Item 1. Business
General
We are one of the largest wire and cable manufacturers in North America based on revenues and enjoy number one market share positions in North America in our core outside plant ("OSP") copper communications cable and magnet wire businesses. Superior Essex, a Delaware holding company, was formed to acquire and conduct the business formerly conducted by Superior TeleCom. Prior to December 11, 2002, Superior TeleCom also manufactured wire and cable products for the electrical markets. Based on sales, we are a leading manufacturer and supplier of communications wire and cable products to telephone companies, distributors and systems integrators, CATV companies, and magnet wire and insulation materials to major original equipment manufacturers, or OEMs, and, through our distribution operations, to small OEMs and the motor repair industry. Our magnet wire products are used in industrial, automotive and other motor applications, power transformers and generators, and electrical coils and controls. We manufacture and supply over 30,000 copper, aluminum, fiber optic and composite wire and cable products. In each of our core markets, we believe we offer our customers the largest single source in North America for their respective copper communications cable and magnet wire needs. We also convert copper cathode to copper rod for sale to other wire and cable manufacturers.
Financial information about our business segments and foreign operations is included in Note 19 to the accompanying audited consolidated financial statements for the year ended December 31, 2004 and the period November 11, 2003 to December 31, 2003, and for Superior TeleCom for the period January 1, 2003 to November 10, 2003 and the year ended December 31, 2002.
Chapter 11 Filing and Reorganization
On March 3, 2003, Superior TeleCom and certain of its U.S. subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The Chapter 11 cases were jointly administered (Case No. 03-10607). Superior TeleCom managed its properties and operated its businesses as a "debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. Superior TeleCom's United Kingdom and Mexican operations were not included in the Chapter 11 filings.
Superior TeleCom decided to file a reorganization proceeding because it had been experiencing continued liquidity shortfalls, which hampered its ability to meet interest and principal obligations on its long-term indebtedness. These shortfalls were primarily a result of Superior TeleCom's leverage, the overall global economic downturn and specific industry conditions, including reduced demand levels in the communications sector caused by, among other things, substantial spending reductions by the regional Bell operating companies, sometimes referred to as RBOCs, and independent telephone operating companies, and reduced demand levels in the magnet wire sector.
At the time of the Chapter 11 bankruptcy filing, Superior TeleCom had approximately $892 million of senior secured debt outstanding under a then existing senior credit facility and approximately $230 million of principal and accrued and unpaid interest outstanding under then existing senior subordinated notes. In addition, prior to the Chapter 11 filing, Superior TeleCom's operating activities were also financed through an accounts receivable securitization facility. As part of Superior TeleCom's Chapter 11 proceedings, it filed its original Joint Plan of Reorganization and related disclosure statement on July 30, 2003. On August 28, 2003, Superior TeleCom filed an amended Joint Plan of Reorganization and disclosure statement. As further modified, the amended plan, which was the product of extensive discussion with certain of the largest holders of Superior TeleCom's senior secured debt and others, was confirmed by order of the Bankruptcy Court on October 22, 2003 and became
effective on November 10, 2003. We refer to the amended Joint Plan of Reorganization, as modified, as the "plan of reorganization" or the "plan."
In accordance with the plan of reorganization, on November 10, 2003, the effective date of the plan, we acquired the business formerly conducted by Superior TeleCom and its subsidiaries, and Superior TeleCom and certain of its dormant subsidiaries were deemed dissolved and ceased to have continuing corporate existences, subject only to obligations under the plan of reorganization to satisfy allowed claims. Except as otherwise provided in the plan of reorganization or certain debt documents, on or after the effective date of the plan all property of Superior TeleCom and its subsidiaries vested in us free and clear of all liens, claims, charges or other encumbrances. On and after the effective date of the plan of reorganization, we began operating our business without supervision or approval by the Bankruptcy Court.
Organizational History
We were incorporated under Delaware law in 2003 to acquire, pursuant to Superior TeleCom's plan of reorganization, and conduct the business formerly conducted by Superior TeleCom. Superior TeleCom was incorporated in July 1996 as a wholly owned subsidiary of The Alpine Group, Inc., or Alpine. In October 1996, Alpine completed a reorganization whereby all of the issued and outstanding common stock of two of Alpine's wholly owned subsidiaries, Superior Telecommunications Inc. and DNE Systems, Inc., or DNE, was contributed to Superior TeleCom. Immediately thereafter, Superior TeleCom completed an initial public offering of its common stock, as a result of which Alpine's common stock ownership position in Superior TeleCom was reduced to approximately 50.1%. As a result of treasury stock repurchases, stock grants and other transactions, Alpine's common stock interest in Superior TeleCom at December 31, 2002 and through November 10, 2003 was 48.9%. The plan of reorganization provided for the cancellation of all outstanding shares of common stock of Superior TeleCom, including those held by Alpine, and Alpine had no equity ownership in Superior Essex as of the effective date of the plan of reorganization.
Acquisitions and Dispositions
On December 11, 2002, Superior TeleCom sold the following assets and securities to a subsidiary of Alpine: (1) substantially all of the assets, subject to related accounts payable and accrued liabilities (excluding, however, any secured debt), of Superior TeleCom's electrical wire business; (2) all of the outstanding shares of capital stock of DNE, a manufacturer of multiplexers and other communications and electronic products; and (3) all of the outstanding shares of capital stock of Texas SUT Inc. and Superior Cable Holdings (1997) Ltd., which together owned approximately 47% of Superior Cables Ltd., or Superior Israel, an Israel based wire and cable manufacturer. We refer to this transaction as the Electrical Sale. The sales price for the Electrical Sale was approximately $85 million in cash, plus the issuance to Superior TeleCom of a warrant to purchase 19.9% of the common stock of Essex Electric, an indirect subsidiary of Alpine formed to own and operate the electrical wire business. In addition, pursuant to a securityholders agreement, preemptive rights were granted to Superior TeleCom to purchase a pro rata share of any new equity securities issued by Essex Electric such that Superior TeleCom's ownership on a fully diluted basis, after consideration of exercise of the warrant, would remain at 19.9%. On July 30, 2003, Superior TeleCom received notice of its right to invest in its pro rata share (19.9%) of a proposed equity offering of up to $2.4 million by Essex Electric. Superior TeleCom exercised its right and invested $0.5 million in this offering. In January 2005, we invested an additional $1.2 million in Essex Electric representing our pro rata share of an additional equity offering by Essex Electric and as a result we currently own 15.8% of the outstanding stock of Essex Electric. In addition, we continue to hold a warrant to purchase an additional 4.1% of the common stock of Essex Electric on a fully diluted basis. Superior TeleCom retained a 3% equity interest in Superior Israel, which we acquired in accordance with the plan of reorganization.
On June 1, 2004, Superior Essex Communications acquired certain assets from operating subsidiaries of Belden Inc. ("Belden") related to their North American copper OSP communications wire and cable business (the "Belden Asset Acquisition"). Under the terms of the asset purchase agreement, Superior Essex Communications acquired certain inventories, selected machinery and equipment and certain customer contracts related to a portion of Belden's communications business for total consideration of $83.1 million including a contingent payment of $10 million to be made nine months after closing based on business relationships successfully transitioned to Superior Essex Communications. Belden retained its manufacturing facilities and employees together with all of the associated liabilities, including, among others, accounts payable, any employee-related obligations, plant shutdown costs and environmental obligations. The full contingent payment was made in March 2005.
On September 7, 2004, Essex Group acquired certain assets from Nexans Magnet Wire USA Inc., a wholly-owned subsidiary of Nexans S.A. Company, or Nexans (the "Nexans Asset Acquisition"). Under the terms of the purchase agreement, Essex Group acquired substantially all inventory associated with Nexans' U.S. magnet wire operations and assumed certain U.S. customer contractual arrangements. We intend to use the assets acquired in our magnet wire and distribution business. The total purchase price for the acquisition was $11.6 million.
In February 2005, we announced the signing of a non-binding Memorandum of Understanding ("MOU") with Nexans regarding potential transactions involving Nexans' magnet wire operations in Europe and China. In Europe, the proposed transaction under discussion between the parties would involve a joint venture combining Nexans' European magnet wire and enamel businesses with our U.K. magnet wire business. We would own a majority of the combined entity with Nexans retaining a meaningful minority position. Separately, the MOU includes negotiations for our purchase of Nexans' stake in Nexans Tianjin, a Chinese magnet wire joint venture. Nexans currently owns an 80% share of the entity, with the remainder owned by TMEIC. Under the MOU, our total cash investment for both the European joint venture and Chinese stake would be approximately $32 million. It is expected that the joint venture will obtain external financing for its operations. Closing of the transactions is subject to a number of conditions, including among others successful due diligence and execution of definitive binding purchase agreements.
Our Products and Markets
We divide our business operations into three business segments, based on the principal markets that we serve. The principal products, principal applications and customers of each of our business segments are summarized in the following table:
Business Segments
Principal Products
Principal Applications
Customers
Communications Cable
Copper outside plant (OSP) wire and cable
Outside plant applications including:
Regional Bell operating companies (RBOCs)
Fiber optic OSP and composite cable
•
Voice and data transmission in the local loop;
Major independent telephone companies
Copper and fiber optic premises wire and cable
•
Trunking and feeder applications in local
Distributors
exchange, CATV and
CATV operators
metropolitan rings; and
OEMs
•
Local exchange distribution and service wire
Premises product applications, including:
•
Homes, home offices and offices;
•
Central office switching; and
•
Local area networks (LANs) and wide area networks (WANs)
Magnet Wire and
Distribution
Over 2,000 types of magnet
Industrial motor applications
Global OEMs (industrial,
wire (copper and aluminum)
power, automotive and
Automotive applications
appliance)
Fabricated insulation
products
Power transformers and generators
Small OEMs (power tool and small appliance)
Appliances
Motor repair shops
Electrical coils and controls
Distributors
Motor repair
Copper Rod
Continuous cast copper rod
Basic raw material used in
Internal use
products
the copper wire and cable
industry
Third party copper wire and cable producers
Communications Cable
The communications cable segment of our business develops, manufactures and markets the following communications wire and cable products to telephone companies, CATV companies, distributors and system integrators:
(1)OSP products, including (i) copper wire and cable for voice and data transmission used in the distribution, or local loop portion, of the telecommunications infrastructure, principally by the local exchange carriers ("LECs")-(which include the RBOCs and large independent telephone companies); (ii) fiber optic cable products used principally for trunking and feeder applications in local exchange, CATV and metropolitan rings; and (iii) composite (or hybrid) cables, which consist of fiber optic/twisted pair and coaxial/twisted pair cables, for local loop, distribution and service wire applications; and
(2)premises wire and cable products, including copper and fiber optic cables used within buildings to provide connectivity for telecommunications networks, LANs, WANs and switching structures to connect various electronic switching and testing components.
OSP Products.
OSP product revenues were $447.7 million, $285.4 million and $293.5 million for the years ended December 31, 2004, 2003 and 2002, respectively. Increased OSP product revenues in 2004 primarily reflect the impact of the Belden Asset Acquisition as well as increased copper prices. A declining trend in 2003 and 2002 revenues reflects the substantial infrastructure spending reductions initiated by the RBOCs and independent telephone operating companies commencing in the latter half of 2001 and continuing through 2004. In addition, four of the major telephone operating companies experienced negative access line growth in the local loop during this period, which contributed to reduced demand for OSP products. Although capital spending by major telephone operating companies for 2004 continued to be well below historical levels, demand in our basic end markets increased modestly during 2004, which we believe is due in part to higher spending levels to compensate for deferred maintenance by the major telephone companies. Demand for fiber optic OSP cable increased in 2004 after significant declines in 2003 and 2002 due to increased deployment by certain RBOCs of fiber optic cable in their networks.
The majority of our OSP product sales relate to copper OSP products. We are the largest manufacturer of copper OSP communications wire and cable in North America, based on sales. At the end of 2004 we believe we had an approximate 65% share of the total North American copper OSP market. Copper wire and cable are the most widely used media for voice and data transmission in the local loop portion of the traditional telecommunications infrastructure operated by the LECs. The local loop is the segment of the telecommunications network that connects the customer's premises to the nearest telephone company switching center or central office.
Demand for copper OSP wire and cable is dependent on several factors, including the rate at which new access lines are installed in homes and businesses, the level of infrastructure spending for items such as road-widenings and bridges, which generally necessitate replacement of existing utilities including telephone cable, and the level of general maintenance spending by the LECs. The installation of new access lines is, in turn, partially dependent on the level of new home construction and expansion of business. Competitive alternatives to traditional telephone service, such as wireless and cable telephony, have had a negative impact on the demand for copper OSP wire and cable, and these threats are expected to increase. Additionally, the demand for copper OSP products is impacted by the extent to which the RBOCs and other telephone companies deploy fiber optic cable in their networks. Recently, certain RBOCs have announced plans to significantly increase the use of fiber optic cable further downstream in their networks, in some cases all the way to the premises. While we believe that ultimately the transition from copper toward fiber optic cable will be evolutionary, it is possible that the rate of fiber optic replacement will accelerate significantly, which could result in a significant decrease in the demand for our copper OSP cable.
The local loop comprises approximately 180 million residential and business access lines in the United States. The installed base of copper wire and cable and associated switches and other components utilized in the local loop represents an investment of over $150 billion that must be maintained by the LECs. Although other media, such as fiber optic cable, are used for trunk lines between central offices and for feeder lines connecting central offices to the local loop, a substantial portion of all local loop lines and systems continues to be copper based. We believe that in the local loop, copper based networks require significantly lower installation costs than other alternative networks such as fiber optics.
Copper usage in the local loop continues to be supported by technological advances that expand the use and bandwidth of the installed local loop copper network. These technologies, together with regulatory developments and increased competition among service providers, have accelerated the demand for and the introduction of new high-speed and bandwidth intensive telecommunications services, such as integrated voice and data, digital subscriber lines, or DSL, broadcast and conference
quality video, Internet, high-speed LAN-to-LAN connectivity, "Voice over Internet Protocol" or VoIP, and other specialized bandwidth intensive applications, all of which can now be provided over the copper based local loop network.
Our copper OSP products include distribution cable and service wire products, ranging in size from a single twisted pair to a 4,200-pair cable. The basic unit of virtually all copper OSP wire and cable is the "twisted pair," a pair of insulated conductors twisted around each other. Twisted pairs are bundled together to form communications wire and cable. Our copper OSP wire and cable products are differentiated by a multitude of design variations, depending on where the cable is to be installed. Copper OSP products normally have metallic shields for mechanical protection and electromagnetic shielding, as well as an outer polyethylene jacket.
The fiber optic OSP cables we manufacture can be used in a variety of installations, such as aerial, buried and underground conduit, and can be configured with two to 288 fibers. These cables are sold to our traditional customers, such as distributors and LECs (including the RBOCs), as well as new customers, such as CATV companies and campus networks.
We are and Superior TeleCom historically was a key supplier of copper OSP wire and cable to the RBOCs and Sprint Corporation. It is estimated that the RBOCs and Sprint comprise approximately 68% of the North American copper OSP market. The remaining North American market is comprised of more than 1,200 smaller independent telephone companies. For years ended December 31, 2004, 2003 and 2002, a total of 63%, 65% and 66%, respectively, of Superior TeleCom's and our OSP product net sales were to the RBOCs and Sprint. We sell to the RBOCs and major independent telephone companies through a direct sales force.
Our sales to the RBOCs and the major independent telephone operating companies are generally pursuant to multi-year supply arrangements in which the customer agrees to have us supply a certain portion of the customer's OSP wire or cable needs during the term of the arrangement. Typically, customers are not required to purchase any minimum quantities of product under these arrangements. At December 31, 2004, we had multi-year arrangements with three of the four RBOCs and with Sprint.
Premises Products
Premises product revenues were $82.7 million, $54.9 million and $57.8 million for the years ended December 31, 2004, 2003 and 2002, respectively. We have experienced increased demand for our copper and fiber premises products during 2004 which we believe is due to growing investment in information technology, including new and upgraded computer systems and associated wiring. We believe the increase in 2004 premises product sales also reflects an increase in our market share. Demand for premises products declined approximately 5% in 2003 as compared to 2002 and 13% in 2002 as compared to 2001, with an attendant impact on the pricing in these markets. Reduction in demand for premises products during these periods was principally associated with reductions in overall investments in telecom projects and commercial office construction, including reduced spending for computer networks and other information technology infrastructure projects.
Premises wire and cable is used within buildings to provide connectivity for telecommunications networks and LANs and within switching structures to connect various electronic switching and testing components. Rapid technological advances in communications and computer system capabilities have created increasing demand for greater bandwidth capabilities in wire and cable products. Demand for premises wire and cable products is dependent upon new office building construction, technological upgrades of existing office buildings networks and residential construction.
There are two primary applications for communications wiring systems within buildings: data applications, estimated at 88% of new wiring system investment and voice applications, estimated at 12% of new wiring system investment.The primary voice application consists of networking telephone
stations. The primary data application is LANs, which require the wired interconnection of workstations and peripherals, such as printer and file servers, to form a network.
Four major types of cables are currently deployed in premises applications: (i) LAN copper twisted pair (unshielded twisted pair, or UTP, and shielded twisted pair, or STP), (ii) LAN fiber optic cable, (iii) LAN coaxial cable and (iv) voice grade twisted copper pair.
Our current premises wire and cable product offerings include high performance data transmission cables (Category 6 and Category 5e) ranging in size from 4-pair to 25-pair. These cables are designed and manufactured for use in both plenum (horizontal) and riser (vertical) environments. Our fiber optic premises cables contain from one to 144 fibers and are used principally for data network backbone applications.
Our premises wire and cable products are sold primarily through major national distributors, international distributors, and smaller regional distributors who in turn resell to contractors, international and domestic telephone companies and private overseas contractors for installation in industrial, commercial and residential markets. While there were two major industry consolidating transactions during 2004, the premises wire and cable market remains fragmented, with more than 20 premises wire and cable manufacturers in North America and more than 75 worldwide.
Superior Israel. Prior to December 11, 2002, the operations of the communications segment included Superior Israel. On December 11, 2002, in connection with the Electrical Sale, Superior TeleCom sold substantially all of its investment in Superior Israel to Alpine Holdco. We continue to own a 3% equity interest in Superior Israel. Superior Israel's net sales represented 21% of the communications cable segment's total sales in 2002.
DNE Systems. The communications cable segment's operations also included the operations of DNE for periods prior to December 11, 2002, when DNE was sold to Alpine Holdco. DNE designed and manufactured data communications equipment, integrated access devices and other electronic equipment for defense, government and commercial applications. DNE's net sales were not material in relation to the total net sales of the communications cable segment.
Magnet Wire and Distribution
The magnet wire and distribution segment of our business develops, manufactures and markets magnet wire and related products to major OEMs for use in motors, transformers and electrical coils and controls. We also distribute magnet wire and fabricated insulation products manufactured by us and related accessory products purchased from third parties to small OEMs and motor repair facilities. We market our products internationally to global OEMs and through authorized distributors.
The magnet wire and distribution segment currently operates eight global magnet wire manufacturing plants in the U.S., United Kingdom and Mexico and two insulation fabricating plants in the U.S. Our magnet wire manufacturing facility in Torreon, Mexico is strategically located to service major U.S. OEM customers with Mexican manufacturing locations as well as to allow us to pursue new market opportunities in Mexico, Central America and South America. We also distribute insulation and other accessory products to customers in Mexico from this location. Our business in the United Kingdom is the largest manufacturer of magnet wire in the United Kingdom, as measured by copper equivalent pounds sold.
In February 2005 we announced plans to enter the Chinese magnet wire market through construction of a wholly owned "greenfield" facility. We intend to form a wholly owned subsidiary that will be based near Shanghai in the New Suzhou district. The facility will be constructed to provide initial capacity of 24 million pounds per year of magnet wire, with the infrastructure in place to increase production up to 44 million pounds per year at a later date if market conditions warrant. It is expected that the first 12 million pounds of capacity will be on line in mid-2006, with an additional
12 million pounds coming on line by the end of 2006. The total investment for this initial phase of construction is expected to be approximately $25 million. We believe this opportunity will allow us to target our North American customers who have migrated to China and enter the rapidly growing Chinese magnet wire market.
Additionally in February 2005, we signed a non-binding Memorandum of Understanding ("MOU") with Nexans regarding potential transactions involving Nexans' magnet wire operations in Europe and China. In Europe, the proposed transaction under discussion between the parties would involve a joint venture combining Nexans' European magnet wire and enamel businesses with our U.K. magnet wire business. We would own a majority of the combined entity with Nexans retaining a meaningful minority position. The Company estimates that 2004 pro forma revenues for the proposed joint venture would be approximately $400 million (at current exchange rates), making it the largest magnet wire business in Europe. Separately, the MOU includes negotiations for our purchase of Nexans' stake in Nexans Tianjin, a Chinese magnet wire joint venture. Nexans currently owns an 80% share of the entity, with the remainder owned by TMEIC. Total 2004 revenues for this entity were approximately $15 million. We believe this investment together with our planned greenfield Chinese facility will provide us with considerable product and geographic diversity in our Chinese magnet wire business. Under the MOU, our total cash investment for both the European joint venture and Chinese stake would be approximately $32 million. Closing of the transactions is subject to a number of conditions, including among others successful due diligence and execution of definitive binding joint venture and purchase agreements.
Magnet Wire/Winding Wire
Magnet wire/winding wire sales were $473.1 million, $354.2 million and $366.2 million for the years ended December 31, 2004, 2003 and 2002, respectively. We are the leading supplier of magnet wire in North America as measured by revenues and copper equivalent pounds sold. Magnet wire is enamel coated copper or aluminum wire that is wound into coils and used in electrical motors, controls, switches and other electronic devices. The principal end market applications include motors used in industrial, automotive and other applications, and for appliances. Magnet wire is also used in transformers for power generation by power utilities and for power conversion and electrical controls in industrial applications. We offer a comprehensive line of magnet wire products including over 2,000 types of magnet wire ranging in diameter from 4 gauge to 46 gauge.
Due to the weak industrial economic environment, the North American market for magnet wire declined by approximately 12% during 2001 and 7% in 2002 resulting in a reduction in net sales of magnet wire products during this period. This overall decrease was driven by the weak industrial sector as well as the shift of manufacturing by certain customers to lower cost labor regions such as China. Despite some stabilization of the industrial sector in 2003, demand for magnet wire in North America continued to decline in 2003, due to continued weak demand and continuing customer migration to lower cost foreign suppliers. Demand for 2004 stabilized reflecting the overall improvement in the general economy, as well as in our basic end markets, particularly related to industrial production and durable goods, transformers and power generation. Offshore migration slowed considerably in 2004 due to a variety of energy and infrastructure issues in China. Government mandated electrical power shutdowns and limited availability of steel and other major raw materials slowed movement of electrical goods production to China from North America.
We work closely with global OEMs to develop new magnet wire products and enhancements to existing products for applications in energy efficient motors, generators and transformers. These products include inverter duty magnet wire for use by OEM motor manufacturers where high voltage spikes are encountered and wire with additional abrasion resistance and thermal protection for use in severe motor/generator winding applications and for form wound coils made with rectangular cross
section wire. We believe our ability to formulate and produce our own enamel coatings allows us to distinguish ourselves in terms of quality and low-cost production relative to our competitors.
Our magnet wire strategy is built upon the foundation of sales to major OEMs through quality products, strategic sales and marketing efforts, technical and customer service and long-term relationships. Our largest OEM customers include, among many others, A.O. Smith, Bosch, Cooper Industries, Delphi, Emerson, Howard Industries, Tecumseh Products and Visteon. Sales to these customers are typically pursuant to annual or multi-year supply agreements with a percentage of each customer's total requirements awarded at a negotiated fixed price, subject to adjustment for the cost of copper. For the years ended December 31, 2004, 2003 and 2002, approximately 80%, 82% and 83%, respectively, of magnet wire sales were pursuant to such supply arrangements. In 2004 one customer accounted for 14% of our total magnet wire/winding wire sales.
Essex Brownell Distribution and Accessory Products
Within our magnet wire and distribution segment, we operate the largest national distribution channel for magnet wire and related products. Our Essex Brownell distribution operations provide a single source for motor repair businesses and smaller OEMs to purchase all of their magnet wire, insulation and related accessory product needs. We also manufacture various fabricated insulation products that are primarily marketed and distributed by Essex Brownell. The Essex Brownell distribution operations include a sales force that covers North America, supported by strategically located distribution and warehouse locations. In addition to internally produced magnet wire and insulation products, the Essex Brownell line includes products from more than 400 third party manufacturers. We believe that we have a distinct competitive advantage as we are the only major North American magnet wire producer that also distributes a full line of complementary electrical accessory products used by the motor repair and small OEM markets.
Copper Rod
Through our copper rod business segment, which generated $282.8 million, $171.7 million and $13.7 million of net sales for the years ended December 31, 2004, 2003 and 2002, respectively, we manufacture continuous-cast copper rod, which is the basic raw materials used in the copper wire and cable industry. We operate three copper rod continuous casting units to convert copper cathode into copper rod. The units are located near certain of our major magnet wire manufacturing plants. Prior to 2003, substantially all copper rod produced by our facilities was utilized in our wire and cable manufacturing operations. Due to our having unused capacity as a result of the Electrical Sale and reduced production volumes in both the communications cable and magnet wire and distribution segments, in 2003 we began to actively offer copper rod for sale to third parties. Copper rod produced for internal processing is recorded by the consuming segment at cost. Production of copper rod meeting our internal specifications is approximately one half of all copper rod produced. We sell the remaining copper rod to third parties for various wire and cable applications and to meet a full range of customer needs. We source our remaining internal need for copper rod from third party producers.
