods sold, as a percentage of net
sales were 79.9% and 80.9% in the first nine months of 1998 and 1997,
respectively. On a copper price adjusted basis, gross margins declined to
20.1% for the first nine months of 1998 from 21.7% for the same period
last year. The decline in gross margin was due primarily to lower
building wire price spreads, partially offset by improved communication
cable and wire pricing.
Selling and administrative expenses for the first nine months of 1998
declined 2% from the comparable period last year due primarily to reduced
selling expenses attributable to lower building wire sales volume,
partially offset by increased expenses resulting from the UK magnet wire
and distribution operations acquired in June 1998. Selling and
administrative expenses were 9.7% of sales for the nine months ended
September 30, 1998 compared to 9.8% in the same period last year on a
copper price adjusted basis.
During the third quarter 1998, the Company recorded unusual charges of
$6.0 million ($3.6 million after tax or $.12 per share) with respect to an
early retirement program offered to certain senior executives of the
Company and plant closing costs. The early retirement program, of
approximately $2.3 million after tax, consists primarily of severance,
20<PAGE>
pension and health insurance payments. The severance benefits are to be
paid over a period of five years beginning December 31, 1998 while the
pension benefits will be paid over the remaining lives of the executives,
but not less than ten years. The plant closing costs approximated $1.3
million after tax, and consisted of non-cash asset write-offs of $.8
million and cash charges of $.5 million for employee severance and other
plant closure expenses. The majority of the cash payments are to be made
in 1998.
Interest expense for the first nine months of 1998 was $20.2 million or
32% below the $29.8 million incurred in the same period last year. Lower
interest expense was attributable to a decline in the Company's average
cost of borrowed funds and a reduced amount of average debt outstanding
for the first nine months of 1998 versus the first nine months of 1997.
The reduction in average debt outstanding was attained through a
combination of strong free cash flows after investing activities and the
proceeds received under the Offering ($46.0 million), partially offset by
$54.1 million expended during the second and third quarters of 1998 to
repurchase shares of the Company's common stock. The average cost of
borrowed funds declined primarily as a result of the Redemption.
Income tax expense for the nine months ended September 30, 1998 was
40.1% of pretax income compared with 39.9% for the first nine months of
1997.
The Company recorded net income of $48.7 million for the nine months
ended September 30, 1998 compared to net income of $64.7 million for the
first nine months of 1997. The year-to-date 1998 results include
extraordinary charges of $7.5 million ($12.5 million before applicable tax
benefit), with respect to the Redemption. These charges represented the
redemption premium of the Notes and the write-offs of unamortized deferred
debt costs associated with the Notes and the prior revolving credit
facility that was replaced in connection with the Redemption.
Liquidity, Capital Resources and Financial Condition
General
Essex International is a holding company with no operations and has
virtually no assets other than its ownership of the outstanding common
stock of Essex. All of such stock is pledged, however, to the lenders
under the Revolving Credit Agreement (as defined below). Accordingly,
Essex International's ability to meet its cash obligations is dependent on
Essex' ability to pay dividends, to loan, or otherwise advance or transfer
funds to Essex International in amounts sufficient to service Essex
International's cash obligations.
Essex International expects that it may receive certain cash payments
from Essex from time to time to the extent cash is available and to the
extent it is permitted under the terms of the Revolving Credit Agreement.
Such payments may include: (i) an amount necessary under the tax sharing
agreement between Essex and Essex International to enable Essex
International to pay Essex' taxes as if computed on an unconsolidated
basis; (ii) an annual management fee to an affiliate of Bessemer of up to
$1.0 million; and (iii) certain other amounts to meet ongoing expenses of
Essex International (such amounts are considered to be immaterial both
individually and in the aggregate, however, because Essex International
has no operations, other than those conducted through Essex, or
21<PAGE>
employees). To the extent Essex makes any such payments, it will do so
out of operating cash flow, borrowings under the Revolving Credit
Agreement or other sources of funds it may obtain in the future subject to
the terms of the Revolving Credit Agreement.
On May 1, 1998, the Company effected the Redemption of its Notes. The
Notes were redeemed at 103.75% of the principal amount then outstanding
plus accrued and unpaid interest to the Redemption date. The aggregate
principal, premium and accrued interest paid upon the Redemption totaled
$217.5 million and was financed by the Company through a combination of
borrowings under the Revolving Credit Facility, which was amended and
restated in connection with the Redemption, and the Receivable
Securitization Program (as defined below).
The Company's aggregate notes payable to banks and long-term debt at
September 30, 1998 was $419.1 million and its stockholders' equity was
$299.0 million. The resulting ratio of debt to total capitalization rose
to 58% from 55% at December 31, 1997. As of September 30, 1998 the
Company was in compliance with all covenants under the agreements
governing its outstanding indebtedness.
Credit Facilities and Lines of Credit
The Company has the following sources of liquidity available to it:
(i) a $370.0 million revolving credit agreement, amended and restated
effective March 27, 1998, among Essex, Essex International, the Lenders
named therein, and The Chase Manhattan Bank, as administrative agent (the
"Revolving Credit Agreement"); (ii) a $150.0 million accounts receivable
securitization program among Essex and certain of its subsidiaries, Essex
Funding Inc. ("Essex Funding") and Three Rivers Funding Corporation
("TRFCO"), dated April 28, 1998 (the "Receivable Securitization Program");
(iii) a $25.0 million agreement and lease, dated as of April 12, 1995,
between Essex and Mellon Leasing Corporation (the "Sale and Leaseback
Agreement"); (iv) a $15.0 million (U.S. dollar) credit agreement between a
subsidiary of the Company and the Bank of Montreal (the "Canadian Credit
Agreement"); and (v) bank lines of credit with various lending banks which
provide for unsecured borrowings for working capital of up to $60.0
million.
The Revolving Credit Agreement, which terminates October 31, 2001,
provides for up to $370.0 million in revolving loans reduced by borrowings
under the Canadian Credit Agreement and the Company's unsecured lines of
credit in excess of $100.0 million. The Revolving Credit Agreement also
provides a $25.0 million letter of credit subfacility. Outstanding
borrowings bear floating rates of interest, at the Company's option, at
bank prime plus 0.50% or a reserve adjusted Eurodollar rate ("LIBOR") plus
1.50%. The spreads over the prime and LIBOR rates can be reduced to 0%
and .375%, respectively, if a specified leverage ratio is achieved. Based
upon the specified leverage ratio at September 30, 1998, the Company's
floating rate of interest for borrowings under the Revolving Credit
Agreement is LIBOR plus 0.50%. The commitment fees during the revolving
loan period are between 0.125% to 0.375% of the average daily unused
portion of the available credit based upon a specific leverage ratio.
Indebtedness under the Revolving Credit Agreement is guaranteed by Essex
International and all of Essex' subsidiaries, and is secured by a pledge
of the capital stock of Essex and its subsidiaries and by a first lien on
substantially all assets of the Company and its subsidiaries except for
those assets secured under the Receivable Securitization Program. The
22<PAGE>
Company's ability to borrow under the Revolving Credit Agreement is
restricted by the financial covenants contained therein. As of September
30, 1998, the Company had $120.3 million of undrawn capacity based upon a
borrowing base of $370.0 million borrowing line of credit, reduced by
outstanding borrowings under: (i) the Revolving Credit Agreement ($244.1
million); and (ii) the Canadian Credit Agreement ($5.6 million). The
Revolving Credit Agreement contains various covenants which include, among
other things: (a) the maintenance of certain financial ratios and
compliance with certain financial tests and limitations; (b) limitations
on investments and capital expenditures; (c) limitations on cash dividends
paid; and (d) limitations on leases and the sale of assets.