We sold copper rod to Essex Electric under a supply and transitional services agreement discussed below. Sales of copper rod to Essex Electric for the years ended December 31, 2004 and 2003 and from December 11, 2002 to December 31, 2002 were $87.1 million, $104.8 million and $10.8 million, respectively, and accounted for 31%, 61% and 79%, respectively, of our copper rod segment sales. Other copper rod customers include major manufacturers and fabricators in the wire and cable industry. Sales to these customers are generally under annual supply arrangements which establish the terms and conditions under which the customer may purchase copper rod during the term of the arrangement. Customers are not typically required to purchase any minimum quantities of product under these arrangements. In addition to Essex Electric, one customer accounted for 36% and three customers accounted for 24% of total copper rod sales for the year ended December 31, 2004. Two
customers (in addition to Essex Electric) accounted for approximately 13% each of the copper rod operations' sales for the years ended December 31, 2003 and a total of four customers (excluding Essex Electric) accounted for approximately 34% of sales for this period.
The market for copper rod is highly competitive and is dominated by a few major producers, including ourselves. Our ability to supply our own copper rod requirements allows us to control the quality and consistency of a substantial portion of the primary raw material for our magnet wire business and also leads to significant cost savings versus buying all of our copper rod requirements from third parities.
We believe we have adequate supplies of copper cathode available from producers and merchants, both foreign and domestic.
Electrical
As previously discussed, on December 11, 2002 Superior TeleCom sold the operations comprising its Electrical Group. The electrical wire business is currently owned and operated by Essex Electric. In connection with the Electrical Sale, Alpine Holdco, Essex Electric and Superior TeleCom entered into a Supply and Transitional Services Agreement. Under this agreement, Essex Electric, among other things, agreed to purchase from Superior TeleCom certain specified quantities of its overall requirements of copper rod. The specified quantities represented a range of Essex Electric's estimated total annual copper rod requirements for use in its building and industrial wire manufacturing process. The purchase price for copper rod specified in this agreement was based on the COMEX price plus an additional amount to reflect conversion to copper rod. This agreement also provided for Superior TeleCom's provision of certain administrative services to Essex Electric. Charges for these services were generally based on actual usage or an allocated portion of the total cost to Superior TeleCom. On November 7, 2003, this agreement was replaced by a new Supply and Services Agreement between Superior Essex and Essex Electric. The new agreement provided for the supply by us to Essex Electric of copper rod, on similar pricing terms, for 2004 and our provision of certain specified administrative services that were more limited than those contained in the original agreement. Charges for administrative services provided to Essex Electric amounted to $1.1 million, $4.4 million and $0.3 million for the years ended December 31, 2004 and 2003 and the period from December 11, 2002 to December 31, 2002, respectively. The new agreement expired on December 31, 2004. We continue to sell copper rod to Essex Electric under an annual supply agreement.
Raw Materials and Manufacturing
The principal raw materials we use in the manufacture of our wire and cable products are copper, aluminum, bronze, steel, optical fibers and plastics, such as polyethylene and polyvinyl chloride. Copper rod is the most significant raw material used in our manufacturing process. We believe that we are one of the largest North American consumers of copper rod. Due to the importance of copper to our business, we maintain a centralized metals operation that manages copper procurement and provides vertical integration in the production of copper rod and in scrap recycling.
As discussed above, we operate three copper rod continuous casting units strategically located in proximity to certain of our major wire producing plants to minimize freight costs. These facilities convert copper cathode into copper rod which is then shipped and utilized directly in our manufacturing operations or sold to third parties.
We purchase copper cathode and, to the extent not provided internally, copper rod from a number of copper producers and metals merchants. Generally, copper cathode and rod purchases are pursuant to supply agreements which extend for a one-year period and are normally based on the COMEX price and, in the case of rod, an additional amount to reflect cathode conversion, plus a premium to cover transportation costs and payment terms.
Historically, we have had adequate supplies of copper available from producers and merchants, both foreign and domestic. In addition, competition from other users of copper has not affected our ability to meet our copper procurement requirements. During the last quarter of 2003 and continuing into 2004, foreign economies have been consuming an increasing proportion of worldwide copper production resulting in a reduction of copper stock levels held in COMEX and LME warehouses and sold through merchants. Accordingly, demand for copper could exceed available supply in the event of a major disruption in the supply of copper available from producers. We and Superior TeleCom have historically purchased the majority of our copper requirements from producers and have accessed COMEX warehouse supplies on only a limited basis. Although neither we nor Superior TeleCom have experienced any shortages in the recent past, no assurance can be given that we will be able to procure adequate supplies of our essential raw materials to meet our future needs.
Copper is a commodity and is therefore subject to price volatility. Fluctuations in the cost of copper have historically not had a material impact on profitability due to the ability in most cases to adjust product pricing in order to properly match the price of copper billed with the copper cost component of inventory shipped. Additionally, we, to a limited extent, utilize COMEX fixed price futures contracts to manage our commodity price risk. We do not hold or issue these contracts for trading purposes.
In addition to copper rod, we are also vertically integrated in the production of magnet wire enamels. We believe one of our primary cost and quality advantages in the magnet wire business is the ability to produce most of our enamel and copper rod requirements internally.
The other raw materials we use in the manufacture of our wire and cable products include aluminum, bronze, steel, optical fibers and plastics, such as polyethylene and polyvinyl chloride. The markets for certain of these key raw materials are extremely tight and are forecasted to remain so for the near term. There can be no assurance that we will be able to procure adequate supplies of our essential raw materials to meet our future needs.
Seasonality
We have historically experienced seasonal fluctuations in our revenues, operating income and net income. Our sales volumes are generally lower in our fourth and first fiscal quarters due primarily to cold weather related reduction in demand from our communications cable segment customers and the impact of year end holiday related plant shutdowns of major OEM customers of our magnet wire and distribution segment.
Export Sales
Export sales from the U.S. during the years ended December 31, 2004, 2003 (combined Superior Essex and Superior TeleCom) and 2002 were $146.8 million, $86.1 million and $87.4 million, respectively. Our primary markets for export sales are Latin America and Canada.
Backlog; Returns
Backlog in the communications cable segment typically consists of two to five weeks of sales depending on seasonal and overall industry demand issues. Our other product lines have no significant order backlog because we follow the industry practice of stocking finished goods to meet customer demand on a just-in-time basis. We believe that the ability to fill orders in a timely fashion is a competitive factor in the markets in which we operate. Historically, sales returns have not had a material adverse effect on results of operations.
Competition
The market for wire and cable products and copper rod is highly competitive. Each of our businesses competes with at least one major competitor. However, due to the diversity of our product lines as a whole, no single competitor competes with us across the entire spectrum of our product lines.
Many of our products are made to industry specifications and, therefore, may be interchangeable with competitors' products. We are subject to competition in many markets on the basis of price, delivery time, customer service and our ability to meet specialty needs. We believe we enjoy strong customer relations resulting from our and Superior TeleCom's long participation in the industry, emphasis on customer service, commitment to quality control, reliability and substantial production resources.
Research and Development
We operate research and development facilities in Kennesaw, Georgia and Fort Wayne, Indiana. The Kennesaw facility's efforts primarily address the needs of the communications cable segment's premises product lines and product cost-reduction activities. At the Fort Wayne facility, our metallurgical and chemical labs are focused on the development of magnet wire metal properties and processing qualities, as well as enhancement of enamels and their application in the magnet wire manufacturing process.
Aggregate research and development expenses during the years ended December 31, 2004, 2003 and 2002 amounted to $3.9 million, $3.9 million and $8.4 million, respectively. The decrease in research and development expenses for the years ended December 31, 2004 and 2003 as compared to the year ended December 31, 2002 is attributable to the effects of the Electrical Sale. Research and development expenses with respect to the communications cable and magnet wire and distribution segments have remained relatively consistent over these periods.
Although we hold certain trademarks, licenses and patents, none is considered to be material to our business.
Employees
As of December 31, 2004, we employed approximately 3,000 employees with approximately 670 persons represented by unions, all of which work in our magnet wire and distribution segment. Collective bargaining agreements expire at various times between June 2005 and April 2007. The collective bargaining agreement at our Vincennes, Indiana magnet wire facility, covering approximately 8% of our workers, expired on October 1, 2004. We have signed an extension which provides that the collective bargaining agreement will remain in effect unless either party gives ten days prior notice of its intent to terminate the agreement. Management and union representatives have been negotiating to reach a new collective bargaining agreement. Two proposals were not accepted by the union membership. The parties are continuing to negotiate to reach a mutually acceptable agreement, but there can be no assurance that these negotiations will be successful. Labor agreements covering an additional 9% of our employees expire during 2006. We consider relations with our employees to be satisfactory.
Environmental Matters
Our manufacturing operations are subject to extensive and evolving federal, foreign, state and local environmental laws and regulations relating to, among other things, the storage, handling, disposal, emission, transportation and discharge of hazardous substances, materials and waste products, as well as the imposition of stringent permitting requirements. We do not believe that compliance with environmental laws and regulations will have a material effect on the level of our capital expenditures
or our business, financial condition, liquidity or results of operations. However, violation of, or non-compliance with, these laws, regulations or permit requirements, even if inadvertent, could result in an adverse impact on our operations, business, financial condition, liquidity or results of operations. During 2001, expenditures of $1.4 million were made by Superior TeleCom, principally related to the installation of air emission control equipment at a facility in Indiana. No material expenditures were made in 2004, 2003, 2002 or 2000. We do not believe that compliance with environmental laws and regulations will have a material effect on our capital expenditures, net income or competitive position.
Other
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available, without charge, on our website, www.shareholder.com/superior/edgar.cfm, as soon as reasonably practicable after they are filed electronically with the SEC. You may also request a copy of these filings, without charge, by writing Mr. Hank Pennington at Superior Essex Inc., 150 Interstate North Parkway, Atlanta, GA, 30339.
Risk factors
The following risk factors should be considered carefully in addition to the other information contained in this Form 10-K. This Form 10-K contains forward looking statements that involve risks and uncertainties. Our actual results could differ materially from those contained in the forward looking statements. Factors that may cause these differences include those discussed below as well as those discussed elsewhere in this Form 10-K.
Risks Relating to Our Business
Our net sales, net income and growth depend largely on the economies in the geographic markets that we serve.
Many of our customers use our products as components in their own products, systems or networks or in projects undertaken for their customers. Our ability to sell our products is largely dependent on general economic conditions, including how much our customers and end-users spend on new construction, maintaining or reconfiguring their communications network, information technology, automobiles and automotive components, industrial manufacturing assets and power transmission and distribution infrastructures. If the U.S. and foreign economies were to weaken, as occurred in the period from 2000 to 2003, many companies could significantly reduce their capital equipment and information technology budgets, and construction activity that necessitates the building or modification of communication networks and power transmission and distribution infrastructures could slow considerably. This could cause our net sales and financial results to decline significantly and we may not be able to service our debt.
The increased use of fiber optic cable in the "local loop" may reduce the market for copper OSP products.
Through our communications cable segment, we are the largest supplier, based on sales, of copper OSP cables used by the RBOCs and other telephone companies in the "local loop" portion of the telecommunications infrastructure. Copper OSP is the communications cable segment's largest product group. However, fiber optic cable, which provides improved bandwidth and transmission speeds as compared to copper cable, has been increasingly deployed in the local exchange network over the past several years. Recently, certain RBOCs have announced plans to significantly increase the use of fiber optic cable further downstream in their networks, in some cases all the way to the premises. While we believe that ultimately the transition from copper toward fiber optic cable will be evolutionary, it is possible that the rate of fiber optic replacement will accelerate significantly, which could significantly
decrease the demand for our copper OSP cable. This decrease could result in a significant decline in sales of copper OSP cable, our net income and liquidity.
Advancing technologies, such as fiber optic and wireless technologies, may make some of our products less competitive.
Technological developments could have a material adverse effect on our business. For example, a significant decrease in the cost and complexity of installation of fiber optic systems or increase in the cost of copper based systems could make fiber optic systems superior on a price performance basis to copper communications systems and may have a material adverse effect on our business. The superior technological characteristics of fiber optic cable have caused companies increasingly to deploy it in the local loop. Also, competitive alternatives to traditional telephone service, such as wireless and cable telephony and VoIP services, have had a negative impact on the demand for copper OSP wire and cable, and these threats are expected to increase. While we sell fiber optic cable and components and cable that is used in certain wireless applications, if fiber optic systems or wireless technology were to significantly erode the markets for copper based communications systems, our sales of fiber optic cable and products for wireless applications would likely not be sufficient to offset any decrease in sales or profitability of other products that may occur.
Spending reductions by the telephone industry could adversely affect our business.
Our largest customer segments for the communications cable segment are the RBOCs and major independent telephone operating or holding companies. Over 66% of the 2004 sales of the communications cable segment are attributable to these customers. Beginning in the second half of 2001 and continuing through 2004, the RBOCs and the independent telephone companies substantially reduced their capital expenditure levels as compared to periods prior to 2001, including substantial reductions in purchases of the communications cable products that we supply. The telephone companies are experiencing extreme competitive pressures from CATV companies and other alternative providers of local exchange service, resulting in negative access line growth and loss of subscribers. These market conditions could result in further reductions in the demand for our communications cable products. Further reductions in demand could lead to a substantial decrease in our revenues, net income and liquidity.
Declines in access lines, including a decline in the new start housing market, could adversely affect our business.
A decrease in access lines to homes and businesses could have a negative impact on our business. Competitive alternatives, such as wireless and cable telephony, digital subscriber lines or "DSL", VoIP services, and cable modems have had a negative impact on the demand for additional access lines. Furthermore, the demand for access lines is impacted by new housing starts. Any negative access line growth resulting from these factors could result in reductions in the demand for our communications cable products.
Migration of magnet wire demand to China may adversely affect our business.
Our business may suffer due to the migration of magnet wire demand to China. Our magnet wire and distribution segment's principal product is magnet wire, which is used primarily in motors for industrial, automotive, appliance and other applications. We currently service the North American market, with limited sales elsewhere. Several of our major magnet wire customers have shifted, or have plans to shift, certain levels of product manufacturing to China. While we have plans to construct a wholly owned "greenfield" manufacturing facility in China and we are currently in negotiations to acquire an 80% stake in Nexans Tianjin, a Chinese magnet wire joint venture, there can be no assurance that we will be successful in establishing production facilities or other arrangements in China in sufficient time to enable us to effectively take advantage of this market, or that we will be able to
successfully compete in China and/or offset any loss of business that may result from declining demand for our products in North America from this shift of customer requirements to China.
Fluctuations in the supply or pricing of copper and other principal raw materials could harm our business.
Copper is the primary raw material that we use to manufacture our products. There are a limited number of copper suppliers in the United States. If we are unable to maintain good relations with our copper suppliers or if there are any business interruptions at our copper suppliers, we may not have access to a sufficient supply of copper. If we were to suffer the loss of one or more important suppliers of copper, we may not be able to meet customer demand, which could result in the loss of customers and revenues.
In addition, copper is a commodity and is therefore subject to price volatility. We may not be able to adjust product pricing to properly match the price of copper billed with the copper cost component of the inventory shipped. Any fluctuations in the cost of copper that we cannot effectively manage could cause us to increase prices for our products, which could hinder our ability to sell those products. Copper pricing under our major telephone company contracts is generally based on the average copper price for the preceding quarter. To minimize the risk of fluctuations in the price of copper, we forward price copper purchases with our suppliers based on forecasted demand. To the extent forecasted demand differs significantly from actual demand, changes in the price of copper may have a negative impact on our operating profit.
Beginning in the fourth quarter of 2003 and continuing through 2004, copper prices have escalated rapidly, increasing from an average of $0.88 per pound for the month of October 2003 to an average of $1.29 per pound for 2004. Additionally, the daily spot price for copper has fluctuated from a low of $1.06 per pound to a high of $1.54 per pound during 2004. The rapid increase in copper prices can impact profitability in the short term based upon the timing of product price adjustments to match the increased copper costs. While we did not experience a material negative impact from this situation in 2003, our results in the second quarter of 2004 were negatively impacted due to accelerated orders by some communications cable customers in the first quarter of 2004 in anticipation of future contractual price adjustments related to increased copper costs. There can be no assurance that continued volatility in copper prices will not impact our future profitability.
In addition, significant increases in the price of copper and the resultant increase in accounts receivable and, to a lesser degree, inventory impacts our working capital requirements. As a result of the increase in copper prices, we have experienced an increase in our working capital financing requirements of $25 million to $30 million. See "Management's discussion and analysis of financial condition and results of operations-Liquidity and Capital Resources" below.
The other raw materials we use in the manufacture of our wire and cable products are aluminum, bronze, steel, optical fibers and plastics, such as polyethylene and polyvinyl chloride. The markets for certain of these key raw materials are extremely tight and are forecasted to remain so for the near term. There can be no assurance that we will be able to procure adequate supplies of our essential raw materials to meet our future needs.
Our inability to compete with other manufacturers in the wire and cable industry could harm our business.
The market for wire and cable products is highly competitive. Each of our businesses competes with at least one major competitor. Many of our products are made to industry specifications and, therefore, may be interchangeable with competitors' products. We are subject to competition on the basis of price, delivery time, customer service and our ability to meet specialty needs. Some of our competitors are significantly larger and have greater resources, financial and otherwise, than we do. There can be no assurance that we will be able to compete successfully with our existing competitors or
with new competitors. Failure to compete successfully could result in a significant decrease in sales of our products and our net income and liquidity.
Our indebtedness may limit cash flow available to invest in the ongoing needs of our business to generate future cash flow.
Our outstanding debt, including our subsidiary's, Superior Essex Holding's, series A preferred stock (which is classified as debt for accounting purposes), as of December 31, 2004 was $293.2 million. We may also incur additional debt from time to time to finance working capital, acquisitions, capital expenditures and other general corporate purposes. Our indebtedness could have important consequences to holders of our common stock. For example, it could:
•require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, reducing the availability of our cash flow to fund working capital, acquisitions, capital expenditures, research and development efforts and other general corporate purposes;
•increase the amount of interest expense that we have to pay, because we increase the principal amount or because some of our borrowings (approximately $30.8 million as of December 31, 2004) are at variable rates of interest, which, if interest rates increase, could result in higher interest expense;
•increase our vulnerability to adverse general economic or industry conditions;
•limit our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate; or
•place us at a competitive disadvantage compared to competitors that have less debt.
We may be unable to meet our covenant obligations under our senior secured revolving credit facility which could adversely affect our business.
Our operations are dependent on the availability and cost of working capital financing and may be adversely affected by any shortage or increased cost of such financing. Our senior secured revolving credit facility contains covenants that we may not be able to meet. If we cannot meet these covenants, events of default would arise, which could result in payment of the applicable indebtedness being accelerated and a cross default to our other indebtedness. In addition, if we require working capital greater than that provided by our senior secured revolving credit facility, we may be required either to (1) seek to increase the availability under the senior secured revolving credit facility, (2) obtain other sources of financing or (3) reduce our operations. There can be no assurance that any amendment of our senior secured revolving credit facility or replacement financing would be available on terms that are favorable or acceptable to us. Moreover, there can be no assurance that we will be able to obtain an acceptable new credit facility upon expiration of our senior secured revolving credit facility or that the terms of any such new credit facility would be acceptable.
We may be unable to raise additional capital to meet capital expenditure needs if our operations do not generate sufficient funds to do so.
Our business is expected to have continuing capital expenditure needs. While we anticipate that our operations will generate sufficient funds to meet our capital expenditure needs for the foreseeable future, our ability to gain access to additional capital, if needed, cannot be assured. If we are unable to obtain additional capital, or unable to obtain additional capital on favorable terms, our business and financial condition could be adversely affected.
Declining returns in the investment portfolio of our defined benefit plans may require us to increase cash contributions to the plans.
Funding for the defined benefit pension plans we sponsor is based upon the funded status of the plans and a number of actuarial assumptions, including an expected long-term rate of return on assets and discount rate. On December 1, 2003, we announced that benefit accruals under our defined benefit pension plans for salaried employees and for eligible employees who are not included in a unit of employees covered by a collective bargaining agreement would be frozen as of January 22, 2004. Due to declining returns in the investment portfolio of our defined benefit pension plans in recent years, the defined benefit plans were underfunded as of December 31, 2004 by approximately $33.9 million, based on the actuarial methods and assumptions utilized for purposes of FAS 87. Our required cash contributions for 2005 are expected to be approximately $3.5 million. In the event that actual results differ negatively from the actuarial assumptions, the funded status of our defined benefit plans may change and any such deficiency could result in additional charges to equity and against earnings and increase our required cash contributions.
If we are unable to retain senior management, our business operations could be adversely affected.
Our success and future prospects depend on the continued contributions of our senior management. There can be no assurances that we would be able to find qualified replacements for these individuals if their services were no longer available. The loss of services of one or more members of our senior management team, and the process of integrating their replacements, could severely disrupt our operations.
Failure to negotiate extensions of our labor agreements as they expire may result in a disruption of our operations.
Approximately 21% of our employees are represented by various labor unions, all of which work in our magnet wire and distribution segment. The collective bargaining agreement at our Vincennes, Indiana magnet wire facility, covering approximately 8% of our workers, expired on October 1, 2004. We have signed an extension which provides that the collective bargaining agreement will remain in effect unless either party gives ten days prior notice of its intent to terminate the agreement. Management and union representatives have been negotiating to reach a new collective bargaining agreement. Two proposals were not accepted by the union membership. The parties are continuing to negotiate to reach a mutually acceptable agreement, but there can be no assurance that these negotiations will be successful. Labor agreements covering an additional 9% of our employees expire during 2006. We cannot predict what issues may be raised by the collective bargaining units representing our employees and, if raised, whether negotiations concerning such issues will be successfully concluded. A protracted work stoppage could result in a disruption of our operations which could adversely affect our ability to deliver certain products and our financial results.
We may not be able to sustain the benefits of the Belden and Nexans Asset Acquisitions or to identify, finance or integrate other acquisitions.
We cannot assure you that we will be able to sustain the benefits of the Belden and Nexans Asset Acquisitions. Customers of Belden and Nexans that have assigned their contracts to us may not continue to purchase at past or anticipated future levels. In addition to the Belden and Nexans Asset Acquisitions, we evaluate possible acquisition opportunities from time to time. We cannot assure you that we will be able to consummate acquisitions in the future on terms acceptable to us, if at all. We cannot assure you that any future acquisitions will be successful or that the anticipated strategic benefits of any future acquisitions will be realized.
We recently emerged from a Chapter 11 bankruptcy reorganization and Superior TeleCom had a history of losses.
On March 3, 2003, Superior TeleCom and certain of its U.S. subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. In accordance with the plan of reorganization, on November 10, 2003, the effective date of the plan, we acquired the business formerly conducted by Superior TeleCom and its subsidiaries. Superior TeleCom incurred net losses of approximately $32.5 million in 2001 and $961.3 million in 2002. We adopted fresh-start reporting as of November 10, 2003, and our emergence from Chapter 11 resulted in a new reporting entity. We may incur losses in the future.
Our historical financial information is not comparable to our current financial condition and results of operations.
As a result of our emergence from bankruptcy, we are operating our business with a new capital structure. We are also subject to the fresh-start reporting prescribed by GAAP and our financial statements for periods subsequent to November 10, 2003 reflect the application of these rules. Accordingly, our financial condition and results of operations will not be comparable to the financial condition and results of operations reflected in the historical financial statements of Superior TeleCom, which may make it difficult for you to assess our future prospects based on historical performance.
Risks Relating to our Common Stock
We cannot assure you as to the market price for our common stock.
Our common stock was only recently listed on the Nasdaq National Market under the trading symbol SPSX. The market price of our common stock will be subject to significant fluctuation in response to numerous factors, including variations in our annual or quarterly financial results or those of our competitors, changes by financial analysts in their estimates of our future earnings, conditions in the economy in general or in the wire and cable industry in particular and other factors beyond our control. No assurance can be given as to the market price for our common stock.
Our dividend policies and other restrictions on the payment of dividends may prevent the payment of dividends for the foreseeable future.
We do not anticipate paying any dividends on our common stock for the foreseeable future. In addition, covenants in our debt instruments restrict our ability to pay cash dividends and may prohibit the payment of dividends and certain other payments. Some institutional investors may only invest in dividend-paying equity securities or may operate under other restrictions that may prohibit or limit their ability to invest in our common stock.
Provisions of our certificate of incorporation and bylaws could discourage potential acquisition proposals and could deter or prevent a change in control.
Some provisions of our certificate of incorporation and bylaws, as well as Delaware statutes, may have the effect of delaying, deferring or preventing a change in control. These provisions, including those providing for the possible issuance of preferred stock and regulating the nomination of directors, may make it more difficult for other persons, without the approval of our board of directors, to make a tender offer or otherwise acquire substantial amounts of our common stock or to launch other takeover attempts that a stockholder might consider to be in such stockholder's best interest. These provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock.
Item 2.
Item 2. Properties
We conduct our principal operations at the facilities set forth below:
(a)The Franklin, Indiana facility is approximately 70,000 square feet, of which 35,000 square feet is leased to Femco Magnet Wire Corporation, a joint venture with the Furukawa Electric Co., Ltd., Tokyo, Japan. Femco manufactures and markets magnet wire with special emphasis on products required by Japanese manufacturers with production facilities in the United States. In addition to the facilities described in the table above, we currently own or lease 21 warehousing and distribution facilities throughout the United States, Canada and the United Kingdom to facilitate the sale and distribution of our products.
We believe that our facilities are generally suitable and adequate for the business being conducted and to service the requirements of our customers. In 2002, Superior TeleCom closed its communications cable segment's manufacturing facilities in Elizabethtown, Kentucky and Winnipeg, Manitoba and its magnet wire manufacturing facility in Rockford, Illinois. The Elizabethtown and Winnipeg facilities were sold in 2003. In 2003, Superior Telecom closed one of its facilities in Columbia City, Indiana that housed a continuous-cast copper rod unit. We will continue, as necessary, to take the appropriate actions to adjust our production capacity to market conditions.
Item 3.
Item 3. Legal Proceedings
On March 3, 2003, Superior TeleCom and certain of its U.S. subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the Unites States Bankruptcy Court for the District of Delaware. On October 22, 2003, the Bankruptcy Court confirmed the plan of reorganization, and the plan of reorganization became effective on November 10, 2003. See "Business-Chapter 11 Filing and Reorganization."
Our operations are subject to environmental laws and regulations in each of the jurisdictions in which we own or operate facilities governing, among other things, emissions into the air, discharges to water, the use, handling and disposal of hazardous substances and the investigation and remediation of soil and groundwater contamination both on-site at past and current facilities and at off-site disposal
locations. On-site contamination at certain of our facilities is the result of historic activities, including certain activities attributable to Superior TeleCom's (or one of its subsidiaries) and our operations and those occurring prior to the use of a facility by Superior TeleCom or us. Off-site liability includes clean-up responsibilities and response costs incurred by others at various sites, under federal or state statutes, for which Superior TeleCom (or one of its subsidiaries) has been identified by the United States Environmental Protection Agency, or state environmental agency, as a Potentially Responsible Party ("PRP"), or the equivalent. At the effective date of the plan of reorganization, Superior TeleCom or one of its subsidiaries had been named as a PRP or a defendant in a civil lawsuit or had received inquiries from environmental regulatory agencies involving a number of off-site or formerly owned locations. Certain PRP representatives filed claims with respect to certain of those sites in connection with Superior TeleCom's Chapter 11 proceedings. The negotiations respecting those claims have been completed, and allowed claims will receive a portion of the $3 million amount that the plan of reorganization allocated to holders of general unsecured claims.
In addition, many of the sites for which Essex International (Essex Group's parent, which Superior TeleCom acquired in 1998 and 1999) and its subsidiaries had been named as a PRP are covered by an indemnity from United Technologies Corporation, or United Technologies, provided in connection with the February 1988 sale of Essex Group by United Technologies to Essex International. Pursuant to the indemnity, United Technologies agreed to indemnify Essex International against losses incurred under any environmental protection and pollution control laws or resulting from, or in connection with, damage or pollution to the environment arising from events, operations or activities of Essex Group prior to February 29, 1988, or from conditions or circumstances existing at or prior to February 29, 1988. To be covered by the indemnity, the condition, event or circumstance must have been known to United Technologies prior to the date of sale (February 29, 1988), and United Technologies must have received notice of the indemnity claim prior to February 28, 1993. The sites covered by this indemnity historically have been handled directly by United Technologies and required payments generally have been made directly by United Technologies. Most of these sites are mature sites where allocations of liability have been settled and remediation is well underway or has been completed.
United Technologies also provided an additional environmental indemnity, referred to as the "basket indemnity." This indemnity relates to liabilities arising from environmental events, conditions or circumstances existing at or prior to February 29, 1988 of which United Technologies received notice prior to February 28, 1993. As to such liabilities, Essex International is responsible for the first $4.0 million incurred. Thereafter, United Technologies has agreed to indemnify Essex International fully for any liabilities in excess of $4.0 million. Essex International has not incurred any liabilities covered by this indemnity.
Except for air quality violations involving two currently operated Indiana facilities, none of the sites or matters mentioned above involves the imposition of sanctions, fines or administrative penalties on us. The Indiana Department of Environmental Quality ("IDEM") asserted claims for fines or administrative penalties relating to alleged air permitting violations at the two Indiana facilities. These claims have been resolved in the bankruptcy claims resolution process by allowing IDEM a general unsecured claim against a portion of the $3 million amount that the plan of reorganization allocated to holders of unsecured claims.
We believe that any other environmental matters or proceedings in which we are involved have been or will be addressed in the bankruptcy claims resolution process, are subject to indemnification, or will not have a material adverse effect either individually, or in the aggregate, on our business, financial condition, liquidity or results of operations. There can be no assurance that future developments will not alter this conclusion.
Since approximately 1990, Essex International and certain subsidiaries have been named as defendants in a number of product liability lawsuits brought by electricians, other skilled tradesmen and
others claiming injury, in a substantial majority of cases, from exposure to asbestos found in electrical wire products produced many years ago. Litigation against various past insurers of Essex International who had previously refused to defend and indemnify Essex International against these lawsuits was settled during 1999. Under the settlement, Essex International was reimbursed for substantially all of its costs and expenses incurred in the defense of these lawsuits, and the insurers have undertaken to defend, are currently directly defending and, if it should become necessary, will indemnify Essex International against those asbestos lawsuits, subject to the terms and limits of the respective policies. Under the plan of reorganization, certain of the claimants in these actions will be able to assert claims under applicable insurance coverage and other similar arrangements. We believe that Essex International's liability, if any, in these matters will not have a material adverse effect either individually, or in the aggregate, upon our business, financial condition, liquidity or results of operations. There can be no assurance, however, that future developments will not alter this conclusion.
On January 18, 2002, United Technologies brought a third party claim against Essex International in a civil action in Massachusetts. United Technologies had been sued by an insurer for, among other things, approximately $3.1 million in compensatory damages for retrospective premiums for 1999, 2000 and 2001 relating to certain events that allegedly occurred while Essex Group was a subsidiary of United Technologies. United Technologies' third party complaint against Essex International contended, among other things, that Essex International had agreed, in the stock purchase agreement dated January 15, 1998, to pay such premiums and sought a declaratory judgment, contribution and indemnification for any such retrospective premiums that United Technologies might have to pay the insurer. On January 13, 2003, the court granted the insurer's motion for summary judgment against United Technologies and Essex International's motion to dismiss with prejudice United Technologies' claim against it. United Technologies thereafter indicated an intention to appeal the ruling dismissing the action against Essex International. However, before Essex International's time to respond, those proceedings were stayed by the filing of Superior TeleCom's bankruptcy proceedings. United Technologies and the insurer filed proofs of claim in connection with Superior TeleCom's bankruptcy. We believe that these claims have been addressed in the bankruptcy claims resolution process and will not have a material adverse effect either individually, or in the aggregate, on our business, financial condition, liquidity or results of operations. There can be no assurance that future developments will not alter this conclusion.
We also are engaged in certain litigations arising in the ordinary course of business. While the outcome of these litigations can never be predicted with certainty, we do not believe that any of these litigations, or any threatened proceedings, either individually or in the aggregate, will have a material adverse effect on our business, financial condition, liquidity or results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is currently traded on the Nasdaq National Market under the trading symbol "SPSX." Our common stock was traded on the Pink Sheets beginning on November 3, 2003 under the trading symbol "SESX.PK" and on the OTC Bulletin Board from February 25, 2004 until November 8, 2004 under the trading symbol "SESX.OB". The high and low bid prices for our common stock since November 11, 2003, the day following the effective date of the plan of reorganization, and for the first, second, third and fourth quarters of 2004 are set forth below:
Our transfer agent is American Stock Transfer & Trust Company, 59 Maiden Lane, New York, New York 10038.
On March 3, 2005, there were 17,034,843 shares of our common stock issued and outstanding and there were approximately 175 record holders (exclusive of beneficial owners of shares held in street name or other nominee form) thereof.
Dividend policy
We have paid no cash dividends on our common stock. We do not currently intend to declare cash dividends on our common stock in the foreseeable future. In addition, our senior secured credit facility and the 9% Notes indenture contain limitations on our ability to pay cash dividends on our common stock.
Recent Sales of Unregistered Securities
On November 10, 2003, the effective date of the plan of reorganization, we issued the following securities:
•to Superior TeleCom's senior secured debt holders or their transferees, (1) 16,500,000 shares of our common stock, representing 100% of our initial outstanding common stock, (2) 5,000,000 shares of series A preferred stock of Superior Essex Holding, and (3) $145 million principal amount of 91/2% senior notes jointly issued by Superior Essex Communications and Essex Group, having a five-year term; and
•to holders of Superior TeleCom's senior subordinated notes, warrants to purchase, until May 10, 2006, up to 868,421 shares of our common stock at a price of $25.00 per share.
Based upon the exemption provided by Section 1145 of the Bankruptcy Code, we believe that the issuance of these securities was exempt from registration under the Securities Act and state securities laws.
On April 14, 2004, Superior Essex Communications and Essex Group completed an offering of $257,100,000 aggregate principal amount of 9% Notes in a private placement to "qualified institutional buyers" pursuant to Rule 144A under the Securities Act. The 9% Notes bear interest at a rate of 9% per year and were issued with an original issue discount of $7.1 million. Fees and expenses related to the offering amounted to $4.9 million. We used the net proceeds of the 9% Notes offering to redeem our subsidiaries' 91/2% senior notes due 2008 and fund the Belden Asset Acquisition. We believe that
the issuance of the 9% Notes was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act, as a private offering to a limited number of sophisticated persons. On October 5, 2004, we completed a registered offer to exchange the 9% Notes for new notes with substantially identical terms.
Equity Compensation Plan Information
The following table sets forth certain information regarding our common stock that may be issued under our equity compensation plans as of December 31, 2004.
(1)Excludes shares of restricted stock awarded as follows: (a) 330,000 shares of restricted stock awarded to our Chief Executive Officer pursuant to his employment contract and the 2003 Plan; (b) 150,000 shares of restricted stock awarded to our executive vice presidents pursuant to their respective employment agreements and the 2003 Plan; (c) 15,000 shares of restricted stock awarded to our directors pursuant to the 2003 Plan; and (d) 53,694 shares of restricted stock awarded to various members of management of the Company pursuant to the 2003 Plan.
(2)In connection with the plan of reorganization of our predecessor Superior Telecom, Inc., we adopted the 2003 Plan, pursuant to which a committee of our board of directors may grant stock options or restricted stock awards to employees, non-employee directors and certain service providers. The 2003 Plan authorizes grants of awards or options to purchase up to 1,833,333 shares of authorized but unissued common stock, stock held in treasury or both. Stock options can be granted with an exercise price less than, equal to or greater than the stock's fair market value at the date of grant. The term of stock options granted shall not exceed 10 years. The 2003 Plan was described in the disclosure statement provided in connection with the plan of reorganization and was part of the plan of reorganization approved by all voting classes of creditors and by the bankruptcy court, but was not separately approved by shareowners following formation of the Company. Purchases of Equity Securities
The following table provides information about our purchases of equity securities that are registered pursuant to Section 12 of the Exchange Act during the quarter ended December 31, 2004:
(a)Represents shares tendered by our Chief Executive Officer to satisfy minimum statutory tax withholdings due upon the vesting of restricted stock awards.
Item 6.
Item 6. Selected Financial Data
Set forth below are selected financial data of Superior Essex and Superior TeleCom. As a result of the plan of reorganization, we acquired the business formerly conducted by Superior TeleCom and its subsidiaries. This information should be read in conjunction with the consolidated financial statements and related notes thereto appearing elsewhere herein and "Management's discussion and analysis of financial condition and results of operations" below. The selected historical consolidated financial data as of December 31, 2004 and 2003 and for the year ended December 31, 2004 and the period November 11, 2003 to December 31, 2003 are derived from the audited consolidated financial statements of Superior Essex. The selected historical consolidated financial data for the period January 1, 2003 to November 10, 2003, and as of the end of, and for the years ended, December 31, 2002, 2001, and 2000 are derived from the audited consolidated financial statements of Superior TeleCom.
Superior TeleCom and certain of its U.S. subsidiaries filed for bankruptcy protection on March 3, 2003. Superior TeleCom's plan of reorganization was confirmed by order of the Bankruptcy Court on October 22, 2003 and became effective on November 10, 2003. The historical consolidated financial statements of Superior TeleCom elsewhere herein have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business, and, for periods subsequent to March 3, 2003, in accordance with AICPA Statement of Position 90-7. As of November 10, 2003, the effective date of the plan of reorganization, we began operating our business under a new holding company and capital structure and we adopted fresh-start reporting for our financial statements. Because of the emergence from bankruptcy and adoption of fresh-start reporting, the historical financial information for Superior TeleCom is not comparable to our financial information for periods after November 10, 2003.
(a)As of November 10, 2003, the effective date of the plan of reorganization, we began operating our business under a new holding company and capital structure and we adopted fresh-start reporting for our financial statements. Because of the emergence from bankruptcy and adoption of fresh-start reporting, the historical financial information for Superior TeleCom is not comparable to our financial information for periods after November 10, 2003.
(b)On December 11, 2002, Superior TeleCom sold substantially all of the assets, subject to related accounts payable and accrued liabilities, of its electrical wire business, all of the outstanding shares of capital stock of DNE Systems, Inc. and approximately 47% of Superior Cables Ltd., or Superior Israel.
(c)Superior TeleCom adopted SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment to FASB Statement No. 13, and Technical Corrections effective January 1, 2003. As a result, the loss on the early extinguishment of debt of $4.6 million previously reported as an extraordinary loss, net of tax, for the year ended December 31, 2001 has been reclassified to other income (expense).
(d)Superior TeleCom adopted SFAS No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002. Adoption of SFAS No. 142 resulted in an impairment charge of $424.5 million, which was recorded as a cumulative effect of accounting change as of January 1, 2002.
(e)Superior TeleCom was in default under its debt agreements and all of its debt outstanding at December 31, 2002 was reflected as a current liability.
(f)Total debt for years prior to December 31, 2002 includes debt of Superior TeleCom's then 50.2% owned Israeli subsidiary, Superior Israel, of $143.9 million and $153.9 million at December 31, 2001 and 2000, respectively.
(g)Mandatorily redeemable preferred stock totaling $5 million at December 31, 2004 and 2003 has been classified as long-term debt in accordance with SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
Superior Essex, a Delaware holding company, and its operating subsidiaries were formed to acquire and conduct the business formerly conducted by Superior TeleCom.
We manufacture a portfolio of wire and cable products grouped into the following segments: (i) our communications cable segment; (ii) our magnet wire and distribution segment; and (iii) our copper rod segment. As discussed in Note 6 to the accompanying audited consolidated financial statements, on December 11, 2002 Superior TeleCom sold the operations comprising its electrical wire business, which we sometimes refer to as the Electrical Group, all of the outstanding capital stock of DNE, and a 47% interest in Superior Israel, to a subsidiary of Alpine. We refer to this transaction as the "Electrical Sale". Our communications cable segment manufactures communications wire and cable products sold to telephone companies, CATV companies, distributors and systems integrators, principally in North America. In addition, included within the communications cable segment for periods prior to December 11, 2002 are DNE and Superior TeleCom's then 50.2% owned Israeli subsidiary, Superior Israel. Our magnet wire and distribution segment manufactures and markets magnet wire and related products to major OEMs for use in motors, transformers and electrical coils and controls. Our magnet wire and distribution segment also distributes magnet wire and fabricated insulation products manufactured by us and related accessory products purchased from third parties to small OEMs and motor repair facilities. Our copper rod operations include sales of copper rod produced by our continuous casting units to external customers. Prior to 2003, substantially all copper rod produced by Superior TeleCom was used in its manufacturing operations. In 2003, due to available capacity resulting from the Electrical Sale and reduced production volumes in both the communications cable and magnet wire and distribution segments, Superior TeleCom began to actively offer copper rod for sale to third parties, including Essex Electric, which was formed by Alpine to acquire the Electrical Group. The Electrical Group manufactured building and industrial wire for applications in commercial and residential construction and industrial facilities.
Industry segment financial data (including sales and operating income by industry segment) for the year ended December 31, 2004, the period November 11, 2003 to December 31, 2003, the period January 1, 2003 to November 10, 2003 and the years ended December 31, 2002 and 2001 are included in Note 19 to the accompanying audited consolidated financial statements.
Chapter 11 Filing and Reorganization
On March 3, 2003, Superior TeleCom and certain of its U.S. subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The Chapter 11 cases were jointly administered (Case No. 03-10607). Superior TeleCom managed its properties and operated its businesses as a "debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. Superior TeleCom's United Kingdom and Mexican operations were not included in the Chapter 11 filings.
Superior TeleCom decided to file a reorganization proceeding because it had been experiencing continued liquidity shortfalls, which hampered its ability to meet interest and principal obligations on its long-term indebtedness. These shortfalls were primarily a result of both the overall global economic downturn and specific industry conditions, including reduced demand levels in the communications cable and magnet wire sectors caused by, among other things, substantial spending reductions by the RBOCs and independent telephone operating companies and reduced demand in the magnet wire sector.
As part of Superior TeleCom's Chapter 11 proceedings, it filed its original Joint Plan of Reorganization and related disclosure statement on July 30, 2003. On August 28, 2003, Superior
TeleCom filed an amended Joint Plan of Reorganization and disclosure statement. As further modified, the amended plan, which was the product of extensive discussion with certain of the largest holders of Superior TeleCom's senior secured debt and others, was confirmed by order of the Bankruptcy Court on October 22, 2003 and became effective on November 10, 2003.
In accordance with the plan of reorganization, on November 10, 2003, the effective date of the plan, we acquired the business formerly conducted by Superior TeleCom and its subsidiaries, and Superior TeleCom and certain of its dormant subsidiaries were deemed dissolved and ceased to have continuing corporate existences, subject only to obligations under the plan of reorganization to satisfy allowed claims. Except as otherwise provided in the plan of reorganization, our senior secured revolving credit facility, our senior notes or any agreement, instrument or indenture relating thereto, on or after the effective date of the plan, all property of Superior TeleCom and its subsidiaries vested in us free and clear of all liens, claims, charges or other encumbrances. On and after the effective date of the plan of reorganization, we began operating our business without supervision or approval by the Bankruptcy Court.
The plan of reorganization provided for the following to occur as of the effective date of the plan (or as soon thereafter as practicable):
•the distribution to Superior TeleCom's senior secured debt holders or their transferees of (1) 16,500,000 shares of our common stock, representing 100% of our initial outstanding common stock, (2) 5,000,000 shares of series A non-convertible preferred stock of Superior Essex Holding, and (3) $145 million principal amount of 91/2% senior secured second lien notes jointly issued by Superior Essex Communications and Essex Group, having a five-year term,
•the distribution to holders of Superior TeleCom's senior subordinated notes of warrants to purchase, until May 10, 2006, up to 868,421 shares of our common stock at a price of $25.00 per share;
•the payment of $3,000,000 in cash to holders of general unsecured claims against Superior TeleCom;
•the consummation of a new $120 million senior secured revolving credit facility to (1) fund repayment of Superior TeleCom's debtor-in-possession, or DIP credit facility and certain expenses relating to the plan of reorganization, (2) provide for working capital needs, (3) fund debt service on the senior notes of Superior Essex Communications and Essex Group and Superior Essex Holding's series A preferred stock and (4) provide for the issuance of letters of credit in connection with the operation of our business;
•the cancellation of all pre-bankruptcy senior secured debt of Superior TeleCom;
•the cancellation of all pre-bankruptcy senior subordinated notes of Superior TeleCom;
•the cancellation of all 81/2% convertible subordinated debentures of Superior TeleCom, which had previously been distributed to holders of the 81/2% trust convertible preferred securities of Superior Trust I in liquidation of that trust;
•the cancellation of all equity and debt interests held in Superior TeleCom by Alpine, Superior TeleCom's former principal stockholder;
•the cancellation of all outstanding shares of common stock of Superior TeleCom, as well as all options, warrants and related rights to purchase or otherwise receive shares of such common stock;
•the ability to issue stock options and/or restricted stock for up to 1.8 million shares of our common stock under Superior Essex's Stock Incentive Plan, with the allocation of awards to be effected by our board of directors following the effective date of the plan of reorganization; and
•the implementation of equity awards to our independent directors as part of Superior Essex's Stock Incentive Plan.
Fresh-Start Reporting
Upon implementation of the plan of reorganization, we adopted fresh-start reporting in accordance with AICPA Statement of Position 90-7, or SOP 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." Under fresh-start reporting, the reorganization value was allocated to our net assets based on their relative fair values in a manner similar to the accounting provisions applied to business combinations under Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141"). Our reorganization value was less than the fair value of the net assets acquired pursuant to the plan of reorganization. In accordance with SFAS No. 141, the excess of the fair value of the net assets over the reorganization value was used to reduce the value of property, plant and equipment. Liabilities existing at the effective date of the plan of reorganization were stated at the present value of amounts to be paid discounted at appropriate current rates. Debt issued in connection with the plan of reorganization was recorded at the stated value, which approximated fair value.
As a result of the reorganization and our implementation of fresh-start reporting, our consolidated financial statements for periods subsequent to November 10, 2003 reflect a new basis of accounting and are not comparable to the historical consolidated financial statements of Superior TeleCom for periods prior to the effective date of the plan of reorganization.
Asset Acquisitions
Belden Asset Acquisition
On June 1, 2004, Superior Essex Communications acquired certain assets from operating subsidiaries of Belden Inc. ("Belden") related to their North American copper OSP communications wire and cable business (the "Belden Asset Acquisition"). Under the terms of the asset purchase agreement, Superior Essex Communications acquired certain inventories, selected machinery and equipment and certain customer contracts related to a portion of Belden's communications business for total consideration of $83.1 million including a contingent payment of up to $10 million to be made nine months after closing based on business relationships successfully transitioned to Superior Essex Communications. Superior Essex Communications intends to use the equipment acquired from Belden in its communications wire and cable business. Belden retained its manufacturing facilities and employees together with all of the associated liabilities, including, among others, accounts payable, any employee-related obligations, plant shutdown costs and environmental obligations. The Company has accrued the full contingent payment of $10 million as of December 31, 2004 which was paid in March 2005.
Nexans Asset Acquisition
On September 7, 2004, Essex Group acquired certain assets from Nexans Magnet Wire USA Inc., a wholly-owned subsidiary of Nexans. Under the terms of the purchase agreement, Essex Group acquired substantially all inventory associated with Nexans' U.S. magnet wire operations and assumed certain U.S. customer contractual arrangements. The Company intends to use the assets acquired in its magnet wire and distribution business. The total purchase price for the acquisition was $11.6 million.
Impact of Copper Price Fluctuations on Operating Results
Copper is one of the principal raw materials used in our wire and cable product manufacturing. Fluctuations in the price of copper affect per unit product pricing and related revenues. Historically, the cost of copper has not had a material impact on profitability, as, in certain cases, we have the ability to adjust prices billed for our products to properly match the copper cost component of our inventory shipped. In our communications cable segment these adjustments include, among others, certain contractual arrangements under which product prices are adjusted quarterly based on an
average of previous periods' copper indices. Beginning in the fourth quarter of 2003 and continuing through 2004, copper prices have escalated rapidly, increasing from an average of $0.88 per pound for the month of October 2003 to an average of $1.29 per pound for 2004. Additionally, the daily spot price for copper has fluctuated from a low of $1.06 per pound to a high of $1.54 per pound during 2004. The rapid increase in copper prices can impact profitability in the short term based upon the timing of product price adjustments to match the increased copper costs. Our results in the second quarter of 2004 were negatively impacted due to accelerated orders by some communications cable customers in the first quarter of 2004 in anticipation of future contractual price adjustments related to increased copper costs. Increases in copper prices can also impact our working capital. See "Liquidity and Capital Resources" below.
Results of Operations
The following discussions provide a comparison of our results of operations for the year ended December 31, 2004 and the results of our operations and those of our predecessor, Superior TeleCom, on a combined basis for the year ended December 31, 2003 and the results of operations of Superior TeleCom for the year ended December 31, 2002. The discussions are provided for comparative purposes only, but the value of such comparisons may be limited. The combined results of operations for the year ended December 31, 2003 include our results of operations for the period November 11, 2003 to December 31, 2003 combined with the results of operations of Superior TeleCom for the period January 1, 2003 to November 10, 2003. The combined financial information for the year ended December 31, 2003 is merely additive and does not give pro forma effect to the transactions provided for in the plan of reorganization or the application of fresh-start reporting. As a result of the reorganization and adoption of fresh-start reporting, our results of operations after November 10, 2003 are not comparable to the results of operations of Superior TeleCom for periods prior to November 10, 2003. The information in this section should be read in conjunction with the consolidated financial statements and related notes thereto appearing in Item 8, Financial Statements and Supplementary Data.
Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003
Average copper prices for the year ended December 31, 2004 increased 59% as compared to the year ended December 31, 2003. Due to the impact of this increase on reported sales, the following table provides supplemental sales information adjusted to a constant $0.80/lb COMEX cost of copper to aid in a comparison of period-to-period revenues by segment. Copper-adjusted gross profit margins are computed by dividing actual gross profit by copper-adjusted sales.
Consolidated sales for the year ended December 31, 2004 were $1,424.6 million, an increase of 44% as compared to consolidated sales of $988.0 million for the year ended December 31, 2003. Sales for 2004 were significantly impacted by the increase in copper prices. Sales adjusted for a constant cost of copper increased $183.6 million, or 18%, for 2004 compared to the prior year. Sales in our communications cable segment for the year ended December 31, 2004 also included approximately $115 million ($99 million on a copper-adjusted basis) attributable to customer contracts acquired in the Belden Asset Acquisition. Sales in our magnet wire and distribution segment for 2004 included approximately $12 million on a copper-adjusted basis attributable to customer contracts acquired in the Nexans Asset Acquisition. Excluding the impact of the Belden Asset Acquisition and the Nexans Asset Acquisition, consolidated sales adjusted for a constant cost of copper increased 7% reflecting volume increases in all of our business segments.