The Receivable Securitization Program provides for the sale of certain
trade receivables of Essex and certain of its subsidiaries, up to $150.0
million, to a wholly owned, limited purpose subsidiary of Essex, Essex
Funding. Essex Funding finances its purchases of receivables through
secured borrowings from TRFCO. TRFCO generally obtains its financing
through proceeds received upon the issuance of commercial paper.
Under the Receivable Securitization Program, Essex Funding has granted a
security interest in all its trade accounts receivable to TRFCO. Essex
Funding's outstanding borrowings generally bear interest at TRFCO's
commercial paper rate (approximately 5.7% per annum, including certain
fees and expenses, at September 30, 1998). The Receivable Securitization
Program expires April 28, 1999, although it may be extended for successive
one-year periods subject to agreement between Essex Funding and TRFCO. At
September 30, 1998, $131.6 million was outstanding under this program.
The Sale and Leaseback Agreement provided $25.0 million for the sale and
leaseback of certain of the Company's fixed assets. The lease obligation
has a seven-year term expiring in May 2002. The principal component of
the rental is paid quarterly, with the amount of each of the first 27
payments equal to 2.5% of lessor's cost of the equipment, and the balance
due at the final payment. The interest component is paid on the unpaid
principal balance and is calculated by lessor at LIBOR plus 1.875%. The
effective interest rate can be reduced by 0.125% to 1.125% if certain
specified financial conditions are achieved.
As of September 30, 1998, $5.6 million was outstanding under the
Canadian Credit Agreement and is denoted as notes payable to banks in the
Company's Consolidated Balance Sheets. Borrowings are secured by the
subsidiary's accounts receivable. Interest rates for borrowings under the
Canadian Credit Agreement are based upon Canadian market rates for
banker's acceptances with spreads similar to the Revolving Credit
Agreement. The Canadian Credit Agreement terminates on March 26, 1999,
although it may be extended for successive one-year periods upon the
mutual consent of the subsidiary and the Bank of Montreal.
The Company had $20.6 million of unsecured bank lines of credit
outstanding as of September 30, 1998 and is denoted as notes payable to
banks in the Company's Consolidated Balance Sheets. These lines of credit
bear interest at rates subject to agreement between the Company and the
lending banks.
Cash Flow and Working Capital
In general, the Company requires liquidity for working capital, capital
expenditures, debt repayments, interest and taxes. Of particular
23<PAGE>
significance to the Company are its working capital requirements which
increase whenever it experiences strong incremental demand in its business
or a significant rise in copper prices. Historically, the Company has
satisfied its liquidity requirements through a combination of funds
generated from operating activities together with funds available under
its credit facilities. Based upon historical experience and the
availability of funds under its credit facilities, the Company expects
that its usual sources of liquidity will be sufficient to enable it to
meet its cash requirements for working capital, capital expenditures, debt
repayments, interest and taxes through September 30, 1999.
Operating Activities. Net cash provided by operating activities in the
first nine months of 1998 was $58.1 million, compared to $63.2 million in
the same period last year. The decrease in cash provided by operating
activities was primarily the result of increased working capital needs.
Higher inventory levels were attributable to increased levels of building
wire inventory, the result of the Company's decision to improve order fill
rates and to participate in that market in a selective manner during the
second and third quarters of 1998. Accounts payable declined due, in
part, to the marked reduction in copper prices during 1998, while accrued
liabilities declined due primarily to the elimination of accrued interest
expense associated with the Notes Redemption. Reduced growth in accounts
receivable, attributable to lower sales volumes and the marked reduction
in copper prices, partially offset the increases in working capital
detailed above.
Investing Activities. Capital expenditures of $22.9 million in the
first nine months of 1998 approximated the comparable period last year.