Sales for our communications cable segment for 2004 increased 56% compared to sales for 2003. Sales adjusted for a constant cost of copper increased 39%. Excluding the estimated impact of the Belden Asset Acquisition, sales for our communications cable segment adjusted for a constant cost of copper increased $34.9 million, or 10%. The copper-adjusted sales increase in 2004, excluding the effects of the Belden Asset Acquisition, reflects increased demand for our copper OSP cable product lines, which we believe is due in part to higher spending levels to support deferred maintenance by some of our major telephone company customers as well as demand resulting from damage caused by the hurricanes in the southeastern United States in the second half of 2004. These increases in copper OSP cable demand were offset in part by increased deployment of fiber optic cable by one of our major copper OSP customers pursuant to an announced plan to increase the use of fiber optic cable further downstream in their network. We also experienced strong growth in our premises and fiber optic cable products supported by growing investment in information technology, including new and upgraded computer systems and associated wiring and an increase in our market share.
Sales for our magnet wire and distribution segment were $611.5 million for the year ended December 31, 2004, an increase of 28% as compared to the prior year. On a copper-adjusted basis, sales for the year increased 8% over the prior year. Excluding the estimated impact of the Nexans
Asset Acquisition, sales for our magnet wire and distribution business increased 5% over the prior year. The increase reflects volume increases in both our Essex Brownell distribution business and to a lesser degree our major OEM customer base particularly related to the power and energy sector a portion of which we believe is associated with hurricane related repairs.
Copper rod sales for the year ended December 31, 2004 were $282.8 million compared to $171.7 million for 2003, an increase of 65%. On a copper-adjusted basis, 2004 sales for our copper rod segment increased by $11.5 million, or 7%. Pricing for copper rod is generally based on monthly average COMEX spot prices and thus sales are directly impacted by changes in copper prices.
For the year ended December 31, 2004, gross profit was $138.6 million, an increase of 29% as compared to the prior year primarily attributable to increased volume in our communications cable and magnet wire and distribution segments and lower depreciation charges in 2004 resulting from the application of fresh-start reporting. The gross profit margin in 2004 was 9.7% compared to 10.9% for 2003. The comparative decline in gross profit margin reflects the effects of increased copper prices on sales. Gross profit margin on a copper-adjusted basis was 11.7% for the year ended December 31, 2004 compared to 10.8% for the year ended December 31, 2003. Copper-adjusted gross profit margins in our communications cable business increased by 0.3% for 2004 compared to the prior year due to improved capacity utilization resulting from higher sales volumes and a more favorable product mix. These positive factors were partially offset by integration costs incurred in connection with the Belden Asset Acquisition and a shortfall in recovering second quarter 2004 increases in copper costs through contractual product price adjustments. This shortfall was principally the result of first quarter 2004 accelerated orders by some customers in anticipation of copper-based contractual price adjustments. Copper-adjusted gross profit margin for our magnet wire and distribution business for the year ended December 31, 2004 increased 1.1% compared to 2003. This increase reflects lower depreciation charges resulting from the application of fresh-start reporting, increased volume through our higher margin Essex Brownell distribution channel and implementation of price surcharges in the second half of the fourth quarter of 2004 which partially offset certain inflationary cost increases including higher natural gas prices, freight costs and copper producer premiums. The 2004 margins in our magnet wire and distribution business were also positively impacted by a $1.5 million gain from inventory depletion in December when COMEX copper prices, and thus product pricing, reached their peak level for the year.
Selling, general and administrative expenses ("SG&A expense") for the year ended December 31, 2004 were $92.9 million, an increase of 13% as compared to SG&A expense of $82.3 million for the year ended December 31, 2003. The increase is attributable to a number of factors including corporate stock-based compensation charges ($1.2 million), professional fees and costs related to compliance with Section 404 of the Sarbanes-Oxley Act ($3.1 million), amortization charges related to intangible assets acquired in the Belden Asset Acquisition and Nexans Asset Acquisition ($1.0 million) and the impact of increased sales volume on related sales costs and commissions in our communications cable segment.
Superior TeleCom incurred $2.3 million of restructuring and other charges for the period January 1, 2003 to November 10, 2003 primarily relating to ongoing closure activities at the communications cable segment's Elizabethtown and Winnipeg facilities offset by foreign currency transaction gains of $1.5 million related to Superior TeleCom's Canadian subsidiary. Restructuring and other charges for the period January 1, 2003 to November 10, 2003 also included pre-petition professional fees of $3.6 million incurred in connection with preparation for Superior TeleCom's Chapter 11 filings, $1.1 million of severance payments related to a workforce reduction at Superior TeleCom's U.K. subsidiary, $2.3 million of asset impairments resulting from closure of one of Superior TeleCom's continuous copper rod casting lines and $0.8 million of asset impairments resulting from the write-off of abandoned equipment. Restructuring and other charges for the year ended December 31, 2004 and the period November 11, 2003 to December 31, 2003 were $2.0 and $1.2 million, respectively, and consisted primarily of ongoing professional fees related to the implementation of the plan of
reorganization and employee retention and severance payments under plans established by Superior TeleCom in connection with its bankruptcy proceedings.
We had operating income of $43.7 million for the year ended December 31, 2004, compared to $15.3 million for 2003. Operating income in 2003 included restructuring and other charges of $9.8 million compared to $2.0 million of such charges in 2004. The comparative improvement in operating income for the current year was principally attributable to increased sales volumes and related gross profit and reduced restructuring and other charges.
Superior TeleCom recorded a benefit from reorganization items related to its Chapter 11 filing of $890.7 million during the period January 1, 2003 to November 10, 2003 comprised of (i) a gain of $976.4 million on cancellation of indebtedness upon implementation of the plan of reorganization, (ii) gains on settlement of pre-petition liabilities of $5.2 million, (iii) $18.6 million of post-petition professional fees relating to the reorganization, (iv) $27.0 million to adjust the carrying value of Superior TeleCom's Trust Convertible Preferred Securities and related unpaid distributions to the amount of the allowed claim in respect of this liability, (v) $26.4 million to write off deferred debt issuance costs associated with Superior TeleCom's pre-petition debt, (vi) $4.5 million of employee retention and severance payments, (vii) fresh start reporting adjustments of $12.1 million and (viii) $2.3 million of other reorganization related costs.
Interest expense for the year ended December 31, 2004 was $26.3 million compared to interest expense of $29.3 million for the combined 2003 period. Interest expense for the combined 2003 period consisted of interest on Superior TeleCom's debtor-in-possession financing and interest on Superior TeleCom's pre-petition indebtedness through March 3, 2003. At the time of its Chapter 11 filing, Superior TeleCom had approximately $890 million of senior debt and $225 million of senior subordinated notes outstanding. The decrease in interest expense in 2004 reflects our new capital structure under the plan of reorganization offset by borrowings to finance our increased working capital and the Belden Asset Acquisition and Nexans Asset Acquisition.
Superior TeleCom recorded a full valuation allowance for the period January 1, 2003 to November 10, 2003 on its net deferred tax assets as the realization of such assets in future periods was uncertain as a result of the bankruptcy filing. The tax benefit recorded for the period January 1, 2003 to November 10, 2003 primarily represents the elimination of the net deferred tax liabilities existing at December 31, 2002. Our effective tax rate for the period November 10, 2003 to December 31, 2003 was 34%. Our effective tax rate for the year ended December 31, 2004 was 40%. The effective tax rate exceeds the U.S. statutory tax rate due to the impact of state taxes, nondeductible executive compensation and a valuation allowance established with respect to operating losses incurred by our U.K. subsidiary offset by the favorable impact of the settlement of prior outstanding claims. See Note 14 to the consolidated financial statements for a reconciliation of the actual 2004 tax expense to the expected statutory tax expense. A significant portion of the income taxes payable at December 31, 2004 relate to pre-petition claims primarily resulting from state income tax audits of Superior Telecom. The Company is currently in negotiations with state taxing authorities to settle these claims. Although we believe we have adequately provided for any liability that may result from settlement of these claims, the ultimate outcome of the negotiations cannot be predicted with certainty.
Year Ended December 31, 2003 as Compared to the Year Ended December 31, 2002
Average copper prices for the year ended December 31, 2003 increased 13% as compared to the year ended December 31, 2002. Due to the impact of this increase on reported sales, the following table provides supplemental sales information adjusted to a constant $0.80/lb COMEX cost of copper
to aid in a comparison of period-to-period revenues by segment. Copper-adjusted gross profit margins are computed by dividing actual gross profit by copper-adjusted sales.
*Percentage change is not meaningful. Combined sales for the year ended December 31, 2003 were $988.0 million, a decrease of 31% as compared to consolidated sales of $1,440.0 million for the year ended December 31, 2002. Sales for the 2002 period relating to the Electrical Group, DNE and Superior Israel were $581.3 million. Excluding the effects of the Electrical Sale, sales in 2003 increased $129.4 million, or 15% (a 13% increase adjusted for a constant cost of copper) compared to 2002. The increase was due to third party sales of manufactured copper rod of $171.7 million, including $104.8 million sold to Essex Electric, during the year ended December 31, 2003 compared to $13.7 million in 2002, partially offset by sales decreases in our communications cable and magnet wire and distribution segments as discussed below.
Combined sales for the communications cable segment for the year ended December 31, 2003 were $340.2 million as compared to $490.6 million for the comparable 2002 period. Sales for 2002 relating to Superior Israel and DNE were $139.3 million. Excluding the effects of the Electrical Sale, sales decreased $11.1 million in 2003, or 3% (a 4% decrease adjusted for a constant cost of copper) compared to 2002. The communications cable segment's sales decline was due primarily to a reduction in comparative sales of copper OSP cables. OSP cables sales were lower due to reduced spending levels by all of our major telephone company customers following budgetary constraints imposed during the second half of 2001 that continued throughout 2002 and into 2003.
The magnet wire and distribution segment's combined sales were $476.1 million for the year ended December 31, 2003, a decline of 4% (a copper adjusted decline of 5%) as compared to the prior year period. The combined sales decline for the year ended December 31, 2003 as compared to 2002 reflected the reduced demand for magnet wire from our major OEM customers due principally to the comparative decline on a year-over-year basis in the industrial sector, which is a core market for the magnet wire and distribution segment's products, and customer migration to lower cost foreign suppliers.
Total combined sales of copper rod for the year ended December 31, 2003 were $171.7 million compared to $13.7 million for the year ended December 31, 2002. Sales of copper rod to Essex Electric amounted to $104.8 million for the year ended December 31, 2003.
For the year ended December 31, 2003, combined gross profit was $107.4 million, a decline of 37% as compared to the prior year period. Gross profit for the 2002 period relating to the Electrical Group,
DNE and Superior Israel amounted to $50.9 million. Excluding the effects of the Electrical Sale, combined gross profit declined $13.0 million for the year ended December 31, 2003 compared to the corresponding prior year period. The combined gross profit margin for the year ended December 31, 2003 was 10.9% which, after excluding the effects of the Electrical Sale, compares to a gross profit margin of 14.1% for the year ended December 31, 2002. The comparative decline in gross profit was principally the result of lower margins related to the outside copper rod sales in 2003 (as compared to other products) and, to a lesser degree, comparative decreases in the magnet wire and distribution segment's gross profit margin percentages caused by competitive pricing pressures and the impact of manufacturing cost absorption resulting from reduced production levels.
Combined SG&A expense for the year ended December 31, 2003 was $82.3 million, a decrease of 43% as compared to SG&A expense of $143.9 million for the comparable 2002 period. SG&A expense for the 2002 period relating to the Electrical Group, DNE and Superior Israel amounted to $54.3 million. Excluding the effects of the Electrical Sale, combined SG&A expense decreased $7.3 million as compared to the corresponding 2002 period due primarily to cost reductions in Superior TeleCom's business units in response to reduced sales and reductions in non-reorganization related professional fees.
During the year ended December 31, 2002, Superior TeleCom recorded restructuring and other charges of $37.8 million. These charges included $31.8 million, $4.2 million, $0.9 million and $0.9 million, respectively, related to (i) the closure of the communications cable segment's Elizabethtown, Kentucky and Winnipeg, Canada manufacturing facilities, (ii) the closure of the magnet wire and distribution segment's Rockford, Illinois manufacturing facility, (iii) the shutdown of its Electrical Group Canadian operations and (iv) operational restructuring activities at Superior Israel. These actions were taken to more closely align the productive capacity with market demand levels and to reduce overall manufacturing costs. The $37.8 million charge included a $22.6 million write-down of property, plant and equipment, $9.0 million of employee separation costs (relating to 422 employees) and $6.2 million of other facility related closure costs. Superior TeleCom incurred an additional $2.3 million of restructuring and other charges for the period January 1, 2003 to November 10, 2003 primarily relating to ongoing closure activities at the communications cable segment's Elizabethtown and Winnipeg facilities offset by foreign currency transaction gains of $1.5 million related to Superior TeleCom's Canadian subsidiary. Restructuring and other charges for the period January 1, 2003 to November 10, 2003 also included pre-petition professional fees of $3.6 million incurred in connection with preparation for Superior TeleCom's Chapter 11 filings, $1.1 million of severance payments related to a workforce reduction at Superior TeleCom's U.K. subsidiary, $2.3 million of asset impairments resulting from closure of one of Superior TeleCom's continuous copper rod casting lines and $0.8 million of asset impairments resulting from the write-off of abandoned equipment. Restructuring and other charges for the period November 11, 2003 to December 31, 2003 were $1.2 million consisting primarily of ongoing professional fees related to the implementation of the plan of reorganization and employee retention and severance payments.
As discussed in Note 15 to the consolidated financial statements, Superior TeleCom incurred a non-cash loss on asset sale and impairment charge of $177.9 million in 2002 associated with the Electrical Sale. The charge related principally to Superior TeleCom's Electrical Group wire business. As discussed below, Superior TeleCom also incurred a goodwill impairment charge in the fourth quarter of 2002 of $324.7 million.
Combined operating income was $15.3 million for the year ended December 31, 2003 compared to an operating loss of $513.0 million for the comparable 2002 period. The operating loss in 2002 included restructuring and other charges and loss on asset sale and impairment charges of $540.3 million as compared to $9.8 million of such charges for the year ended December 31, 2003. The comparative improvement in operating income for the current year was principally attributable to the decrease in the aforementioned restructuring and other charges offset by lower sales volumes and reduced gross
profit margins in the magnet wire and distribution segment. The operating loss for the year ended December 31, 2002 included a combined operating loss of $3.5 million attributable to the Electrical Group, DNE and Superior Israel.
Superior TeleCom recorded a benefit from reorganization items related to its Chapter 11 filing of $890.7 million during the period January 1, 2003 to November 10, 2003 comprised of (i) a gain of $976.4 million on cancellation of indebtedness upon implementation of the plan of reorganization, (ii) gains on settlement of pre-petition liabilities of $5.2 million, (iii) $18.6 million of post-petition professional fees relating to the reorganization, (iv) $27.0 million to adjust the carrying value of Superior TeleCom's Trust Convertible Preferred Securities and related unpaid distributions to the amount of the allowed claim in respect of this liability, (v) $26.4 million to write off deferred debt issuance costs associated with Superior TeleCom's pre-petition debt, (vi) $4.5 million of employee retention and severance payments, (vii) fresh start reporting adjustments of $12.1 million and (viii) $2.3 million of other reorganization related costs.
Combined interest expense for the year ended December 31, 2003 was $29.3 million, compared to interest expense of $114.3 million for the comparable 2002 period. As a result of Superior TeleCom's Chapter 11 filing, effective March 3, 2003, Superior TeleCom ceased accruing interest on all pre-petition debt in accordance with SOP 90-7. Combined interest expense for the year ended December 31, 2003 consisted primarily of interest related to Superior TeleCom's DIP credit facility ($6.7 million), interest on pre-petition debt through March 3, 2003 ($20.0 million) and interest incurred by us after November 10, 2003 on our senior secured revolving credit facility, senior notes and redeemable preferred stock ($2.7 million).
Superior TeleCom recorded a full valuation allowance for the period January 1, 2003 to November 10, 2003 on its net deferred tax assets as the realization of such assets in future periods was uncertain as a result of the bankruptcy filing. The tax benefit recorded for the period January 1, 2003 to November 10, 2003 primarily represents the elimination of the net deferred tax liabilities existing at December 31, 2002. Our effective tax rate for the period November 10, 2003 to December 31, 2003 was 34%.
Superior TeleCom adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. SFAS No. 142 requires that the amortization of goodwill and certain other intangible assets cease as of January 1, 2002 and that the related recorded value of goodwill be allocated to the identified reporting units of Superior TeleCom and its consolidated subsidiaries and be reviewed annually for impairment. The transitional rules for implementing SFAS No. 142 provided that any goodwill impairment resulting from initial application of this new rule be reflected through a charge to income as a cumulative effect of an accounting change, applied retroactively to January 1, 2002. The impact of economic and industry specific conditions affecting Superior TeleCom's business segments resulted in substantially reduced fair values and thus initial implementation of SFAS No. 142 gave rise to a non-cash goodwill impairment charge of $424 million which was recorded retroactively to January 1, 2002 as a cumulative effect of accounting change. The charge included $166 million related to the Electrical Group and $258 million related to the magnet wire and distribution segment.
Liquidity and Capital Resources
Cash from Operating Activities
We reported cash provided by operating activities of $21.5 million for the year ended December 31, 2004 compared to cash provided by operating activities of $68.3 million on a combined basis for the year ended December 31, 2003. Cash from operations for the combined 2003 period was positively impacted by Superior TeleCom's Chapter 11 filing as payment of interest on pre-petition indebtedness was suspended and actions to collect pre-petition liabilities were stayed pending settlement under a plan of reorganization. In addition, cash from operations for the combined 2003
period included approximately $58.1 million of tax refunds related to Superior TeleCom's fiscal 2002. The tax refund was used to repay pre-petition indebtedness. Cash provided by operating activities for the year ended December 31, 2004 includes a net working capital increase of $5.9 million (exclusive of inventories acquired in the Belden and Nexans asset acquisitions) which reflects incremental accounts receivable attributable primarily to sales under customer contracts acquired in the Belden and Nexans asset acquisitions and the impact of substantially higher copper costs. Additionally, we paid approximately $12.2 million during 2004 of previously accrued reorganization costs consisting primarily of professional fees related to implementation of the plan of reorganization and employee retention and severance payments under plans established by Superior TeleCom in connection with its bankruptcy proceedings and $11.9 million to fund our defined benefit pension plan. Working capital at December 31, 2004 was favorably impacted by an advance payment of $6 million in late December 2004 by one of our major copper rod customers. We closed the Belden Asset Acquisition and the Nexans Asset Acquisition in 2004 and paid a total purchase price of $87.1 million, including related fees and expenses. The purchase price for the acquisitions was primarily financed with the proceeds from our 9% Notes offering. Additionally, a contingent payment of up to $10 million is payable with respect to the Belden Asset Acquisition nine months after the closing based on business relationships successfully transitioned to us. We accrued the full $10 million contingent payment as of December 31, 2004, which was paid in March 2005.
Capital Resources
As previously discussed, the plan of reorganization provided for the issuance, as of the effective date of the plan of reorganization (or as soon thereafter as practicable), of the senior notes of Superior Essex Communications and Essex Group, the series A preferred stock of Superior Essex Holding and 16,500,000 shares of our common stock.
The senior notes were issued jointly by Superior Essex Communications and Essex Group in an aggregate principal amount of $145 million due in November 2008, with interest payable semi-annually in cash at a rate of 91/2%. On April 29, 2004 we redeemed the senior notes with the proceeds from a Rule 144A private placement offering of $257.1 million of 9% unsecured senior notes (the "9% Notes"), completed on April 14, 2004. Interest on the 9% Notes is payable April 15 and October 15 of each year beginning on October 15, 2004. The 9% Notes were issued at an original issue discount of $7.1 million. The proceeds from the offering were also used to pay fees and expenses of the offering and fund the Belden Asset Acquisition. In October 2004, we completed an exchange offering whereby the 9% Notes were exchanged for an equal amount of registered notes with substantially identical terms.
The 9% Notes were issued by Superior Essex Communications and Essex Group and are fully and unconditionally guaranteed by us and each of our existing and future domestic subsidiaries. We may redeem some or all of the 9% Notes at any time on or after April 15, 2008 at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on April 15 of the year set forth below:
We may also redeem up to 40% of the aggregate principal amount of the 9% Notes at a redemption price of 109% of the principal amount thereof using the proceeds of one or more equity offerings completed before April 15, 2007. Additionally, upon the occurrence of specific kinds of changes in control as specified in the indenture governing the 9% Notes, holders of the 9% Notes will
have the right to require us to purchase all or a portion of the outstanding 9% Notes at a purchase price equal to 101% of the principal amount thereof plus accrued interest.
The indenture governing the 9% Notes contains covenants which restrict our ability and the ability of certain of our subsidiaries to, among other things: incur additional debt and issue preferred stock; make certain distributions, investments and other restricted payments; create certain liens; enter into transactions with affiliates; and merge, consolidate or sell substantially all of our assets.
Holders of the series A preferred stock issued by our subsidiary, Superior Essex Holding, are entitled to receive cumulative cash dividends at a rate of 91/2% per annum per share, payable semi-annually. The series A preferred stock ranks junior to all other classes of preferred stock of Superior Essex Holding. The series A preferred stock is mandatorily redeemable in November 2013 at $1 per share plus accrued and unpaid dividends. The series A preferred stock contains certain other mandatory and optional redemption provisions. Each share of series A preferred stock shall have one vote with respect to all matters submitted to stockholders for a vote, provided however, that holders of the series A preferred stock shall not be entitled to vote generally for directors.
On November 10, 2003, Superior Essex Communications and Essex Group entered into a $120 million senior secured revolving credit facility with a $25 million sublimit for letters of credit. In 2004, the senior secured revolving credit facility was amended to increase the total facility amount by $55 million to $175 million. Superior Essex, Superior Essex Holding and our domestic subsidiaries have fully guaranteed the senior secured revolving credit facility. Interest accrues on outstanding borrowings at an annual rate equal to, at our option, LIBOR or a base rate, plus, in each case, an applicable margin, determined quarterly based on average borrowing availability, ranging from 1.75% to 2.75% for LIBOR loans and 0.25% to 1.25% for base rate loans. The applicable margin in effect for the first quarter of 2005 is 1.75% for LIBOR loans and 0.25% for base rate loans. The weighted average interest rate was 4.2% and 3.7% at December 31, 2004 and 2003, respectively. Obligations under the senior secured revolving credit facility are secured by substantially all of our tangible and intangible assets. Availability under the senior secured revolving credit facility is subject to a borrowing base equal to the lesser of (1) $175 million less outstanding letters of credit and (2) a specified percentage of eligible accounts receivable and inventory less specified reserves. The specified percentages of eligible accounts receivable and eligible inventory are each subject to decrease in the reasonable credit judgment of the administrative agent. Currently, the applicable percentages are (i) 85% of eligible receivables and (ii) with respect to eligible inventory the lesser of (a) $70 million or (b) the lesser of (x) 65% of the value of the eligible inventory and (y) 85% multiplied by the net orderly liquidation value percentage then applicable to our inventory multiplied by the value of the eligible inventory. The specified reserves that reduce availability are not fixed and may be imposed by the administrative agent of the revolving credit facility in its reasonable credit judgment. Current reserves include a rent reserve related to property on which collateral is located. Under the revolving credit facility, if availability under the revolving credit line falls below $15 million for any period of two consecutive days, the borrowers will be required to maintain a ratio of 1.1 to 1 of (a) the sum of the consolidated EBITDA of the borrowers minus specified distributions of the borrowers relating to capital expenditures, foreign investments, tax distributions and pension contributions of the borrowers to (b) all principal and cash interest payments on specified debt of the borrowers. The senior secured revolving credit facility also contains covenants that limit our and our subsidiaries' ability to (i) pay dividends, redeem capital stock or make other restricted payments, (ii) sell or dispose of assets, (iii) incur additional indebtedness or permit liens to exist on our property, (iv) engage in transactions with affiliates and (v) make additional investments or acquisitions. Under the terms of the senior secured revolving credit facility, Superior Essex Communications and Essex Group may not declare or make any distributions to the Company except for distributions made for the payment of certain corporate operating expenses, income taxes and certain other specified costs. We are currently obligated to pay an unused commitment fee of 0.375% per annum on the unused amount of the maximum committed amount and a fee of 0.125% per
annum on the outstanding face amount of outstanding letters of credit. A total of $30.0 million was drawn under this facility as of December 31, 2004. Undrawn availability (after considering outstanding letters of credit) on such date amounted to $134.0 million. The senior secured revolving credit facility matures in November 2007, however in accordance with Emerging Issues Task Force Issue 95-22, Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement, borrowings under our senior secured revolving credit facility have been classified as a current liability.
Liquidity
Our principal cash requirements generally include interest payments on our senior secured revolving credit facility and the 9% Notes, dividend payments on our series A preferred stock, capital expenditures currently estimated at approximately $15 million annually, the Belden Asset Acquisition contingent payment and obligations related to our defined benefit pension plans. In addition, the price of copper, our principal raw material, has increased approximately 43% as of December 31, 2004 compared to December 31, 2003. Significant increases in the price of copper and the resultant increase in accounts receivable and, to a lesser degree, inventory impacts our working capital funding requirements. We have experienced an increase in net working capital (excluding short-term borrowings) at December 31, 2004 of approximately $65.8 million compared to December 31, 2003 reflecting the increase in copper prices as well as the impact of the Belden and Nexans Asset Acquisitions. We have also announced plans to construct a wholly owned greenfield manufacturing facility near Shanghai in China. Total investment for the initial phase of construction is expected to be approximately $25 million expended in 2005 and 2006.