Capital expenditures for the next twelve months are expected to be above
those reported in the twelve months ended September 30, 1998 and will be
used to improve manufacturing efficiency, expand capacity and maintain
current facilities and equipment--see also "Long-Term Liquidity
Considerations" below. At September 30, 1998, approximately $19.0 million
was committed to outside vendors for capital expenditures. In June 1998,
the Company completed its acquisition of BICC's UK magnet wire and related
distribution operations for approximately $14.8 million in cash plus
assumed accounts payable and accrued liabilities. In August 1998, the
Company acquired Active Industries Inc. for $13.7 million in cash (net)
plus assumed debt of $8.0 million. These acquisitions were financed from
proceeds under the Company's existing credit facilities and their future
cash requirements are expected to be satisfied through the Company's
traditional sources of liquidity. The Revolving Credit Agreement imposes
limitations on capital expenditures, business acquisitions and
investments.
Financing Activities. In June 1998, the Company announced that its
Board of Directors had approved the repurchase of up to an aggregate of
3,000,000 shares of its common stock. Through September 30, 1998, the
Company has repurchased 2,469,900 shares of its common stock at an
aggregate cost of $54.1 million. The Company also paid in 1998 a $7.5
million redemption premium in conjunction with the Redemption. The
redemption premium and share repurchases were financed from proceeds under
the Company's existing credit facilities.
Long-Term Liquidity Considerations
The terms of the Sale and Leaseback Agreement include a balloon payment
of $8.1 million in 2002. Additionally, in July 1998, the Company
24<PAGE>
announced a five-year profit growth plan consisting of a series of long-
term initiatives requiring considerable amounts of financial resources.
The five-year profit growth plan, which concludes in the year 2003,
includes $131 million of capital expenditures for new plants and
equipment, manufacturing and distribution improvements and a major upgrade
of the Company's business information systems. The Company expects these
additional capital requirements and its traditional liquidity needs for
working capital, capital expenditures, interest and taxes, as well as its
debt repayment obligations under the Sale and Leaseback Agreement will be
met through a combination of funds available under its various credit
facilities and cash flows from operations. The Company may also consider
additional sources of funds if considered necessary and if favorable terms
and conditions can be secured.
The Company's operations involve the use, disposal and cleanup of
certain substances regulated under environmental protection laws. The
Company has accrued $0.9 million for environmental remediation and
restoration costs. The accrual is based upon management's estimate of the
Company's exposure in light of relevant available information including
the allocations and remedies set forth in applicable consent decrees,
third-party estimates of remediation costs, the estimated ability of other
potentially responsible parties to pay their proportionate share of
remediation costs, the nature of each site and the number of participating
parties. Subject to the difficulty in estimating future environmental
costs, the Company expects that any sum it may have to pay in connection
with environmental matters in excess of the amounts recorded or disclosed,
if any, will not have a material adverse effect on its financial position,
cash flow or results of operations. There can be no assurance, however,
that future developments will not alter this conclusion.
Derivative Financial Instruments
The Company, to a limited extent, uses forward fixed price contracts and
derivative financial instruments to manage foreign currency exchange and
commodity price risks. To protect the Company's anticipated cash flows
from the risk of adverse foreign currency exchange fluctuations for firm
sales and purchase commitments, the Company enters into foreign currency
forward exchange contracts. Copper, the Company's principal raw material,
experiences marked fluctuations in market prices, thereby subjecting the
Company to copper price risk with respect to copper repurchases on fixed
customer sales contracts. Forward fixed price contracts and derivative
financial instruments in the form of copper futures contracts are utilized
by the Company to reduce those risks. The Company does not hold or issue
financial instruments for investment or trading purposes. The Company is
exposed to credit risk in the event of nonperformance by counterparties
for foreign exchange forward contracts, metal forward price contracts and
metals futures contracts but the Company does not anticipate
nonperformance by any of these counterparties. The amount of such
exposure is generally the unrealized gains with respect to the underlying
contracts.
Impact of 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. The six-digit date (YYMMDD) has become the standard for date
representations and is embedded in a multitude of computer programs and
25<PAGE>
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.
At this time, based upon the action steps 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 Y2K
issue. However, there can be no assurance that future developments will
not alter the effect of the Y2K issue.
The Company's State of Readiness
In 1996 the Company established a Y2K project to ensure that the issue
receive appropriate priority and that necessary resources were made
available. Three senior executives including the Company's Director of IT
were assigned to direct the project.