As described under "Business-Magnet Wire and Distribution," in February 2005 we announced the signing of a non-binding MOU with Nexans regarding potential transactions involving Nexans' magnet wire operations in Europe and China. Under the MOU, our total cash investment for both the European joint venture and Chinese stake would be approximately $32 million. It is expected that the joint venture will obtain external financing for its operations. Closing of the transactions is subject to a number of conditions, including among others successful due diligence and execution of definitive binding joint venture and purchase agreements.
We believe that cash provided by operations, together with borrowing availability under our senior secured revolving credit facility together with our cash on hand ($18 million at December 31, 2004) will be sufficient to meet our obligations (including the potential transactions involving Nexans' magnet wire operations discussed above) and fund our working capital requirements for the foreseeable future.
Contractual Obligations
As of December 31, 2004, our long-term debt obligations and future minimum payments under capital and operating leases with terms over one year were as follows (in thousands):
(a)The 9% Notes were issued with an aggregate principal balance of $257.1 million and are due in April 2012. Interest on the 9% Notes is payable April 15 and October 15 of each year at the rate of 9% per annum. We may redeem the 9% Notes at any time after April 15, 2008 at redemption prices commencing at 104.5% of the principal amount thereof for redemptions commencing during the twelve-month period beginning April 15, 2008 and declining to 100% of the principal amount thereof for redemptions commencing after April 15, 2010. We may also redeem up to 40% of the aggregate principal amount of the 9% Notes at a redemption price of 109% of the principal amount thereof using the proceeds of one or more equity offerings completed prior to April 15, 2007.
(b)The series A preferred stock is entitled to receive cumulative cash dividends at a rate of 91/2% per annum per share, payable semiannually. The series A preferred stock is subject to mandatory redemption at $1 per share, plus accrued and unpaid dividends, in November 2013. The series A preferred stock may be redeemed, at our option at any time, at $1 per share plus accrued and unpaid dividends.
(c)The sale/leaseback finance obligation reflects a one-time purchase option during the period from December 13, 2008 to December 13, 2009 at a price equal to the greater of $5 million and the then fair market value of the leased property. Annual interest payments are fixed at $0.7 million per year subject to a tri-annual escalator based on increases in the consumer price index.
(d)Other long-term obligations relate to the estimated funding of our defined benefit pension plans. The estimated contributions to our defined benefit pension plan represent the minimum required contributions calculated using an assumed rate of return on assets of 8% and a current liability rate of 6.6%.
(e)Commodity purchase obligations consist of forward fixed price purchase commitments principally for copper cathode, and to a lesser degree, for aluminum and natural gas. We enter into copper cathode purchase obligations to match the copper component of product pricing for outstanding customer orders. We expect that all of these commodity purchases will be used in our normal manufacturing operations.
Critical Accounting Policies
Our consolidated financial statements and the consolidated financial statements of Superior TeleCom are prepared in conformity with accounting principles generally accepted in the United States. In the preparation of these financial statements, management makes judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The significant accounting policies followed in the preparation of the financial statements are detailed in Note 2 to the audited consolidated financial statements. Management believes that the application of policies regarding the implementation of fresh-start reporting, LIFO inventories, establishment of allowances for accounts receivable and inventories, long-lived asset and goodwill impairment, valuation allowances for deferred tax assets and certain accrued expenses involve significant levels of judgments, estimates and complexity.
Upon implementation of the plan of reorganization, we adopted fresh-start reporting in accordance with AICPA Statement of Position 90-7, or SOP 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." Under fresh-start reporting, the reorganization value is allocated to our net assets based on their relative fair values in a manner similar to the accounting provisions applied to business combinations under Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141"). Information concerning the determination of our reorganization value is included in Note 1 to the accompanying consolidated financial statements. The reorganization value was less than the fair value of the net assets acquired pursuant to the plan of reorganization. In accordance with SFAS No. 141, the excess of the fair value of the net assets over the reorganization value was used to reduce the value of property, plant and equipment. Liabilities existing at the effective date of the plan of reorganization were stated at the present value of amounts to be paid discounted at appropriate current rates. Debt issued in connection with the plan of reorganization was recorded at the stated value, which approximated fair value. Deferred taxes were reported in conformity with existing generally accepted accounting principles. The determination of reorganization value and the net fair values of the assets and liabilities was subject to significant estimation and assumptions. Actual results could differ from the estimates made.
We utilize the last-in first-out (LIFO) method of inventory accounting for the majority of our magnet wire and copper rod inventories. Under the LIFO method, cost of sales reflects the current costs of magnet wire and copper rod inventories, while balance sheet inventories are valued at historical costs in the periods the LIFO layers were created. In periods of volatile copper prices, significant differences can arise between the replacement cost of copper inventories and the historic LIFO cost. If we were not able to recover the LIFO value of our inventory at a profit in some future period when replacement costs are lower than the LIFO value of our inventory, we would be required to take a charge to recognize in our income statement all or a portion of the higher LIFO value of the inventory. Additionally, if LIFO inventory quantities were reduced in a period when replacement costs were lower than the LIFO value of the inventory, we would experience a decline in reported margins. Conversely, if LIFO inventory quantities were reduced in a period when the replacement cost of the inventory exceeded the LIFO value, we would experience an increase in reported margins.
Allowances for discounts and sales incentives are made at the time of sale based on incentive programs available to the customer. The cost of these programs is dependent on various factors including the timing of the sale and the volume of sales achieved by the customer. We monitor these factors and revise the provisions when necessary.
Our allowances for surplus and obsolete inventory are based on estimates of future sales and production. Changes in demand and product design can impact these estimates. We periodically evaluate and update assumptions when assessing the adequacy of inventory allowances.
We review long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of the asset to the undiscounted future cash flows expected to be generated by the asset. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the asset's residual value, if any. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount exceeds the fair value of the asset. Assumptions and estimates with respect to estimated future cash flows used in the evaluation of long-lived assets are subject to a high degree of judgment and complexity.
Valuation allowances for deferred tax assets are established when it is estimated it is more likely than not that the tax assets will not be realized. These estimates are based on projections of future income in certain tax jurisdictions. Changes in industry conditions and the competitive environment may impact the accuracy of our projections.
Insurance reserves are provided for estimates of losses due to claims for worker's compensation and health insurance for which we are self-insured subject to certain individual and aggregate limitations. Insurance reserves are established based on estimates of the ultimate value of incurred claims, which often have long periods of resolution. Ultimate claim values are estimated by application of various claim development methodologies to historical paid loss, incurred loss and claim count information. We closely monitor the claims to maintain adequate reserves.
Due to the level of judgment, complexity and period of time over which many of these items are resolved, actual results could differ from those estimated at the time of preparation of the financial statements. Adjustments to these estimates would impact our financial position and future results of operations.
Recent Accounting Pronouncements
In December 2004, the FASB issued Statement 123 (revised 2004), "Share-Based Payment", a revision of Statement 123, "Accounting for Stock Based Compensation." Statement 123(R) supercedes APB Opinion No. 25 and requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (e.g. stock options and restricted stock awards) granted to employees. Statement 123(R) is effective for periods beginning after June 15, 2005. We intend to apply the standard on a modified prospective method. Under this method, all awards granted after the date of adoption must be accounted for under the provisions of Statement 123(R). In addition, compensation expense must be recognized for the unvested portion of previously granted awards and options that remain outstanding at the date of adoption. We will adopt Statement 123(R) effective July 1, 2005 and expect to recognize incremental non-cash compensation expense related to currently outstanding options and awards of approximately $0.4 million in 2005.
In November 2004, the FASB issued Statement 151, "Inventory". This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Statement 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" specified in ARB No. 43. In addition, Statement 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. Statement 151 is effective for periods beginning after June 15, 2005. We do not expect that adoption of Statement 151 will have a material effect on our financial position or results of operations.
In December 2004, the FASB issued Statement No. 153, "Exchanges of Nonmonetary Assets," an amendment of APB Opinion No. 29. This Statement amends Opinion No. 29 to eliminate the
exception to the fair value measurement principle for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this Statement shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect that adoption of Statement 151 will have a material effect on our financial position or results of operations.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We, to a limited extent, use or have used forward fixed price contracts and derivative financial instruments to manage commodity price, interest rate and foreign currency exchange risks. We do not hold or issue financial instruments for investment or trading purposes. We are exposed to credit risk in the event of nonperformance by counter parties for foreign exchange forward contracts, metal forward price contracts and metals futures contracts but we do not anticipate nonperformance by any of these counter parties. The amount of such exposure is generally limited to any unrealized gains within the underlying contracts.
Commodity price risk management
The costs of copper, our most significant raw material, and aluminum have historically been subject to considerable volatility. To manage the risk associated with such volatility, we enter into futures contracts to match the metal component of customer product pricing with the cost component of the inventory shipped. These futures contracts have been designated as cash flow hedges with unrealized gains and losses recorded in other comprehensive income until the hedged sales transactions are reflected in the income statement which are generally expected to occur in the next twelve months. Hedge ineffectiveness, which is not significant, is immediately recognized in earnings. At December 31, 2003, a total of $0.6 million of the unrealized gain arose during the period November 11, 2003 to December 31, 2003 and is recorded in other comprehensive income. We recorded a liability of $3.0 million representing the unrealized loss on sales commitments to customers in connection with the application of fresh- start reporting as of November 10, 2003 corresponding with a $3.0 million unrealized gain on copper futures contracts at that time. Our commodities futures purchase contracts are summarized as follows at December 31, 2004 and 2003:
At December 31, 2003 we also had futures contracts to purchase 110,000 MMBTUs of natural gas which expired in June 2004 with a fair value of $0.1 million. Additionally, at December 31, 2003, we had futures sales contracts for 10.7 million pounds of copper, or $9.5 million, expiring in March 2004
with an estimated fair value(loss) of $(1.6) million. Changes in the fair value of these futures sales contracts are recorded in the consolidated statement of operations on the same line as the underlying exposure being hedged.
Interest rate risk management
In order to limit our exposure to rising interest rates with respect to borrowings under our variable rate senior secured revolving credit facility, we have entered into interest rate cap agreements. The following interest rate cap agreements were outstanding as of December 31, 2004 and 2003:
Foreign currency exchange risk management
We engage, to a limited extent, in the sale of products which result in accounts receivable denominated in foreign currencies. We enter into foreign currency forward exchange contracts to hedge against fluctuations in the value of these receivables. Changes in the fair value of these contracts are reflected in current earnings. At December 31, 2004, we had outstanding foreign currency forward exchange contracts to exchange 7.5 million Canadian dollars for $6.2 million in February 2005. The fair value of the forward exchange contracts was insignificant at December 31, 2004. No foreign currency forward exchange contracts were outstanding at December 31, 2003.
Item 8.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements as of December 31, 2004 and 2003 and for the year ended December 31, 2004 and the period November 11, 2003 to December 31, 2003 and Superior TeleCom's consolidated financial statements for the period January 1, 2003 to November 10, 2003 and for the year ended December 31, 2002, the report of the independent registered public accountants thereon, the financial statement schedule required under Regulation S-X, and our unaudited quarterly results of operations for the year ended December 31, 2004 and the period November 11, 2003 to December 31, 2003 and for Superior TeleCom for the period January 1, 2003 to November 10, 2003, are submitted herein as a separate section following Item 15 of this report.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Form 10-K, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures have been designed and are being operated in a manner that provides reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Changes in Internal Controls Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004. Our management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Superior Essex Inc.
Atlanta, Georgia
We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that Superior Essex Inc. and subsidiaries (the "Company") maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2004 of the Company and our report dated March 15, 2005 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 15, 2005
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Code of Ethics
We have adopted a code of ethics which applies to all officers, directors and employees and is filed as Exhibit 14 to this Form 10-K. The Code of Ethics is entitled Code of Ethics and Business Conduct and is available on our website, www.superioressex.com, under the "Investor Center-Corporate Governance" caption. Any amendments or waivers to the Code of Ethics and Business Conduct will be disclosed on our website promptly following the date of such amendment or waiver. Information on our website, however, does not form a part of this Form 10-K.
The other information called for by Item 10 is incorporated herein by reference to Superior Essex's Proxy Statement to be delivered in connection with its 2005 Annual Meeting of Stockholders.
Item 11.
Item 11. Executive compensation
Information called for by Item 11 is incorporated herein by reference to Superior Essex's Proxy Statement to be delivered in connection with its 2005 Annual Meeting of Stockholders.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information called for by Item 12 with respect to the security ownership of certain beneficial owners and management is incorporated herein by reference to Superior Essex's Proxy Statement to be delivered in connection with its 2005 Annual Meeting of Stockholders.
Information called for by this Item 12 with respect to the securities authorized for issuance under equity compensation plans is incorporated by reference from the section captioned "Equity Compensation Plan Information" in Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities."
Item 13.
Item 13. Certain Relationships and Related Transactions
Information called for by Item 13 is incorporated herein by reference to Superior Essex's Proxy Statement to be delivered in connection with its 2005 Annual Meeting of Stockholders.
Item 14.
Item 14. Principal Accounting Fees and Services
Information called for by Item 14 is incorporated herein by reference to Superior Essex's Proxy Statement to be delivered in connection with its 2005 Annual Meeting of Stockholders.
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a)(1), (a)(2) See the separate section of this report following Item 15 for a list of financial statements and schedules filed herewith.
(a)(3) Exhibits as required by Item 601 of Regulation S-K are listed in Item 15(b) below.
(b) Exhibits
Exhibit
Number
Description
2.1
Disclosure Statement with respect to First Amended Joint Plan of Reorganization of Superior TeleCom Inc. and its affiliated debtors and debtors-in-possession (including the Amended Joint Plan of Reorganization attached as Exhibit A thereto) (incorporated herein by reference to Exhibit 2(a) to the Registration Statement on Form 10 (Registration No. 000-50514) of Superior Essex Inc., as filed with the Securities and Exchange Commission on December 15, 2003, as amended (the "Superior Essex Form 10")).
2.2
Asset Purchase Agreement, dated as of March 18, 2004, by and among Superior Essex Communications LLC, Belden Communications Company and Belden (Canada) Inc. (incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K of Superior Essex Inc. dated June 16, 2004).
3.1
Amended and Restated Certificate of Incorporation of Superior Essex Inc. (incorporated herein by reference to Exhibit 3(a) to the Superior Essex Form 10).
3.2
Restated By-Laws of Superior Essex Inc. (incorporated herein by reference to Exhibit 3(b) to the Superior Essex Form 10).
4.1
Indenture dated as of April 14, 2004 among Superior Essex Communications LLC and Essex Group, Inc., as Co-Issuers, the Guarantors named therein and The Bank of New York Trust Company, N.A., as Trustee (incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Superior Essex Inc. for the quarter ended March 31, 2004 (the "Q1 2004 Form 10-Q")).
4.2
Form of 9% Senior Series B Note due 2012 (included in Exhibit 4.1) (incorporated herein by reference to Exhibit 10.3 to the Q1 2004 Form 10-Q).
4.3
Escrow Agreement dated April 14, 2004, between Superior Essex Communications LLC and Essex Group Inc. as the issuers and The Bank of New York Trust Company, N.A. as escrow agent (incorporated herein by reference to Exhibit 10.4 to the Q1 2004 Form 10-Q).
4.4
Registration Rights Agreement dated April 14, 2004 by and among Superior Essex Communications LLC, Essex Group, Inc., the Guarantors named therein, J.P. Morgan Securities Inc., Lehman Brothers Inc., UBS Securities LLC, Wachovia Capital Markets, LLC and Fleet Securities, Inc. (incorporated herein by reference to Exhibit 10.5 to the Q1 2004 Form 10-Q).
4.5
Registration Rights Agreement, dated as of November 10, 2003, by and among Superior Essex Inc., the holders of Registrable Common Stock (as defined therein) and the holders of the Warrants (as defined therein) and such other Persons who may become a party thereto pursuant to Section 16 or 19(i) thereof (incorporated herein by reference to Exhibit 10(b) to the Superior Essex Form 10).
4.6
Form of Director Restricted Stock Certificate* (incorporated herein by reference to Exhibit 99.2 to the Current Report on Form 8-K of Superior Essex Inc. dated November 10, 2004).
10.1
Credit Agreement, dated November 10, 2003, by and among Superior Essex Communications LLC, as a borrower, Essex Group, Inc., as a borrower, the financial institutions party thereto, as lenders, Fleet Capital Corporation, as collateral and administrative agent for the lenders, General Electric Capital Corporation, as syndication agent, Fleet Securities, Inc. and GECC Capital Markets Group, Inc., as co-lead arrangers (incorporated herein by reference to Exhibit 10 (a) to the Superior Essex Form 10).
10.2
First Amendment to Credit Agreement, dated February 20, 2004, by and among Superior Essex Communications LLC, as a borrower, Essex Group Inc., as a borrower, the financial institutions party thereto, as lenders, Fleet Capital Corporation, as collateral and administrative agent for the lenders, General Electric Capital Corporation, as syndication agent, Fleet Securities, Inc. and GECC Capital Markets Group, Inc., as co-lead arrangers (incorporated herein by reference to Exhibit 10(b) to the Annual Report on Form 10-K of Superior Essex Inc. for the year ended December 31, 2003 (the "2003 Form 10-K")).
10.3
Second Amendment to Credit Agreement, dated March 18, 2004, by and among Superior Essex Communications LLC, as a borrower, Essex Group Inc., as a borrower, the financial institutions party thereto, as lenders, Fleet Capital Corporation, as collateral and administrative agent for the lenders, General Electric Capital Corporation, as syndication agent, Fleet Securities, Inc. and GECC Capital Markets Group, Inc., as co-lead arrangers (incorporated herein by reference to Exhibit 10(c) to the 2003 Form 10-K).
10.4
Third Amendment to Credit Agreement, dated April 2, 2004, by and among Superior Essex Communications LLC, as a borrower, Essex Group Inc., as a borrower, the financial institutions party thereto, as lenders, Fleet Capital Corporation, a collateral and administrative agent for the lenders, General Electric Capital Corporation, as syndication agent for the lenders (incorporated herein by reference to Exhibit 10.1 to the Q1 2004 Form 10-Q).
10.5
Fourth Amendment to Credit Agreement, dated April 30, 2004, by and among Superior Essex Communications LLC, as a borrower, Essex Group Inc., as a borrower, the financial institutions party thereto, as lenders, Fleet Capital Corporation, as collateral and administrative agent for the lenders, General Electric Capital Corporation, as syndication agent for the lenders (incorporated herein by reference to Exhibit 10.2 to the Q1 2004 Form 10-Q).
10.6
Fifth Amendment to Credit Agreement, dated June 16, 2004, by and among Superior Essex Communications LLC, as a borrower, Essex Group Inc., as a borrower, the financial institutions party thereto, as lenders, Fleet Capital Corporation, as collateral and administrative agent for the lenders, General Electric Capital Corporation, as syndication agent for the lenders (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Superior Essex Inc. for the quarter ended June 30, 2004).
10.7
Warrant Agreement, dated as of November 10, 2003, between Superior Essex Inc. and American Stock Transfer & Trust Company, as warrant agent (incorporated herein by reference to Exhibit 10(d) to the Superior Essex Form 10).
10.8
Superior Essex Inc. 2003 Stock Incentive Plan* (incorporated herein by reference to Exhibit 10(e) to the Superior Essex Form 10).
10.9
Employment Agreement, dated November 10, 2003, between Superior Essex and Stephen M. Carter* (incorporated herein by reference to Exhibit 10(f) to the Superior Essex Form 10).
10.10
Employment Agreement, dated March 15, 2004, between SEI and David S. Aldridge* (incorporated herein by reference to Exhibit 10(i) to the 2003 Form 10-K).
10.11
Employment Agreement, dated March 15, 2004, between SEI and Justin F. Deedy, Jr.* (incorporated herein by reference to Exhibit 10(j) to the 2003 Form 10-K).
10.12
Employment Agreement, dated March 5, 2004, between SEI and H. Patrick Jack* (incorporated herein by reference to Exhibit 10(k) to the 2003 Form 10-K).
10.13
Letter Agreement, dated February 26, 2004, between Superior Essex Inc. and Barbara L. Blackford* (incorporated herein by reference to Exhibit 10.6 to the Q1 2004 Form 10-Q).
10.14
Separation Agreement, dated November 5, 2003, between Superior Essex Inc. and Stephen C. Knup* (incorporated herein by reference to Exhibit 10(j) to the Superior Essex Form 10).
10.15
Lease Agreement, dated as of December 16, 1993, by and between ALP (TX) QRS 11-28, Inc. and Superior TeleTec Transmission Products, Inc. (incorporated herein by reference to Exhibit (i) to the Quarterly Report on Form 10-Q of The Alpine Group, Inc. for the quarter ended January 31, 1994).
10.16
First Amendment to Lease Agreement, dated as of May 10, 1995, by and between ALP (TX) QRS 11-28, Inc. and Superior TeleTec Inc. (incorporated herein by reference to Exhibit 10(o) to the Annual Report on Form 10-K of The Alpine Group, Inc. for the year ended April 30, 1995 (the "1995 Alpine 10-K")).
10.17
Second Amendment to Lease Agreement, dated as of July 21, 1995, by and between ALP (TX) QRS 11-28, Inc. and Superior Telecommunications Inc. (incorporated herein by reference to Exhibit 10(x) to the 1995 Alpine 10-K).
10.18
Third Amendment to Lease Agreement, dated as of October 2, 1996, by and between ALP (TX) QRS 11-28, Inc. and Superior Telecommunications Inc. (incorporated herein by reference to Exhibit 10.8 to the Registration Statement on Form S-1 (Registration No. 333-09933) of Superior TeleCom Inc., as filed with the Securities and Exchange Commission on August 9, 1996, as amended (the "Superior TeleCom S-1")).
10.19
First Amendment to Guaranty and Surety Agreement, dated as of October 2, 1996, among Superior TeleCom Inc., The Alpine Group, Inc. and ALP (TX) QRS 11-28, Inc. (incorporated herein by reference to Exhibit 10.12 to the Superior TeleCom S-1).
10.20
Fourth Amendment to Lease Agreement, dated as of November 27, 1998, between ALP (TX) QRS 11-28, Inc. and Superior Telecommunications Inc. (incorporated herein by reference to Exhibit 10(x) to the Annual Report on Form 10-K of Superior TeleCom Inc. for the year ended December 31, 1999 (the "1999 Superior TeleCom 10-K")).
10.21
Second Amendment to Guaranty and Suretyship Agreement, dated as of November 27, 1998, among ALP (TX) QRS 11-28, Inc., Superior TeleCom Inc. and The Alpine Group, Inc. (incorporated herein by reference to Exhibit 10(y) to the 1999 Superior TeleCom 10-K).
10.22
Fifth Amendment to Lease Agreement and Waiver, dated as of December 27, 2001, between ALP (TX) QRS 11-28, Inc. and Superior Telecommunications Inc. (incorporated herein by reference to Exhibit 10(yy) to the Annual Report on Form 10-K of Superior TeleCom Inc. for the year ended December 31, 2001).
10.23
Consent, Amendment and Waiver to Lease Agreement, dated as of December 11, 2002, between ST (TX) LP and Superior Telecommunications Inc. (incorporated herein by reference to Exhibit 10(eee) to the Annual Report on Form 10-K of Superior TeleCom Inc. for the year ended December 31, 2002).
10.24
Superior Essex Inc. Senior Executive Retirement Plan* (incorporated herein by reference to Exhibit 10.27 to the Quarterly Report on Form 10-Q of Superior Essex Inc. for the quarter ended September 30, 2004)
10.25
Consulting Agreement, dated February 1, 2005, between DG Network and Superior Essex Inc. (incorporated herein by reference to Exhibit 99.1 to the Current Report on Form 8-K of Superior Essex Inc. dated February 18, 2005)
10.26
Superior Essex Inc. Director Compensation Plan* (incorporated herein by reference to Exhibit 99.1 to the Current Report on Form 8-K of Superior Essex Inc. dated November 10, 2004).
10.27
Sixth Amendment to Credit Agreement, dated March 11, 2005, by and among Superior Essex Communications LP, as a borrower, Essex Group Inc., as a borrower, the financial institutions party thereto, as lenders, Fleet Capital Corporation, as collateral and administrative agent for the lenders, and General Electric Capital Corporation, as syndication agent for the lenders.
10.28
Key Employee Retention Plan* (incorporated herein by reference to Exhibit 10(m) to the Superior Essex Form 10).
Code of Ethics and Business Conduct of Superior Essex Inc. (incorporated herein by reference to Exhibit 14 to the 2003 Form 10-K).
List of Subsidiaries.
Consent of Deloitte & Touche LLP.
Powers of Attorney.
31.1
Certification of the Company's Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Company's Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the Company's Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of the Company's Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*Management contract or compensatory plan or arrangement. (c) See the separate section of this report following Item 15 for a list of financial statements and schedules filed herewith.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements of Superior Essex Inc. and Superior TeleCom Inc. are included at the indicated page in this annual report:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Superior Essex Inc.
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of Superior Essex Inc. and subsidiaries (successor) as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the year ended December 31, 2004 and the period November 11, 2003 (inception) to December 31, 2003. We have audited the consolidated statements of operations, stockholders' equity (deficit), and cash flows of Superior TeleCom Inc. and subsidiaries (predecessor) for the period January 1, 2003 to November 10, 2003 and the year ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, on October 22, 2003, the Bankruptcy Court entered an order confirming the plan of reorganization which became effective after the close of business on November 10, 2003. Accordingly, the accompanying financial statements of Superior Essex Inc. and subsidiaries have been prepared in conformity with AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," as a new entity with assets, liabilities, and a capital structure having carrying values not comparable with that of Superior TeleCom Inc. and subsidiaries for prior periods, as described in Note 1.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Superior Essex Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for the year ended December 31, 2004 and the period November 11, 2003 to December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Superior TeleCom Inc. and subsidiaries for the period January 1, 2003 to November 10, 2003 and the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, (1) effective January 1, 2002 the method of accounting for goodwill and other intangible assets was changed to conform with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"; (2) effective January 1, 2003, the accounting for costs associated with exit or disposal activities was changed to conform with Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" and was applied to exit and disposal costs incurred in 2003 and 2004; and (3) effective June 1, 2003, Statement of Financial Accounting Standards, No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" was adopted and applied to financial instruments issued after that date.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2005 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 15, 2005
SUPERIOR ESSEX INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
SUPERIOR ESSEX INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
SUPERIOR ESSEX INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
SUPERIOR ESSEX INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
SUPERIOR ESSEX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Background and Organization
Description of business and basis of presentation
Superior Essex Inc. (together with its subsidiaries, unless the context otherwise requires, the "Company" or "Superior Essex"), a Delaware holding company, and its operating subsidiaries were formed to acquire and conduct the business formerly conducted by Superior TeleCom Inc. ("Superior TeleCom"), and its subsidiaries, pursuant to a plan of reorganization confirmed by the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") and implemented by Superior TeleCom effective November 10, 2003 as discussed below. As a result of the reorganization and the Company's implementation of fresh-start reporting as described below, the consolidated financial statements of the Company (the successor entity for purposes of fresh-start reporting) for periods subsequent to November 10, 2003 reflect a new basis of accounting and are not comparable to the historical consolidated financial statements of Superior TeleCom, the Company's predecessor, for periods prior to the effective date of the plan of reorganization.
The Company is a manufacturer and supplier of communications wire and cable products to telephone companies, CATV companies, distributors and systems integrators, and magnet wire and insulation materials to major original equipment manufacturers, or OEMs, and, through its distribution operations, to small OEMs and the motor repair industry. The Company also converts copper cathode to copper rod for sale to other wire and cable manufacturers. Prior to December 11, 2002, Superior TeleCom was also a manufacturer of building and industrial wire for applications in commercial and residential construction and industrial facilities. The Company operates manufacturing and distribution facilities in the United States, the United Kingdom and Mexico.
Chapter 11 Filing and Reorganization
On March 3, 2003, Superior TeleCom and certain of its U.S. subsidiaries (collectively, the "Debtors") filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code and continued to manage their properties and operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. Superior TeleCom's United Kingdom and Mexican operations were not included in the Chapter 11 filings.
Superior TeleCom decided to file a reorganization proceeding because it had been experiencing continued liquidity shortfalls, which hampered its ability to meet interest and principal obligations on its long-term indebtedness. These shortfalls were primarily a result of Superior TeleCom's leverage, the overall global economic downturn and specific industry conditions, including reduced demand levels in the communications sector caused by, among other things, substantial spending reductions by the regional Bell operating companies, sometimes referred to as RBOCs, and independent telephone operating companies, and reduced demand levels in the magnet wire sector.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness, as well as most other pending litigation, were stayed and certain contractual provisions could not be enforced against Superior TeleCom. Absent an order of the Bankruptcy Court, substantially all pre-petition liabilities were subject to settlement under a plan of reorganization voted upon by certain classes of the Company's creditors and approved by the Bankruptcy Court.
As part of the Chapter 11 proceedings, Superior TeleCom filed its original Joint Plan of Reorganization and related disclosure statement on July 30, 2003. On August 28, 2003, Superior TeleCom filed an amended Joint Plan of Reorganization and disclosure statement. As further modified,
the amended plan, was confirmed by order of the Bankruptcy Court on October 22, 2003 and became effective on November 10, 2003.
In accordance with the plan of reorganization, on November 10, 2003, the effective date of the plan, the Company acquired the business formerly conducted by Superior TeleCom and its subsidiaries, and Superior TeleCom and certain of its dormant subsidiaries were deemed dissolved and ceased to have continuing corporate existences, subject only to obligations under the plan of reorganization to satisfy allowed claims. Except as otherwise provided in the plan of reorganization or certain debt documents, on and after the effective date of the plan, all property of Superior TeleCom and its subsidiaries vested in the Company, free and clear of all liens, claims, charges or other encumbrances. On and after the effective date of the plan of reorganization, the Company began operating its business without supervision or approval by the Bankruptcy Court.
The plan of reorganization provided for the following to occur as of the effective date of the plan (or as soon thereafter as practicable):
•the distribution to Superior TeleCom's senior secured debt holders or their transferees of (1) 16,500,000 shares of common stock of Superior Essex, representing 100% of the then outstanding common stock of Superior Essex, (2) 5,000,000 shares of series A non-convertible preferred stock of Superior Essex Holding Corp. ("Superior Essex Holding"), the Company's direct subsidiary, referred to herein as the series A preferred stock, and (3) $145 million principal amount of 91/2% senior notes jointly issued by Superior Essex Communications LP ("Superior Essex Communications"-formerly Superior Essex Communications LLC), Superior Essex Holding's direct subsidiary, and Essex Group, Inc. ("Essex Group"), Superior Essex Holding's indirect subsidiary, having a five-year term, referred to herein as the 91/2% senior notes;
•the distribution to holders of Superior TeleCom's senior subordinated notes of warrants to purchase, until May 10, 2006, up to 868,421 shares of common stock of Superior Essex at a price of $25.00 per share;
•the payment of $3 million in cash to holders of general unsecured claims against Superior TeleCom;
•the consummation of a new $120 million senior secured revolving credit facility (see Note 7) to (1) fund repayment of Superior TeleCom's "debtor in possession," or DIP, credit facility and certain expenses relating to the plan of reorganization, (2) provide for working capital needs, (3) fund debt service on the senior notes of Superior Essex Communications and Essex Group and Superior Essex Holding's series A preferred stock and (4) provide for the issuance of letters of credit in connection with the operation of Superior Essex's business;
•the cancellation of all pre-bankruptcy senior secured debt of Superior TeleCom;
•the cancellation of all pre-bankruptcy senior subordinated notes of Superior TeleCom;
•the cancellation of all 81/2% convertible subordinated debentures of Superior TeleCom, which had previously been distributed to holders of the 81/2% trust convertible preferred securities of Superior Trust I in liquidation of that trust (see Note 10);
•the cancellation of all equity and debt interests held in Superior TeleCom by The Alpine Group, Inc. ("Alpine"), Superior TeleCom's former principal stockholder;
•the cancellation of all outstanding shares of common stock of Superior TeleCom, as well as all options, warrants and related rights to purchase or otherwise receive shares of such common stock;
•the ability to issue stock options and/or restricted stock for up to 1.8 million shares of common stock of Superior Essex under Superior Essex's Stock Incentive Plan, with the allocation of awards to be effected by Superior Essex's board of directors following the effective date of the plan of reorganization; and
•the implementation of equity awards to the independent directors of Superior Essex as part of Superior Essex's Stock Incentive Plan.
Fresh-Start Reporting
Upon implementation of the plan of reorganization fresh-start reporting was adopted in accordance with AICPA Statement of Position 90-7, or SOP 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code," since holders of Superior TeleCom's common stock immediately prior to confirmation of the plan of reorganization received less than 50% of the Company's common stock and the reorganization value of the Company's assets upon emergence was less than Superior TeleCom's post-petition liabilities and allowed claims. Under fresh-start reporting, the reorganization value was allocated to the Company's net assets based on their relative fair values in a manner similar to the accounting provisions applied to business combinations under Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141"). The Company's reorganization value was less than the fair value of the Company's net assets acquired pursuant to the plan of reorganization. In accordance with SFAS No. 141, the excess of the fair value of the net assets over the reorganization value was used to reduce the value of property, plant and equipment. Liabilities existing at the effective date of the plan of reorganization were stated at the present value of amounts to be paid discounted at appropriate current rates. Debt issued in connection with the plan of reorganization was recorded at the stated value, which approximated fair value.
In connection with its development of the plan of reorganization Superior TeleCom directed its financial advisor to prepare a valuation analysis of its business and the new securities to be issued under the Plan. In preparing this analysis, Superior TeleCom's financial advisors, among other things, (a) reviewed certain recent publicly available financial results of Superior TeleCom, (b) reviewed certain interim financial and operating data of Superior TeleCom, (c) discussed with certain senior executives the current operations and prospects of Superior TeleCom, (d) reviewed certain operating and financial forecasts prepared by Superior TeleCom, including the financial projections contained in Superior TeleCom's Disclosure Statement, (e) discussed with certain senior executives of Superior TeleCom key assumptions related to the financial projections, (f) prepared 41/2 year discounted cash flow analyses based on the financial projections, utilizing various discount rates ranging from 11% to 15% and EBITDA terminal multiples of 5x to 6.5x based on relevant comparable company analysis, (g) considered the market value of certain publicly traded companies in businesses reasonably comparable to the operating business of Superior TeleCom and (i) conducted such other analyses as they deemed necessary under the circumstances.
As a result of such analyses, review, discussions, considerations and assumptions, Superior TeleCom's financial advisor presented estimates that the total enterprise value of Superior TeleCom was within a range of $350 million to $400 million with a mid-point value of $375 million. The Company used the mid-point valuation of $375 million as the basis for its reorganization value for purposes of applying fresh-start reporting. The total enterprise value of $375 million and its derivation was a key element in negotiations with Superior TeleCom's creditors and equity holders in developing the plan of reorganization which was ultimately approved by Superior TeleCom's creditors and the Bankruptcy Court. The allocation of the reorganization value as of the effective date of the plan of reorganization, which was subject to minor revisions upon finalization of the asset valuations, is summarized as follows (in thousands):
The following table reflects adjustments to the consolidated balance sheet resulting from implementation of the plan of reorganization and application of fresh start reporting as of November 10, 2003, the effective date of the plan of reorganization:
(a)To reflect distribution under the plan of reorganization of the Company's new common stock, the series A preferred stock of Superior Essex Holdings and the senior notes jointly issued by Superior Essex Communications and Essex Group in settlement of pre-petition liabilities subject to compromise, summarized as follows (in thousands):
(b)To reflect application of proceeds from the Company's senior credit facility, including repayment of the DIP credit facility, as follows (in thousands):
(c)To write off remaining debt issuance costs of Superior TeleCom.
(d)To reflect cancellation of stockholders' equity of Superior TeleCom.
(e)To reflect fresh start accounting adjustments to adjust inventory, pension liabilities and deferred tax liabilities and certain current liabilities. Deferred tax accounts were adjusted to give effect to differences between the new accounting basis and the new tax basis of assets and liabilities. The adjustment to other long-term liabilities is summarized as follows (in thousands):
(f)To reflect adjustment of assets in excess of reorganization value.
Reorganization items
Reorganization items represent amounts incurred or gains recognized by Superior Telecom as a result of the Chapter 11 filings and the adoption of fresh-start reporting and are summarized as follows for the period January 1, 2003 to November 10, 2003 (in thousands):
Adjustments to pre-petition liabilities represent amounts to adjust the carrying value of the Trust Convertible Preferred Securities (which were exchanged for Convertible Debentures as a result of the liquidation of the Trust on or about April 30, 2003) to the estimated amount of the allowed claim including accrued and unpaid distributions.
2. Summary of significant accounting policies
Principles of consolidation
The consolidated financial statements represent the consolidation of all majority owned companies. Investments in affiliated companies representing 20% to 50% ownership are accounted for using the equity method of accounting. Other investments representing ownership of less than 20% are recorded at cost. All significant intercompany accounts and transactions have been eliminated. Minority interest recorded in the consolidated financial statements of Superior TeleCom was related to Superior TeleCom's 50.2% owned subsidiary, Superior Cables Limited ("Superior Israel") for periods prior to December 11, 2002.
Cash and cash equivalents
All highly liquid investments purchased with a maturity at acquisition of 90 days or less are considered to be cash equivalents.
Inventories
Inventories of communications products are stated at the lower of cost or market, using the first-in, first-out ("FIFO") cost method. Inventories of magnet wire and copper rod are primarily stated at the lower of cost or market, using the last-in, first-out ("LIFO") cost method. Inventories include costs of materials, labor and manufacturing overhead. See Note 3.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the lease term. Depreciation and amortization are provided over the estimated useful lives of the assets using the straight-line method. The estimated lives are as follows:
Maintenance and repairs are charged to expense as incurred. Long-term improvements are capitalized as additions to property, plant and equipment. Upon retirement or other disposal, the asset cost and related accumulated depreciation are removed from the accounts and the net amount, less any proceeds, is charged or credited to income. Interest is capitalized during the active construction period of major capital projects. During the year ended December 31 2002, $0.2 million of interest was capitalized in connection with various capital projects. No interest was capitalized in 2003 and insignificant amounts were capitalized in 2004.
Goodwill and Other Intangible Assets
Superior TeleCom adopted SFAS No. 142, "Goodwill and Other Intangible Assets" effective January 1, 2002. As of December 31, 2001, $750 million in goodwill was included as an asset in Superior TeleCom's consolidated balance sheet. Changes in goodwill for the year ended December 31, 2002 are described below. SFAS No. 142 required that the amortization of goodwill and certain other intangible assets cease as of January 1, 2002 and that the related recorded value of goodwill be allocated to the identified reporting units and be reviewed annually for impairment. If the carrying value (including goodwill) of any reporting unit exceeds the fair value (determined on a discounted cash flow basis or other fair value method), impairment of goodwill may exist resulting in a charge to earnings to the extent of goodwill impairment.
The transitional rules for implementing SFAS No. 142 provided for an initial assessment as to whether there was an implied impairment to the carrying value of goodwill within six months of adoption of SFAS No. 142, with a final determination of goodwill impairment completed by the end of 2002. SFAS No. 142 required that any goodwill impairment resulting from initial application of this new rule be reflected through a charge to income as a cumulative effect of an accounting change, applied retroactively to January 1, 2002.
Superior TeleCom completed its final determination of initial goodwill impairment in August 2002. The application of this new standard and the impact of economic conditions and industry specific conditions affecting Superior TeleCom's business segments resulted in a non-cash goodwill impairment charge of $424 million including $166 million related to Superior TeleCom's Electrical segment and $258 million related to Superior TeleCom's Magnet Wire and Distribution segment. The goodwill impairment charge was recorded retroactively to January 1, 2002 as a cumulative effect of accounting change for goodwill impairment in accordance with SFAS No. 142.
As required by SFAS No. 142, Superior TeleCom performed its annual assessment of goodwill impairment in the fourth quarter of 2002. As a result of generally depressed economic conditions and
specific industry conditions in the telecommunications industry, Superior TeleCom's operating income and results of operations continued to decline during 2002. Based on that trend, the earnings forecast for the next five years was revised and in the fourth quarter of 2002 Superior TeleCom recognized an additional goodwill impairment loss of $73.4 million in its Magnet Wire and Distribution and $251.3 million in Communications Cable reporting units since the carrying amount of the reporting units was greater than the fair value of the reporting units (as determined using the expected present value of expected future cash flows) and the carrying amount of the reporting unit goodwill exceeded the implied fair value of that goodwill. The impairment charge resulted in the write-off of all remaining goodwill.
Intangible assets at December 31, 2004 consist primarily of acquired customer base intangibles and are being amortized on a straight-line basis over their estimated useful lives. See Note 5.
Deferred financing costs
Origination costs incurred in connection with outstanding debt financings are included in the balance sheet in other assets. These deferred financing costs are being amortized over the lives of the applicable debt instruments on an effective interest rate basis and are charged to operations as additional interest expense. As a result of Superior TeleCom's bankruptcy filing and subsequent plan of reorganization, all deferred debt issue costs relating to pre-effective date financing were written-off as a reorganization item in the accompanying consolidated statement of operations during the period January 1, 2003 to November 10, 2003.
Amounts due customers
At December 31, 2004 and 2003, the Company had certain amounts due customers totaling $4.2 million and $3.3 million, respectively, representing amounts due to customers who meet certain contractual sales volume criteria. Such amounts are recorded as a reduction of sales and are paid periodically to those qualifying customers.
Income taxes
Income taxes are accounted for under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax impact of temporary differences arising from assets and liabilities whose tax bases are different from financial statement amounts. A valuation allowance is established if it is more likely than not that all or a portion of deferred tax assets will not be realized. Realization of the future tax benefits of deferred tax assets is dependent on the Company's ability to generate taxable income within the carryforward period and the periods in which net temporary differences reverse.
Derivative financial instruments
All derivatives are recognized on the balance sheet at fair value. On the date the derivative contract is entered, the derivative is designated as either (i) a fair value hedge of a recognized asset or liability, (ii) a cash flow hedge of a forecasted transaction, (iii) a hedge of a net investment in a foreign operation, or (iv) a non-designated derivative instrument. The Company engages in certain derivatives that are classified as fair value hedges, cash flow hedges and non-designated derivative instruments. Changes in the fair value of a derivative that is designated as a fair value hedge and the underlying
exposure being hedged are adjusted to fair value and are recorded in the consolidated statements of operations in the same line item. Changes in the fair value of a derivative that is designated as a cash flow hedge are recorded in other comprehensive income with any ineffective portion of a financial instrument hedge immediately recognized in earnings. Changes in the fair value of non-designated derivative contracts are reported in current earnings.
The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk management objectives and strategy for undertaking various hedge transactions. The Company formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flow of hedged items. When it is determined that a derivative is no longer highly effective as a hedge, hedge accounting is discontinued on a prospective basis. Derivative financial instruments and derivative transactions reflected in the consolidated financial statements are discussed in Note 16.
Revenue recognition
Revenue is recognized when pervasive evidence of an agreement exists, delivery has occurred, the price to the buyer is fixed and determinable and collectability is reasonably assured.
Foreign currency translation
The financial position and results of operations of foreign subsidiaries are measured using local currency as the functional currency. Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates in effect at year-end. Revenues and expenses are translated at average exchange rates prevailing during the year. The resulting translation gains and losses are charged directly to accumulated other comprehensive income, a component of stockholders' equity, and are not included in net income until realized through sale or liquidation of the investment. The Company's Canadian subsidiary became inactive in 2002 and its accounts are remeasured using the U.S. dollar as the functional currency for periods subsequent to December 31, 2002. The Company's Canadian subsidiary was dissolved in 2004. Foreign currency exchange gains and losses incurred on foreign currency transactions are included in income as they occur.
Stock Based Compensation Plans
The Company and Superior TeleCom applied the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in March 2000, to account for stock based compensation plans. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock Based Compensation, established accounting and disclosure requirements using a fair-value based method of accounting for stock based employee compensation plans. Compensation expense attributable to fixed stock awards is recognized on a straight-line basis over the related vesting period. As allowed by SFAS No. 123, the Company and Superior TeleCom elected to continue to apply the intrinsic value based method of accounting described above, and adopted only the disclosure requirements of SFAS No. 123. The following table
illustrates the effect on net income (loss) if the fair value based method had been applied to all outstanding and unvested awards in each period.
The effects of applying SFAS No. 123 in the pro forma disclosure are not necessarily indicative of future amounts, since the estimated fair value of stock options is amortized to expense over the vesting period and additional options may be granted in future years. The weighted average per share fair value of options granted at an exercise price equal to the fair market value (using the Black Scholes option pricing model) for the year ended December 31, 2004, the period November 11, 2003 to December 31, 2003 and the year ended December 31, 2002 was $3.83, $5.69 and $0.25, respectively. No options were granted during the period January 1, 2003 to November 10, 2003. The weighted average per share fair value of options granted at an exercise price below the fair market value in accordance with the terms of the 2003 Stock Incentive Plan during the year ended December 31, 2004 was $6.21. The 2003 Stock Incentive Plan provides that the exercise price would be the initial value of the Company's stock on the effective date of the plan of reorganization ($10 per share) for options granted prior to May 10, 2004 to individuals who were members of management as of the effective date of the plan of reorganization. The fair value for these options was estimated at the date of grant using the Black Scholes option pricing model with the following weighted average assumptions for the year ended December 31, 2004, the period November 11, 2003 to December 31, 2003 and the year ended December 31, 2002, respectively: dividend yield of 0% for all periods; expected volatility of 41%, 60% and 91%; risk-free interest rate of 2.51%, 2.44% and 2.64%; and expected life of 3 years, 3 years and 2 years.
Research and development costs
Research and development costs are expensed as incurred. Research and development costs for the year ended December 31, 2004, the period November 11, 2003 to December 31, 2003, the period January 1, 2003 to November 10, 2003 and the year ended December 31, 2002 were $3.9 million, $0.5 million, $3.4 million and $8.4 million, respectively.
Advertising costs
Advertising costs are expensed as incurred. Advertising costs for the year ended December 31, 2004, the period November 11, 2003 to December 31, 2003, the period January 1, 2003 to November 10, 2003 and the year ended December 31, 2002 were $1.0 million, $0.1 million, $1.2 million and $2.5 million, respectively.
Insurance reserves
It is or has been the policy of the Company to self-insure up to certain limits (on an individual and aggregate basis) for certain insurable risks related primarily to workers' compensation, health insurance and comprehensive general and vehicle liability. Under current policy arrangements, the Company has a self-insured retention of $250,000 per claim with an annual aggregate self-insured retention of $4.1 million for workers compensation coverage. The self-insured retention for employee health insurance is $150,000 per employee, spouse or combined dependent coverage. Effective September 2002, the Company became fully insured with respect to general and automobile liability claims. Provisions for losses expected under these programs are recorded based on estimates of the aggregate liabilities for the claims incurred. Total reserves relating to self-insured programs amounted to $5.5 million and $5.9 million at December 31, 2004 and 2003, respectively.
Shipping and handling
All shipping and handling costs are included in costs of sales and all billings associated with these costs are included in revenues.
Income (loss) per share
Basic income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period. The computation of diluted income (loss) per share does not assume conversion or exercise of securities that would have an antidilutive effect on income (loss) per share. Diluted income (loss) per common share is determined assuming the conversion of the trust convertible preferred securities and inclusion of outstanding stock options, warrants and grants under the treasury stock method.
Comprehensive income
Comprehensive income includes all changes in equity from non-owner sources such as net income, foreign currency translation adjustments, changes in the fair value of derivatives and minimum pension liability adjustments.
The components of accumulated other comprehensive income (loss) at December 31, 2004 and 2003 were as follows:
Concentrations of risk and allowance for doubtful accounts
At December 31, 2004 and 2003, accounts receivable from the regional Bell operating companies ("RBOCs") and major independent telephone companies amounted to $23.5 million and $10.8 million, respectively. See Note 19 for concentrations of risk within the Company's business segments.
Accounts receivable are net of allowances for doubtful accounts of $1.8 and $2.1 million at December 31, 2004 and 2003, respectively.
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. The assets and liabilities of a disposal group classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet and are no longer depreciated.
Use of estimates
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include the determination of reorganization value and its allocation to assets, liabilities assumed and securities issued; the carrying amount of property, plant and equipment and intangible assets; valuation allowances for receivables, inventories and deferred income tax assets; self-insurance reserves; and obligations related to employee benefits. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the presentation used in the current period.
Recent Accounting Pronouncements
In December 2004, the FASB issued Statement 123 (revised 2004), "Share-Based Payment", a revision of Statement 123, "Accounting for Stock Based Compensation." Statement 123(R) supercedes APB Opinion No. 25 and requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (e.g. stock options and restricted stock awards) granted to employees. Statement 123(R) is effective for periods beginning after June 15, 2005. The Company intends to apply the standard on a modified prospective method. Under this method, all awards granted after the date of adoption must be accounted for under the provisions of Statement 123(R). In addition, compensation expense must be recognized for the unvested portion of previously granted awards and options that remain outstanding at the date of adoption. The Company will adopt Statement 123(R) effective July 1, 2005 and expects to recognize incremental non-cash compensation expense related to currently outstanding options and awards of approximately $0.4 million in 2005.
Superior TeleCom adopted SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities effective January 1, 2003. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The restructuring costs incurred during the year ended December 31, 2003 have been accounted for in accordance with SFAS No. 146.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and imposes certain additional disclosure requirements. The provisions of SFAS No. 150 are generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. As a result of its mandatory redemption provisions, the series A preferred stock issued by the SEHC has been classified as long-term debt and related dividends have been recorded as interest expense in accordance with Statement of Financial Accountings Standards No. 150.
In November 2004, the FASB issued Statement 151, "Inventory". This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Statement 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" specified in ARB No. 43. In addition, Statement 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. Statement 151 is effective for fiscal years beginning after June 15, 2005. The Company will adopt Statement 151 effective January 1, 2006 and does not expect that adoption of Statement 151 will have a material effect on its financial position or results of operations.
3. Inventories
At December 31, 2004 and 2003, the components of inventories are as follows:
Inventories valued using the LIFO method amounted to $78.8 million and $69.0 million at December 31, 2004 and 2003, respectively. The adoption of fresh start reporting resulted in the elimination of the LIFO reserve as of November 10, 2003.
4. Property, plant and equipment
At December 31, 2004 and 2003, property, plant and equipment consists of the following:
Depreciation expense for the year ended December 31, 2004, the period November 11, 2003 to December 31, 2003, the period January 1, 2003 to November 10, 2003 and the year ended December 31, 2002 was $21.1 million, $2.6 million, $25.1 million and $42.5 million, respectively.