Status of project:
Inventories of all file servers, microprocessors, non-computer digital
and control devices and software applications have been established.
Remediation efforts in connection with the above-described software are
nearly complete. Additionally, all major financial systems, including
data collection and reporting, and all electronic data interchange
software with respect to customers, vendors and financial institutions,
are in the process of being upgraded to Y2K compliant versions. These
systems will be tested during the second quarter 1999. The mainframe
computer, file servers, and Local Area Networks (LANs) are currently under
review in connection with embedded technology and their ability to deal
with the Y2K issue (most LAN applications are less than two years old and
were placed in service as Y2K compliant). Such hardware, including
embedded technologies, will be tested extensively prior to December 31,
1999. Compliance information has been requested of every primary vendor
and service provider; secondary providers will be contacted in the near
future.
Costs to Address the Company's Year-2000 Issues
The Company estimates that the total cost to remediate the Y2K problem
is approximately $5 million, of which approximately $2 million has been
spent through September 30, 1998. Approximately one-half of the remaining
$3 million to be spent in 1998 and beyond is to be paid to external
parties for the purchase of new systems and equipment.
Risks of the Company's Year-2000 Issues and Associated Contingency Plans
The Company believes that it will have adequate levels of inventory,
both raw materials and finished goods, whereby short-term disruptions in
production or availability of raw materials or utilities will be
mitigated. Further, most of the Company's manufactured goods are produced
or can be produced, at other locations if necessary. Alternate vendors
have been identified to support interruptions in raw materials flows.
The Company maintains both a mainframe computer and LAN hardware
infrastructure. All of these systems will be tested several times before
the millennium change and are anticipated to accommodate the change
without major interruptions. However, should problems be encountered,
there will be extensive personnel on-site to address those issues.
26<PAGE>
Further, the Company has in place a standard disaster plan, which consists
of certain backup measures including manual processes, standalone
generators for the delivery of electricity and utilizing external computer
services providers.
The Company expects all electronic commerce functions to be Y2K
compliant by December 31, 1999. However, in the event problems with
electronic commerce are encountered, alternative means will be employed
such as telephones and FAX.
General Economic Conditions and Inflation
Although net sales are heavily influenced by the price of copper, the
Company's major raw material, the Company's operating results are
generally not affected by changes in copper prices because the Company
generally has been able to pass on its cost of copper to its customers.
The Company attempts to match its copper purchases with its production
requirements and thereby minimize copper cathode and rod inventories. The
Company cannot predict future copper prices or the effect of fluctuations
in the cost of copper on the Company's future operating results.
The Company believes that it is only affected by inflation to the extent
that the economy in general is thereby affected. Should inflationary
pressures drive costs higher, the Company believes that general industry
competitive price increases would sustain operating results, although
there can be no assurance that this will be the case. In addition, the
Company believes that its sensitivity to downturns in its primary markets
is less significant than it might otherwise be due to its diverse customer
base, broad product line and its strategy of attempting to match its
copper purchases with its needs.
Information Regarding Forward Looking Statements
This document, particularly the section titled "Impact of Year 2000",
contains various forward-looking statements and information that are based
on management's belief, as well as assumptions made by and information
currently available to management. Any statements made that are not
historical in nature, including statements preceded by the words "intend",
"expect", "would", and similar expressions are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Such statements are
subject to certain risks, uncertainties and assumptions. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
expected. Among the key factors that may have a direct bearing on the
Company's operating results and forward-looking statements included herein
are fluctuations in the economy, acquisition and consolidation activity in
the Company's businesses, the willingness of customers to accept more
distant distribution channels, demand for the Company's products, the
impact of price competition, the ability to obtain and implement Y2K
compliant hardware and software and fluctuations in the price of copper.
Further risk factors that may effect the Company's operating results and
forward-looking statements can be found in the Company's registration
statement on Form S-1, File No. 333-22043, declared effective on September
17, 1997.