5. Intangible and other long-term assets
At December 31, 2004 and 2003 intangible and other long-term assets are summarized as follows:
Acquired amortizing intangible assets at December 31, 2004 are summarized as follows:
Aggregate amortization expense for amortizing intangible assets for the year ended December 31, 2004 was $1.0 million. Estimated amortization expense for the next five years is: $2.1 million in 2005, $2.1 million in 2006, $2.1 million in 2007, $2.1 million in 2008, and $1.9 million in 2009.
6. Asset acquisitions and sales
Belden Asset Acquisition
On June 1, 2004, Superior Essex Communications acquired certain assets from operating subsidiaries of Belden Inc. ("Belden") related to their North American copper OSP communications wire and cable business (the "Belden Asset Acquisition"). Under the terms of the asset purchase agreement, Superior Essex Communications acquired certain inventories, selected machinery and equipment and certain customer contracts related to a portion of Belden's communications business for total consideration of $83.1 million including a contingent payment of up to $10 million to be made nine months after closing based on business relationships successfully transitioned to Superior Essex Communications. Superior Essex Communications intends to use the equipment acquired from Belden in its communications wire and cable business. Belden retained its manufacturing facilities and employees together with all of the associated liabilities, including, among others, accounts payable, any employee-related obligations, plant shutdown costs and environmental obligations. The Company has accrued the full contingent payment of $10 million as of December 31, 2004 which was paid in March 2005. The allocation of the purchase price is summarized as follows (in thousands):
The customer base intangible asset is being amortized on a straight-line basis over 171/2 years. Amortization for the year ended December 31, 2004 was $0.8 million. The Company intends to install the machinery and equipment acquired in the Belden Asset Acquisition in certain of its manufacturing
plants to replace certain existing machinery and equipment. As a result, machinery and equipment with a net book value of approximately $2.2 million at June 1, 2004 is expected to be taken out of service through the second quarter of 2005. Accordingly, the Company has revised the estimated depreciable lives of the machinery and equipment to be replaced resulting in additional depreciation charges included in cost of goods sold of $1.8 million during the year ended December 31, 2004. Additionally, the Company incurred approximately $2.1 million of plant employee training costs for acquisition-related production capacity expansion which have been included in cost of goods sold in the accompanying statement of operations for the year ended December 31, 2004.
Nexans Asset Acquisition
On September 7, 2004, Essex Group acquired certain assets from Nexans Magnet Wire USA Inc., a wholly-owned subsidiary of Nexans S.A. Company. Under the terms of the purchase agreement, Essex Group acquired substantially all inventory associated with Nexans' U.S. magnet wire operations and assumed certain U.S. customer contractual arrangements. The Company intends to use the assets acquired in its magnet wire and distribution business. The total purchase price for the acquisition was $11.6 million. The allocation of the purchase price is summarized as follows (in thousands):
Electrical Sale
On December 11, 2002, in accordance with the terms of the Purchase Agreement, dated October 31, 2002, as amended on December 11, 2002 (the "Purchase Agreement"), by and among Alpine, Alpine Holdco Inc., a newly formed, wholly owned subsidiary of Alpine ("Alpine Holdco"), Superior TeleCom and certain of Superior TeleCom's wholly owned subsidiaries, Superior Telecom sold the following assets and securities to Alpine Holdco: (1) substantially all of the assets, subject to related accounts payable and accrued liabilities (excluding, however any secured debt), of Superior TeleCom's electrical wire business; (2) all of the outstanding shares of capital stock of DNE Systems, Inc., a manufacturer of multiplexers and other communications and electronic products; and (3) all of the outstanding shares of capital stock of Texas SUT Inc. and Superior Cable Holdings (1997) Ltd., which together owned approximately 47% of Superior Israel. This transaction is referred to herein as the "Electrical Sale". Superior TeleCom retained a 3% equity interest in Superior Israel, which the Company acquired in accordance with the plan of reorganization. The aggregate sales price for the Electrical Sale was approximately $85 million in cash plus the issuance of a warrant to Superior TeleCom to purchase 199 shares (19.9%) of the then outstanding common stock of Essex Electric, Inc. ("Essex Electric"), a wholly owned subsidiary of Alpine Holdco formed to own and operate the
acquired electrical wire business. The warrant is only exercisable during the 30 day period prior to its expiration on December 11, 2007 or upon the earlier occurrence of certain specified transactions. The total exercise price is $0.6 million. The warrant was valued at $1 million based upon a Black Scholes option pricing model and is included in other long-term assets in the accompanying consolidated balance sheet at December 31, 2004 and 2003. In addition, pursuant to a securityholders agreement among Essex Electric, Alpine Holdco and Superior TeleCom, preemptive rights were granted to Superior TeleCom to purchase a pro rata share of any new equity securities issued by Essex Electric such that Superior TeleCom's ownership on a fully diluted basis, after consideration of exercise of the warrant, would remain at 19.9%. On July 30, 2003, Superior TeleCom received notice of its right to invest its pro rata share (19.9%) of a proposed equity offering by Essex Electric. Superior TeleCom exercised its right to invest in its pro rata share in the offering which amounted to $0.5 million. In January 2005, the Company invested an additional $1.2 million in Essex Electric representing its pro rata share of an additional equity offering by Essex Electric.
In connection with the Electrical Sale, Superior TeleCom, Alpine Holdco and Essex Electric entered into a Supply and Transitional Services Agreement (the "Supply Agreement"). Under the Supply Agreement, Essex Electric, among other things, agreed to purchase from Superior TeleCom certain specified quantities of its overall requirements of copper rod. The specified quantities represented a range of Essex Electric's estimated total annual copper rod requirements for use in its wire manufacturing process. The purchase price for copper rod specified in the Supply Agreement is based on the COMEX price plus an adder to reflect conversion to copper rod. The Supply Agreement also provided for Superior's provision of certain administrative services to Essex Electric. Charges for these services were generally based on actual usage or an allocated portion of the total cost to Superior. The total sales of copper rod by Superior TeleCom under the Supply Agreement during 2003 and 2002 were $92.1 million and $10.8 million, respectively. Superior TeleCom also recorded $4.0 million as reimbursement for administrative services provided to Essex Electric for the period January 1, 2003 to November 10, 2003 as a reduction of selling, general and administrative expenses. On November 7, 2003, the Supply Agreement was replaced by a new Supply and Services Agreement between the Company and Essex Electric. The new agreement provides for the supply by the Company to Essex Electric of copper rod, on similar pricing terms, for 2004 and the provision of certain specified administrative services that are more limited than those contained in the original agreement. The new agreement expired on December 31, 2004. The Company continues to sell copper rod to Essex Electric under an annual supply agreement. The total sales of copper rod by the Company under the new agreement were $87.1 million and $12.7 million, respectively, for the year ended December 31, 2004 and the period November 11, 2003 to December 31, 2003. The total charges for administrative services under the new agreement were $1.1 million and $0.4 million, respectively, for the year ended December 31, 2004 and the period November 11, 2003 to December 31, 2003.
The Electrical Sale has not been accounted for as a discontinued operation in the accompanying statement of operations of Superior TeleCom pursuant to SFAS No. 144, as management believes the Essex Electric warrant, the securityholders agreement and the Supply Agreement constitute significant continuing involvement in the disposed operations. By virtue of the Supply Agreement, the Company continued to be a significant supplier to Essex Electric and a participant in the cash flows of Essex Electric. Additionally, given the nature of the administrative functions provided, management believes that substantial dependence on the Company and its predecessor existed over the term of the Supply Agreement.
7. Short-term borrowings
At December 31, 2004 and 2003 short-term borrowings consist of the following:
Superior Essex
On the effective date of the plan of reorganization, Superior Essex Communications and Essex Group Inc. entered into a new $120 million senior secured revolving credit facility with a $25 million sublimit for letters of credit. In 2004 the senior secured credit facility was amended to increase the total facility amount by $55 million to $175 million. Interest accrues on outstanding borrowings at an annual rate equal to, at the Company's option, LIBOR or a base rate, plus, in each case, an applicable margin, determined quarterly based on average borrowing availability, ranging from 1.75% to 2.75% for LIBOR loans and 0.25% to 1.25% for base rate loans. The applicable margin as of December 31, 2004 is 1.75% for LIBOR loans and 0.25% for base rate loans. The weighted average interest rate was 4.2% and 3.7% at December 31, 2004 and 2003, respectively. Obligations under the senior secured revolving credit facility are secured by substantially all of the Company's tangible and intangible assets. Availability under the senior credit facility is subject to a borrowing base equal to the lesser of (1) $175 million less outstanding letters of credit and (2) a specified percentage of eligible accounts receivable and inventory less specified reserves. The specified percentages of eligible accounts receivable and eligible inventory are each subject to decrease in the reasonable credit judgment of the lender. At December 31, 2004, the applicable percentages are (i) 85% of the value of the eligible accounts receivable and with respect to inventory the lesser of (a) $70 million or (b) the lesser of (x) 65% of the value of the eligible inventory and (y) 85% multiplied by the net orderly liquidation value percentage then applicable to the borrowers inventory multiplied by the value of the eligible inventory. If borrowing availability under the senior secured revolving credit facility falls below $15 million for any period of two consecutive days, the borrowers will be required to maintain a ratio of 1.1 to 1 of (a) the consolidated EBITDA of the borrowers minus specified distributions of the borrowers relating to capital expenditures, foreign investments, tax distributions and pension contributions of the borrowers to (b) all principal and cash interest payments on specified debt of the borrowers. The Company is obligated to pay an unused commitment fee of 0.5% per annum on the unused amount of the maximum committed amount and a fee of 0.125% per annum on the outstanding face amount of outstanding letters of credit. The senior secured revolving credit facility also contains covenants that limit the Company's and its subsidiaries' ability to (i) pay dividends, redeem capital stock or make other restricted payments, (ii) sell or dispose of assets, (iii) incur additional indebtedness or permit liens to exist on the Company's property, (iv) engage in transactions with affiliates and (v) make additional investments or acquisitions. Under the terms of the senior secured revolving credit facility, Superior Essex Communications and Essex Group may not declare or make any distributions to the Company except for distributions made for the payment of certain corporate operating expenses, income taxes and certain other specified costs. Undrawn availability (after considering outstanding letters of credit of $4.4 million) on December 31, 2004 amounted to $134.0 million. The senior secured revolving credit facility matures in November 2007, however in
accordance with Emerging Issues Task Force Issue 95-22, Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement, borrowings under the revolving credit facility have been classified as a current liability.
The Company entered into interest rate cap agreements in order to limit the effect of changes in interest rates on borrowings under the revolving credit facility (See Note 16). Amounts currently due to or from interest rate cap counterparties are recorded in interest expense in the period in which they accrue.
Superior TeleCom
In connection with its filings for relief under Chapter 11 of the Bankruptcy Code, Superior TeleCom received bankruptcy court approval of a $100 million (with a sub-limit of $15 million in letters of credit) debtor-in-possession financing facility (the "DIP Credit Facility") in order to refinance its accounts receivable securitization facility and to provide liquidity during the reorganization process. The DIP Credit Facility also provided for adequate protection payments to certain pre-petition lenders in an amount representing Superior TeleCom's 2002 income tax refunds received in 2003 and monthly payments commencing April 1, 2003 in an amount not to exceed $1.5 million per month. Superior TeleCom paid monthly adequate protection payments of $1.0 million on April 1, May 1, June 1, and November 1, 2003. The adequate protection payments reduced the amount of the pre-petition lenders' allowed claim with respect to pre-petition indebtedness. Additionally, Superior TeleCom received income tax refunds of approximately $58.1 million in May 2003 and, as contemplated by an existing Bankruptcy Court order, applied this amount to the reduction of pre-petition indebtedness.
Borrowings under the DIP Credit Facility bore interest at the prime rate plus 2.5% or, at Superior TeleCom's option, at the LIBOR rate plus 3.5%. Superior TeleCom was obligated to pay an unused commitment fee of 1% per annum on the unused amount of the maximum committed amount and a fee of 3.5% per annum on the outstanding face amount of outstanding letters of credit. The DIP Credit Facility was fully repaid on the effective date of the plan of reorganization.
8. Accrued Expenses
At December 31, 2004 and 2003 accrued expenses consists of the following:
9. Long-term Debt
At December 31, 2004 and 2003, long-term debt consists of the following:
Superior Essex
As described in Note 1 above, as of the effective date of the plan of reorganization, $145 million principal amount of 91/2% senior notes of Superior Essex Communications and Essex Group, and 5 million shares of series A preferred stock, par value $1 per share, of Superior Essex Holding, were issued to creditors of Superior TeleCom in accordance with the plan of reorganization.
The 91/2% senior notes were issued jointly by Superior Essex Communications and Essex Group in an aggregate principal amount of $145 million due in November 2008, with interest payable semi-annually in cash at a rate of 91/2%. On April 29, 2004 the Company redeemed the senior notes with the proceeds from a Rule 144A private placement offering, completed on April 14, 2004, of $257.1 million of 9% unsecured senior notes due April 2012 (the "9% senior notes"). Interest on the 9% senior notes is payable April 15 and October 15 of each year beginning on October 15, 2004. The 9% senior notes were issued at an original issue discount of $7.1 million resulting in an effective interest rate of 91/2%. The proceeds from the offering were also used to pay fees and expenses of the offering and fund the Belden Asset Acquisition.
The 9% senior notes issued by Superior Essex Communications and Essex Group are fully and unconditionally guaranteed by the Company and each of its existing and future domestic restricted subsidiaries. The Company may redeem some or all of the 9% senior notes at any time on or after April 15, 2008 at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on April 15 of the year set forth below:
The Company may also redeem up to 40% of the aggregate principal amount of the 9% senior notes at a redemption price of 109% of the principal amount thereof using the proceeds of one or more equity offerings completed before April 15, 2007. Additionally, upon the occurrence of specific kinds of changes in control of the Company, as specified in the indenture governing the 9% senior notes, holders of the 9% senior notes will have the right to require the Company to purchase all or a portion of the outstanding 9% senior notes at a purchase price equal to 101% of the principal amount thereof plus accrued interest.
Simultaneously with the sale of the 9% senior notes on April 14, 2004, we entered into a registration rights agreement with the initial purchasers of the 9% senior notes requiring us to use our reasonable best efforts to file with the Securities and Exchange Commission (the "SEC") and cause to become effective a registration statement relating to an offer to exchange the 9% senior notes for registered notes with substantially identical terms. The Company filed an initial registration statement with respect to this exchange offer with the SEC on August 2, 2004 which, as amended, was declared effective on September 1, 2004. The exchange offer expired on October 5, 2004. The entire $257.1 million principal amount of the 9% senior notes was tendered prior to the expiration of the exchange offer and exchanged for an equal amount of registered notes with substantially identical terms.
The indenture governing the 9% senior notes contains covenants which restrict the Company's ability and the ability of certain of its subsidiaries to, among other things: incur additional debt and issue preferred stock; make certain distributions, investments and other restricted payments; create certain liens; enter into transactions with affiliates; and merge, consolidate or sell substantially all of its assets. Approximately one-half of the Company's retained earnings are restricted from the payment of dividends under the terms of the indenture.
Holders of the series A preferred stock issued by Superior Essex Holding are entitled to receive cumulative cash dividends at a rate of 91/2% per annum per share, payable semi-annually. The series A preferred stock ranks junior to all other classes of preferred stock of Superior Essex Holding. The series A preferred stock is mandatorily redeemable on November 10, 2013 at par value plus accrued and unpaid dividends. The series A preferred stock contains certain other mandatory and optional redemption provisions. Each share of series A preferred stock shall have one vote with respect to all matters submitted to stockholders for a vote, provided however, that holders of the series A preferred stock shall not be entitled to vote generally for directors. As a result of its mandatory redemption provisions, the series A preferred stock has been classified as long-term debt and related dividends have been recorded as interest expense in accordance with Statement of Financial Accountings Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
Other debt at December 31, 2004 and 2003 consists of a sale/leaseback finance obligation with a one-time purchase option with respect to one of the Company's manufacturing facilities exercisable during the period December 13, 2008 to December 13, 2009 at a price equal to the greater of $5 million and the then fair value of the leased property.
The fair value of the Company's long-debt at December 31, 2004 and 2003 was approximately $278.3 million and $173 million, respectively, based primarily on trading activity and market quotations.
The aggregate contractual principal maturities of long-term debt for the five years subsequent to December 31, 2004 are as follows:
Superior TeleCom
Superior TeleCom's principal pre-petition long-term debt agreements included a senior credit facility comprised of a revolving credit facility along with a term loan A and a term loan B, all of which were governed by an Amended and Restated Credit Agreement (the "Pre-Petition Credit Agreement") and outstanding Senior Subordinated Notes. The revolving credit facility under the Pre-Petition Credit Agreement allowed for borrowings by Superior TeleCom's subsidiaries (other than Superior Israel) of up to $225 million in the aggregate (subject to reductions in 2002 which limited total borrowings to $214 million). Prior to Superior TeleCom's bankruptcy filing, the revolving credit facility was due to mature on May 27, 2004. The Senior Subordinated Notes included a $120 million term note A and an $80 million term note B which were due in 2007. As discussed in Note 1, all amounts outstanding under the Pre-Petition Credit Agreement and the Senior Subordinated Notes were cancelled on November 10, 2003 in accordance with the terms of the plan of reorganization.
10. Trust Convertible Preferred Securities
On March 31, 1999, Superior Trust I (the "Trust"), a trust in which Superior TeleCom owned all the common equity interests, issued 3,332,254 shares of 81/2% Trust Convertible Preferred Securities ("Trust Convertible Preferred Securities") with a liquidation value of $50 per share. The sole assets of the Trust were Superior TeleCom's 81/2% Convertible Subordinated Debentures ("Convertible Debentures") with an aggregate principal amount of $171.8 million at an interest rate of 81/2% per annum and a maturity date of March 30, 2014.
Superior TeleCom's Chapter 11 filing constituted an early dissolution event under the terms of the instruments governing the Trust and as a result the Trust was liquidated by distributing to holders of the Trust Convertible Preferred Securities an aggregate principal amount of Convertible Debentures equal to the aggregate liquidation amount of their Trust Convertible Preferred Securities. As discussed in Note 1, all outstanding 81/2% Convertible Debentures were cancelled on November 10, 2003 in accordance with the terms of the plan of reorganization.
11. Income (loss) per share
The computation of basic and diluted income (loss) per share for the year ended December 31, 2004, the period November 11, 2003 to December 31, 2003, the period January 1, 2003 to November 10, 2003, and the year ended December 31, 2002 is as follows:
The basic and diluted income(loss) per share amounts for year ended December 31, 2004, the period November 11, 2003 to December 31, 2003, the period January 1, 2003 to November 10, 2003, and the year ended December 31, 2002 are computed by dividing the applicable statement of operations amount by the weighted average shares outstanding. The assumed conversion of the Trust Convertible Preferred Securities has been excluded from the loss per share calculation for the year ended December 31, 2002 as the impact would be anti-dilutive. As discussed in Note 1, the plan of reorganization resulted in the cancellation of all outstanding shares of common stock of Superior TeleCom, as well as all options, warrants and related rights to purchase or otherwise receive shares of Superior TeleCom common stock. None of the Company's or Superior TeleCom's stock options or unvested restricted stock awards outstanding have been included in the computation of diluted income(loss) per share for periods prior to 2004 because to do so would be antidilutive. A total of 1,096,374 anti-dilutive weighted average shares with respect to outstanding stock options, restricted stock awards and Superior Essex's warrant have been excluded from the computation of diluted income per share for the year ended December 31, 2004.
As a publicly traded company, Superior Israel had certain stock options outstanding pursuant to stock option plans in existence prior to investment by Superior Telecom therein. The dilutive impact of such stock options to the Superior TeleCom' loss per share calculation for the year ended December 31, 2002 was immaterial.
12. Stock based compensation plans
In connection with the plan of reorganization, the Company adopted the Superior Essex Inc. 2003 Stock Incentive Plan (the "2003 Plan") pursuant to which a committee of the Company's board of directors may grant stock options or restricted stock awards to employees, non-employee directors and certain service providers. The Plan authorizes grants of awards or options to purchase up to 1,833,333 shares of authorized but unissued common stock, stock held in treasury or both. Stock options can be granted with an exercise price less than, equal to or greater than the stock's fair market value at the date of grant. The term of stock options granted shall not exceed 10 years.
Superior Telecom sponsored the Superior TeleCom Inc. 1996 Stock Incentive Plan which provided for grants of incentive and non-qualified stock options. In January 2001, Superior TeleCom adopted a stock option restructuring program pursuant to which designated employees and non-employee directors could elect to cancel certain of their outstanding stock options in exchange for the grant of replacement stock options or shares of restricted stock, depending upon the number of stock options held. Approximately 2.9 million options were cancelled and the new options granted were accounted for on a variable basis.
Superior Telecom also sponsored the Stock Compensation Plan for Non-Employee Directors. Under the Stock Compensation Plan for Non-Employee Directors, prior to 2003 each non-employee director of Superior TeleCom automatically received 50% of the annual retainer in either deferred common stock or non-qualified stock options, as elected by the director.
Superior Telecom sponsored unfunded deferred compensation plans whereby certain key management employees were permitted to defer the receipt of all, or a portion of, their salary or bonus (including cash or shares of restricted stock) and shares issued upon stock option exercises, as defined by the plans. The plans also provided for matching contributions by Superior TeleCom in various percentages upon shares of common stock deferred therein. Shares issued pursuant to the deferred stock component of these plans were held in irrevocable grantor trusts.
As discussed in Note 1, the plan of reorganization resulted in the cancellation of all outstanding shares of common stock of Superior TeleCom, as well as all options, warrants and related rights to purchase or otherwise receive shares of Superior TeleCom common stock.
Total compensation expense related to all stock based compensation plans for the year ended December 31, 2004, the period November 11, 2003 to December 31, 2003, the period January 1, 2003 to November 10, 2003 and the year ended December 31, 2002 was $2.2 million, $0.1 million, $0.9 million and $1.3 million, respectively.
The following table summarizes stock option activity for the year ended December 31, 2004, the period November 11, 2003 to December 31, 2003, the period January 1, 2003 to November 10, 2003 and the year ended December 31, 2002:
Information with respect to stock-based compensation plan stock options outstanding at December 31, 2004 is as follows:
Pursuant to an employment agreement, a total of 330,000 shares of restricted stock valued at $10 per share were granted to the Company's Chief Executive Officer in the period November 10, 2003 to December 31, 2003. The restricted stock award vests at the rate of 12.5% of the shares granted at the end of each six-month period commencing on November 10, 2003. During the first quarter of 2004, the Company awarded 150,000 shares of restricted stock with a weighted average per share value at the date of award of $13.25 to certain members of senior management. These restricted stock awards vest after 7 years with earlier vesting after 3 years if the Company's stock price exceeds certain specified levels for a period of 20 consecutive trading days. The initial stock price targets were met in January 2005 and one third of these awards will vest in November 2007. An additional 40,000 shares of
restricted stock with a weighted average per share value at the date of award of $15.25 were granted during the first quarter of 2004 to other members of management. These shares vest 50% after three years and 50% after five years. A total of 13,694 shares of restricted stock with a weighted average per share value of $13.75 were awarded to certain employees in the third and fourth quarters of 2004 and were fully vested as of December 31, 2004. A total of 15,000 shares of restricted stock with a weighted average per share value at the date of award of $17.95 were awarded to the Company's independent directors in November 2004. These awards vest ratably over three years.
13. Employee benefits
Pension and postretirement benefits
The Company provides for postretirement employee health care and life insurance benefits for a limited number of its employees. The Company has established a specified amount it will pay per employee for such benefits; therefore, health care cost trends do not affect the calculation of the postretirement benefit obligation or its net periodic benefit cost.
Superior TeleCom sponsored several defined benefit pension plans which were assumed by the Company pursuant to the plan of reorganization. The defined benefit pension plans generally provide for payment of benefits, commencing at retirement (between the ages of 55 and 65), based on the employee's length of service and earnings. In connection with implementation of the plan of reorganization, benefit accruals for salaried employees and non-union hourly employees were frozen effective January 22, 2004. The impact of the freeze has been reflected in the change in the benefit obligation for the period January 1, 2003 to November 10, 2003.
In July 2004, the Company's board of directors approved the adoption of an unfunded supplemental executive retirement plan (the "SERP"). The SERP is designed to provide benefits to certain specified members of management commencing at retirement (between the ages of 55 and 65) based on the employee's length of service and compensation. Superior TeleCom sponsored an unfunded supplemental executive retirement plan (the "Superior TeleCom SERP"). The Superior TeleCom SERP provided for retirement benefits based on the same formula as in effect under a certain salaried employees' plan, but only took into account compensation in excess of amounts that could be recognized under the salaried employees' plan. The Superior TeleCom SERP was rejected pursuant to the plan of reorganization resulting in a reduction of the benefit obligation of Superior TeleCom of $8.2 million. In 2004 the Company settled its previously terminated Canadian defined benefit pension plan resulting in the payment of benefits from the plan of approximately $9.0 million.