Subsequent Event
27<PAGE>
Essex International and Superior TeleCom Inc. ("Superior") jointly
announced on October 22, 1998 that they have entered into a definitive
merger agreement (the "Merger Agreement") whereby Superior, through a
wholly owned acquisition subsidiary, will purchase up to 22, 562, 135
shares of common stock of Essex International (approximately 81% of
outstanding Essex International common stock) in a cash tender offer (the
"Offer"), and subsequently acquire the remaining shares of common stock of
Essex International in a second step merger. In a separate arrangement,
Bessemer Holdings L.P. ("Bessemer"), Essex International's largest
stockholder, and certain of Bessemer's affiliates have agreed with
Superior to tender their shares of Essex International common stock into
the Offer and otherwise to support the transaction with Superior.
Bessemer and its affiliates own approximately 48% of the outstanding Essex
International common stock.
Pursuant to the Merger Agreement, on October 28, 1998 Superior commenced
the offer for up to 22,562,135 shares of Essex International common stock
for $32.00 per share in cash. The Offer is conditioned on the tender of a
majority of the outstanding shares of Essex International common stock, on
a fully diluted basis, receipt of financing, expiration or termination of
the applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 and certain other conditions. Upon a successful
completion of the Offer, the Merger Agreement requires Superior to
consummate a merger between its acquisition subsidiary and Essex
International in which the remaining shares of Essex International common
stock (other than dissenting shares) will be acquired in exchange for .64
shares of series A cumulative convertible exchangeable preferred stock,
liquidation preference $50.00 per share, of Superior ("Superior Preferred
Stock"), or to the extent the offer is not fully subscribed, a mix of cash
and Superior Preferred Stock. The Superior Preferred Stock will be
convertible into Superior common stock at $56.00 per share. The merger is
subject to the approval of Essex International's stockholders and certain
other conditions.
In connection with the transactions contemplated under the Merger
Agreement, loans outstanding under Essex International's Revolving Credit
Agreement would become due upon completion of the Offer. Superior is
currently in the process of securing a new credit facility to repay loans
outstanding under the Revolving Credit Agreement and to provide for
working capital and other traditional liquidity needs. Essex
International would incur an extraordinary charge of approximately $0.8
million ($1.3 million before tax) for the write-off of unamortized
deferred debt costs associated with the termination of the Revolving
Credit Agreement. Based upon discussions with Mellon Leasing Corporation
with regard to the Sale and Leaseback Agreement and with Three Rivers
Funding Corporation with regard to the Receivable Securitization Program,
the Company expects that both the Sale and Leaseback Agreement and the
Receivable Securitization Program will remain in place following the
transactions contemplated under the Merger Agreement.
Superior, through its wholly owned subsidiary, Superior
Telecommunications Inc., is a leading manufacturer and supplier of
telecommunications cable and wire products to telephone companies,
distributors and system integrators. It also develops and manufactures
voice and data multiplexers and other electronics and signal processing
components and systems.
28<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
2.1 Agreement and Plan of Merger, dated as of October 21, 1998,
among the Company, Superior TeleCom Inc. and SUT
Acquisition
Corp., incorporated by reference to Exhibit 1 to the
Company's Schedule 14D-9, filed with the Securities and
Exchange Commission (the "Commission") on October 28, 1998
(Commission File No. 1-10211).
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
A Current Report on Form 8-K (Items 5 and 7) was filed on
October 23, 1998 announcing the entry into a definitive
merger agreement, dated as of October 21, 1998, among the
Company, Superior TeleCom Inc. and SUT Acquisition Corp.
29<PAGE>
SIGNATURE
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.
ESSEX INTERNATIONAL INC.
(Registrant)
November 9, 1998 /s/ David A. Owen
---------------------------------
David A. Owen
Executive Vice President,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
30<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q as
of September 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000846919
<NAME> ESSEX INTERNATIONAL INC.
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<FISCAL-YEAR-END> DEC-31-1998
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