The change in the projected benefit obligation, the change in plan assets and the funded status of the defined benefit pension plans and the post-retirement health care benefits plans during the year ended December 31, 2004, the period November 11, 2003 to December 31, 2003 and the period
January 1, 2003 to November 10, 2003 are presented below, along with amounts recognized in the respective consolidated balance sheets:
The aggregate projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets as of December 31, 2004 and 2003 were as follows:
The defined benefit pension plan weighted average asset allocations by asset category at December 31, 2004 and 2003 are as follows:
Pension plan assets are managed by an investment committee. The investment committee has engaged an investment consultant to provide advice on the investment program and assist in selecting outside investment managers. The investment policy with respect to pension assets seeks long-term appreciation and consistency of total portfolio returns with a target average return of 8% compounded annually over a five-year moving time frame. The investment policy provides for the following targeted asset allocation ranges: equity investments of 40-60%; fixed income investments of 25-50%; cash equivalents of 3-10%; and alternative investments (hedge funds) of 5%. Equity securities must be traded on the New York, American and regional stock exchanges or the NASDAQ market and must represent companies with a minimum market capitalization of $300 million. Fixed income securities are limited to securities with less than 10 years to maturity and a Standard & Poor's rating of A or higher at the time of purchase. Investments in private placements, uncovered options, interest rate futures and
derivatives are not permitted. Limits are also placed on investments in individual securities and market sectors.
The components of net periodic benefit cost of the defined benefit pension plans and the post-retirement health care benefit plans during the year ended December 31, 2004, the period November 11, 2003 to December 31, 2003, the period January 1, 2003 to November 10, 2003, and the year ended December 31, 2002 are presented below:
The actuarial present value of the projected pension benefit obligation and the postretirement health care benefits obligation at December 31, 2004, 2003 and 2002 were determined based upon the following assumptions:
The net periodic benefit cost of the defined benefit pension plans was determined using the following assumptions:
To determine the long-term rate of return on pension assets, the Company considers the current and expected plan asset allocation, as well as historical and expected returns on various categories of plan assets.
Benefit payments under the Company's defined benefit pension plans and post-retirement health care benefit plan, which reflect expected future service, are expected to be paid as follows:
The Company expects to contribute $3.5 million to its defined benefit pension plans in 2005.
Pursuant to the plan of reorganization the Company assumed several 401K defined contribution plans sponsored by Superior TeleCom and its subsidiaries covering substantially all U.S. employees. The plans provide for limited company matching of participants' contributions. The Company's or Superior TeleCom's contributions for the year ended December 31, 2004, the period November 11, 2003 to
December 31, 2003, the period January 1, 2003 to November 10, 2003 and the year ended December 31, 2002 were $2.6 million, $0.2 million, $1.6 million and $4.8 million, respectively.
Employee retention plans
In connection with the bankruptcy proceedings, Superior TeleCom filed a motion seeking approval of the implementation of a key employee retention plan and related programs. The Bankruptcy Court approved the following programs: (1) Key Employee Retention Plan (the "KERP"), (2) Cash Incentive Bonus Pool Plan (the "CIBP"), (3) Change in Control Severance Pay Plan (the "CIC Plan"), and (4) Severance Pay Plan (the "Severance Plan"). These plans were assumed by the Company pursuant to the plan of reorganization.
The KERP provided 26 participants with the right to receive a one-time stay bonus based on a specified percentage of the participant's base salary. Payments under the KERP were made in three installments: the first installment equal to 25% of the stay bonus was made on May 1, 2003, the second installment equal to 37.5% of the stay bonus was made on September 4, 2003, and the final installment equal to 37.5% of the stay bonus was made on May 10, 2004.
The CIBP provided 125 employees not participating in the KERP with the right to receive a one-time annual incentive bonus, generally payable in a single installment on or about January 1, 2004, based on a specified percentage of the participant's base salary. Continued employment through January 1, 2004 was the only condition to receive the bonus.
The Severance Plan provided approximately 1,000 employees with the right to receive a severance benefit based on a specified percentage of the participant's base salary in the event that the participant's employment was terminated by the Company without "cause." The severance plan was terminated by the Company in November 2004.
The CIC Plan provided seven employees with the right to receive a severance benefit, in lieu of any severance benefits otherwise payable under the Severance Plan, based on a specified percentage of the participant's base salary and target performance bonus in the event that the participant's employment was terminated by the Company without "cause" or by the participant for "good reason" during the period commencing on a "change in control" (which does not include confirmation of the plan of reorganization) and ending on the first anniversary thereof. No amounts were paid under the CIC Plan which expired in May 2004.
A total of $1.2 million, $0.8 million and $6.4 million related to the plans described above was expensed during the year ended December 31, 2004, the period November 11, 2003 to December 31, 2003 and the period January 1, 2003 to November 10, 2003, respectively.
14. Income taxes
The provision for income tax expense (benefit) for the year ended December 31, 2004, the period November 11, 2003 to December 31, 2003, the period January 1, 2003 to November 10, 2003 and the year ended December 31, 2002 is comprised of the following:
Income (loss) before income taxes, distributions on preferred securities of Superior Trust I, minority interest and cumulative effect of accounting change attributable to domestic and foreign operations was as follows:
The provision (benefit) for income taxes differs from the amount computed by applying the U.S. federal income tax rate of 35% because of the effect of the following items:
Items that result in deferred tax assets and liabilities at December 31, 2004 and 2003 are as follows:
Net deferred tax assets and liabilities are included in the consolidated balance sheets at December 31, 2004 and 2003 as follows:
At December 31, 2004, the Company had net operating loss carryforwards for U.S. federal income tax purposes of $3.8 million which are available to offset future federal taxable income through 2023. Additionally, the Company had a net operating loss carryforward of $13.9 million, which is fully reserved, related to its United Kingdom subsidiary which is available to offset future taxable income of the subsidiary. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon these considerations, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of valuation allowances, at December 31, 2004.
15. Asset impairments, restructuring and other charges
As a result of the Electrical Sale (see Note 6), Superior TeleCom evaluated for impairment the long-lived assets of its Electrical wire business, DNE and Superior Israel as of September 30, 2002 pursuant to SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". In accordance with SFAS No. 144, such impairment test was based on probability weighted estimated future cash flows related to such assets including assessment of cash proceeds associated with the sale to Alpine of the Electrical wire business, DNE and Superior TeleCom's investment in Superior Israel. As a result of such review and the subsequent asset sale in connection with the Electrical Sale, Superior TeleCom recorded a pre-tax charge, principally related to the Electrical wire business, of $177.9 million to recognize an impairment of the identified long-lived assets of the Electrical wire business and Superior Israel and the loss on consummation of the Electrical Sale transaction. Additionally, as further discussed in Note 2, Superior TeleCom recognized a goodwill impairment loss of $324.7 million in its Magnet Wire and Distribution and Communications Cable reporting units.
During the year ended December 31, 2002, Superior TeleCom recorded restructuring and other charges of $37.8 million. These charges included $31.8 million, $4.2 million, $0.9 million and $0.9 million, respectively, related to (i) the closure of its Communications Cable segment's Elizabethtown, Kentucky and Winnipeg, Canada manufacturing facilities; (ii) the closure of its Magnet Wire and Distribution segment's Rockford, Illinois manufacturing facility; (iii) the shutdown of its Electrical Group Canadian operations and (iv) operational restructuring activities at Superior Israel. These actions were principally taken to more closely align productive capacity with current market demands and to reduce overall manufacturing costs. The $37.8 million charge included a $22.6 million
write-down of idled property, plant and equipment, $9.0 million of employee separation costs (422 employees) and $6.2 million of other facility related closure costs. Costs to relocate inventory and manufacturing equipment into remaining facilities were expensed as incurred. Superior TeleCom incurred an additional $2.3 million of restructuring and other charges for the period January 1, 2003 to November 10, 2003 primarily relating to ongoing closure activities at the Elizabethtown and Winnipeg facilities offset by foreign currency transaction gains of $1.5 million related to Superior TeleCom's Canadian subsidiary. Restructuring and other charges for the period January 1, 2003 to November 10, 2003 also included pre-petition professional fees of $3.6 million incurred in connection with preparation for Superior TeleCom's Chapter 11 filings, $1.1 million of severance payments related to a workforce reduction at Superior TeleCom's U.K. subsidiary, $2.3 million of asset impairments resulting from closure of one of Superior TeleCom's continuous casting lines and $0.8 million of asset impairments resulting from the write-off of abandoned equipment. Restructuring and other charges for the year ended December 31, 2004 and the period November 11, 2003 to December 31, 2003 were $2.0 million and $1.2 million, respectively, consisting primarily of ongoing professional fees related to the implementation of the plan of reorganization and employee retention and severance payments under plans established by Superior TeleCom during the pendency of its bankruptcy proceedings.
16. Derivative financial instruments and fair value information
The Company, to a limited extent, uses or has used forward fixed price contracts and derivative financial instruments to manage commodity price, interest rate and foreign currency exchange 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 counter parties for foreign exchange forward contracts, metal forward price contracts and metals futures contracts but the Company does not anticipate nonperformance by any of these counter parties. The amount of such exposure is generally limited to any unrealized gains within the underlying contracts.
Commodity price risk management
The costs of copper, the Company's most significant raw material, and aluminum have historically been subject to considerable volatility. To manage the risk associated with such volatility, the Company enters into futures contracts to match the metal component of customer product pricing with the cost component of the inventory shipped. These futures contracts have been designated as cash flow hedges with unrealized gains and losses recorded in other comprehensive income. Gains and losses are reclassified into earnings, as a component of cost of goods sold, when the hedged sales transactions are reflected in the income statement. Hedge ineffectiveness, which is not significant, is immediately recognized in earnings. At December 31, 2003, a total of $0.6 million of the unrealized gain arose during the period November 11, 2003 to December 31, 2003 and is recorded in other comprehensive income. The Company recorded a liability of $3.0 million representing the unrealized loss on sales commitments to customers in connection with the application of fresh- start reporting as of November 10, 2003 corresponding with a $3.0 million unrealized gain on copper futures contracts at
that time. The Company's commodities futures purchase contracts are summarized as follows at December 31, 2004 and 2003:
At December 31, 2003 the Company also had futures contracts to purchase 110,000 MMBTUs of natural gas expiring through June 2004 with a fair value of $.1 million. Additionally, at December 31, 2003, the Company had futures sales contracts for 10.7 million pounds of copper, or $9.5 million, expiring in March 2004 with an estimated fair value(loss) of $(1.6) million. Changes in the fair value of these futures sales contracts are recorded in the consolidated statement of operations on the same line as the underlying exposure being hedged.
Interest rate risk management
In order to limit the Company's exposure to rising interest rates with respect to borrowings under its variable rate senior secured revolving credit facility, the Company has entered into interest rate cap agreements. The following interest rate cap agreements were outstanding as of December 31, 2004 and 2003:
Foreign currency exchange risk management
The Company engages, to a limited extent, in the sale of products which result in accounts receivable denominated in foreign currencies. The Company enters into foreign currency forward exchange contracts to hedge against fluctuations in the value of these receivables. Changes in the fair
value of these contracts are reflected in current earnings. At December 31, 2004, the Company had outstanding foreign currency forward exchange contracts to exchange 7.5 million Canadian dollars for $6.2 million in February 2005. The fair value of the forward exchange contracts was insignificant at December 31, 2004. No foreign currency forward exchange contracts were outstanding at December 31, 2003.
17. Commitments and contingencies
The Company has various operating leases, primarily for warehouse space and certain manufacturing plants. These leases generally contain renewal options and require the Company to pay all executory costs such as maintenance and insurance. Total rent expense under cancelable and noncancelable operating leases was $8.4 million, $1.2 million, $7.1 million and $13.2 million for the year ended December 31, 2004, the period November 11, 2003 to December 31, 2003, the period January 1, 2003 to November 10, 2003 and the year ended December 31, 2002, respectively.
At December 31, 2004, future minimum lease payments under noncancelable operating leases are as follows (in thousands):
The Company is subject to lawsuits incidental to its business. In the opinion of management, based on its examination of such matters and discussions with counsel, the ultimate resolution of all pending or threatened litigation, claims and assessments will have no material adverse effect upon the Company's financial position, liquidity or results of operations.
The Company's operations are subject to environmental laws and regulations in each of the jurisdictions in which it owns or operates facilities governing, among other things, emissions into the air, discharges to water, the use, handling and disposal of hazardous substances and the investigation and remediation of soil and groundwater contamination both on-site at past and current facilities and at off-site disposal locations. On-site contamination at certain of the Company's facilities is the result of historic activities, including certain activities attributable to Superior TeleCom's (or one of its subsidiaries) and the Company's operations and those occurring prior to the use of a facility by Superior TeleCom or the Company. Off-site liability includes clean-up responsibilities and response costs incurred by others at various sites, under federal or state statutes, for which Superior TeleCom (or one of its subsidiaries) has been identified by the United States Environmental Protection Agency, or state environmental agency, as a Potentially Responsible Party, ("PRP"), or the equivalent. At the effective date of the plan of reorganization, Superior TeleCom or one of its subsidiaries had been named as a PRP or a defendant in a civil lawsuit or had received inquiries from environmental agencies involving a number of off-site or formerly owned locations. Certain PRP representatives filed claims with respect to certain of those sites in connection with Superior TeleCom's Chapter 11
proceedings. The negotiations respecting those claims have been completed, and allowed claims will receive a portion of the $3.0 million amount that the plan of reorganization allocated to holders of general unsecured claims.
In addition, many of the sites for which Essex International and its subsidiaries had been named as a PRP are covered by an indemnity from United Technologies Corporation provided in connection with the February 1988 sale of Essex Group by United Technologies to Essex International. Pursuant to the indemnity, United Technologies agreed to indemnify Essex International against losses incurred under any environmental protection and pollution control laws or resulting from, or in connection with, damage or pollution to the environment arising from events, operations or activities of Essex Group prior to February 29, 1988, or from conditions or circumstances existing at or prior to February 29, 1988. To be covered by the indemnity, the condition, event or circumstance must have been known to United Technologies prior to the date of sale (February 29, 1988), and United Technologies must have received notice of the indemnity claim prior to February 28, 1993. The sites covered by this indemnity historically have been handled directly by United Technologies and required payments generally have been made directly by United Technologies. Most of these sites are mature sites where allocations of liability have been settled and remediation is well underway or has been completed.
United Technologies also provided an additional environmental indemnity, referred to as the "basket indemnity." This indemnity relates to liabilities arising from environmental events, conditions or circumstances existing at or prior to February 29, 1988 of which United Technologies received notice prior to February 28, 1993. As to such liabilities, Essex International is responsible for the first $4.0 million incurred. Thereafter, United Technologies has agreed to indemnify Essex International fully for any liabilities in excess of $4.0 million. Essex International has not incurred any liabilities covered by this indemnity.
Except for air quality violations involving two currently operated Indiana facilities, none of the sites or matters mentioned above involves the imposition of sanctions, fines or administrative penalties on the Company. The Indiana Department of Environmental Quality ("IDEM") asserted claims for fines or administrative penalties relating to alleged air quality permitting violations at the two Indiana facilities. These claims have been resolved in the bankruptcy claims resolution process by allowing IDEM a general unsecured claim against a portion of the $3 million amount that the plan of reorganization allocated to holders of unsecured claims.
The Company believes that any other environmental matters or proceedings in which it is involved have been or will be addressed in the bankruptcy claims resolution process, are subject to indemnification, or will not have a material adverse effect either individually, or in the aggregate, upon its business, financial condition, liquidity or results of operations. There can be no assurance that future developments will not alter this conclusion.
Since approximately 1990, Essex International and certain subsidiaries have been named as defendants in a number of product liability lawsuits brought by electricians, other skilled tradesmen and others claiming injury, in a substantial majority of cases, from exposure to asbestos found in electrical wire products produced many years ago. Litigation against various past insurers of Essex International who had previously refused to defend and indemnify Essex International against these lawsuits was settled during 1999. Under the settlement, Essex International was reimbursed for substantially all of its costs and expenses incurred in the defense of these lawsuits, and the insurers have undertaken to defend, are currently directly defending and, if it should become necessary, will indemnify Essex
International against those asbestos lawsuits, subject to the terms and limits of the respective policies. Under the plan of reorganization, certain of the claimants in these actions will be able to assert claims under applicable insurance coverage and other similar arrangements. The Company believes that Essex International's liability, if any, in these matters will not have a material adverse effect either individually, or in the aggregate, upon its business, financial condition, liquidity or results of operations. There can be no assurance, however, that future developments will not alter this conclusion.
On January 18, 2002, United Technologies brought a third party claim against Essex International in a civil action in Massachusetts. United Technologies had been sued by an insurer for, among other things, approximately $3.1 million in compensatory damages for retrospective premiums for 1999, 2000 and 2001 relating to certain events that allegedly occurred while EGI was a subsidiary of United Technologies. United Technologies' third party complaint against Essex International contended, among other things, that Essex International had agreed, in the stock purchase agreement dated January 15, 1998, to pay such premiums and sought a declaratory judgment, contribution and indemnification for any such retrospective premiums that United Technologies might have to pay the insurer. On January 13, 2003, the court granted the insurer's motion for summary judgment against United Technologies and Essex International's motion to dismiss with prejudice United Technologies' claim against it. United Technologies thereafter indicated an intention to appeal the ruling dismissing the action against Essex International. However, before Essex International's time to respond, those proceedings were stayed by the filing of Superior TeleCom's bankruptcy proceedings. United Technologies and the insurer filed proofs of claim in connection with Superior TeleCom's bankruptcy. The Company believes that these claims have been addressed in the bankruptcy claims resolution process and will not have a material adverse effect either individually, or in the aggregate, upon its business, financial condition, liquidity or results of operations. There can be no assurance that future developments will not alter this conclusion.
The Company accepts certain customer orders for future delivery at fixed prices. As copper is the most significant raw material used in the manufacturing process, the Company enters into forward purchase fixed price commitments for copper to properly match its cost to the value of the copper to be billed to the customers. At December 31, 2004, the Company had forward fixed price copper purchase commitments for delivery through August 2005 for $36.8 million. Additionally at December 31, 2004, the Company has forward purchase fixed price commitments for aluminum and natural gas amounting to $4.4 million and $6.2 million, respectively.
A significant portion of the income taxes payable at December 31, 2004 and 2003 relate to pre-petition claims primarily resulting from state income tax audits of Superior Telecom. The Company is currently in negotiations with state taxing authorities to settle these claims. Although the Company believes it has adequately provided for any liability that may result from settlement of these claims, the ultimate outcome of the negotiations cannot be predicted with certainty.
18. Related party transactions
As discussed in Note 6, in December 2002 Superior TeleCom sold certain assets and securities to Alpine. Also as discussed in Note 6, the Company entered into a Supply and Transitional Services Agreement with Essex Electric, a wholly owned subsidiary of Alpine.
Superior TeleCom and Alpine were parties to a services agreement (the "Services Agreement") whereby Alpine has provided during certain periods financial, audit and accounting, corporate finance
and strategic planning, legal, treasury, insurance and administrative services in return for an annual fee in addition to reimbursement of incidental costs and expenses incurred in connection with Alpine's provision of such services. Under the Services Agreement as amended, Superior TeleCom incurred expense of $1.1 million during the years ended December 31, 2002. The Services Agreement expired on June 30, 2002.
In 2001, Alpine entered into a commitment to advance to Superior TeleCom approximately $3.8 million to be used solely by Superior TeleCom to make one quarterly cash interest payment on its Senior Subordinated Notes. In 2002, the commitment was funded, and Superior TeleCom issued subordinated notes to Alpine in the face amount of the funds advanced, with such notes due seven years from the date issued. In connection with the funding, Superior TeleCom issued warrants to Alpine to acquire 250,000 shares of its common stock at an exercise price of $1.41 per share and warrants to acquire an additional 2.1 million shares of its common stock at an exercise price of $1.69 per share, subject to Superior TeleCom stockholder approval. The warrants were canceled in connection with the Electrical Sale. The debt was cancelled pursuant to the plan of reorganization.
19. Business segments and foreign operations
Reportable segments are strategic businesses that offer different products and services to different customers. These segments are Communications Cable, Magnet Wire and Distribution, Copper Rod and prior to December 11, 2002, Electrical. The Communications Cable segment includes (i) copper and fiber optic outside plant wire and cable for voice and data transmission in telecommunications networks (ii) copper and fiber optic datacom or premises wire and cable for use within homes and offices for local area networks, Internet connectivity and other applications, and (iii) prior to December 11, 2002, all of Superior Israel's and DNE's products. The Magnet Wire and Distribution segment includes magnet wire and related products. Prior to 2003, substantially all copper rod produced by Superior TeleCom was used in its manufacturing operations. Due to available capacity resulting from the Electrical Sale and reduced production volumes in both the Communications Cable and Magnet Wire and Distribution segments, in 2003 Superior TeleCom began to actively offer copper rod for sale to external parties, including Essex Electric. Copper rod produced for internal processing is recorded by the consuming segment at cost as a component of cost of goods sold. Other intersegment transactions are insignificant. The Electrical segment included building and industrial wire and cable. As discussed in Note 6, Superior TeleCom sold DNE, substantially all of its investment in Superior Israel and the operations comprising its Electrical segment on December 11, 2002.
Segment performance is evaluated based on a number of factors with operating income, excluding restructuring and other charges and asset impairments, being the most critical.
Operating results for each of the Company's reportable segments are presented below. Corporate and other items shown below are provided to reconcile to the Company's consolidated statements of operations, cash flows and balance sheets.
(a)Sales of copper rod to Essex Electric accounted for 11% and 10% of consolidated sales for the period January 1, 2003 to November 10, 2003 and the period November 11, 2003 to December 31, 2003, respectively. No other customer accounted for more than 10% of consolidated net sales for the year ended December 31, 2004, the period November 11, 2003 to December 31, 2003, the period January 1, 2003 to November 10, 2003 and the year ended December 31, 2002.
(b)Four customers accounted for 18%, 14%, 12% and 11% of the Communications Cable segment's net sales for the year ended December 31, 2004 and two customers accounted for 22% and 12%, 19% and 18%, and 14% and 13% of the Communications Cable segment's net sales for the period November 11, 2003 to December 31, 2003, the period January 1, 2003 to November 10, 2003 and the year ended December 31, 2002, respectively. Net sales to the RBOCs and major independent telephone companies accounted for 66%, 57%, 57%, and 34% of the Communications Cable segment's sales for the year ended December 31, 2004, the period November 11, 2003 to December 31, 2003, the period January 1, 2003 to November 10, 2003 and the year ended December 31, 2002, respectively. Superior Israel net sales represented 21% of the Communications Cable segment's sales for the year ended December 31, 2002.
(c)One customer accounted for 11% of the Magnet Wire and Distribution segment's sales for the year ended December 31, 2004.
(d)Two customers accounted for 36% and 31% of the Copper Rod segment's net sales for the year ended December 31, 2004. One customer accounted for 61% and two customers accounted for 13% each of the Copper Rod segment's sales for the year ended December 31, 2003.
(e)Includes machinery and equipment of $22.2 million and customer base intangibles of $28.1 million acquired in 2004 in connection with the Belden Asset Acquisition.
(f)Includes intangible assets of $2.2 million acquired in 2004 in connection with the Nexans Asset Acquisition.
The following provides information about domestic and foreign operations for the year ended December 31, 2004, period November 11, 2003 to December 31, 2003, the period January 1, 2003 to November 10, 2003, and the year ended December 31, 2002. Net sales are attributed to the location in which the sale was originated.
20. Quarterly financial information (unaudited)
The unaudited quarterly results of operations of the Company for the year ended December 31, 2004 and the period November 11, 2003 to December 31, 2003 and for Superior TeleCom for the period January 1, 2003 to November 10, 2003 are as follows:
(a)Net income per share of common stock is determined by computing a year-to-date weighted average of the incremental shares included in each quarterly net income per share calculation. As a result, the sum of the net income per share for the four quarterly periods may not equal the net income per share for the twelve month period.
21. Supplemental guarantor information
The 9% senior unsecured notes issued on April 14, 2004 were issued by Superior Essex Communications and Essex Group as joint and several obligors. The notes are fully and unconditionally guaranteed by the Company and each of its existing and future domestic restricted subsidiaries (as defined in the indenture governing the notes). All of the Company's current domestic subsidiaries, other than IP Licensing LLP, are restricted subsidiaries. The following consolidating information presents information about the Company (the "Parent"), the issuers, guarantor subsidiaries and non-guarantor subsidiaries. As a result of the plan of reorganization and the Company's implementation of fresh-start reporting, the consolidating financial information for periods subsequent to November 10, 2003 reflects a new organizational structure and basis of accounting and is not comparable to the historical consolidating financial information of Superior TeleCom for periods prior to the effective date of the plan of reorganization. For purposes of this presentation for periods prior to November 10, 2003 the parent is Superior TeleCom, the issuers are Superior Telecommunications Inc. and Essex Group Inc., the guarantor subsidiaries are all direct and indirect domestic subsidiaries of Superior TeleCom, and the non-guarantor subsidiaries are all direct and indirect non-domestic subsidiaries of Superior TeleCom together with Superior Trust I. Investments in subsidiaries are presented on the equity method. Intercompany transactions are eliminated in consolidation.
22. Subsequent Event
On March 4, 2005, the Company sold accounts receivable and inventory totaling approximately $1.2 million together with related trademarks and service names constituting business conducted by the Company under the U.S. Seal trade name for a total purchase price of $11.6 million. Total sales with respect to the U.S. Seal business were approximately $4 million in 2004. In connection with the sale, the Company also signed a non-exclusive distribution agreement to act as a distributor for certain of the U.S Seal products.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
* Monte R. Haymon
Chairman of the Board
March 15, 2005
/s/ STEPHEN M. CARTER Stephen M. Carter
Chief Executive Officer and Director
(principal executive officer)
March 15, 2005
/s/ DAVID S. ALDRIDGE David S. Aldridge
Chief Financial Officer, Executive Vice President and Treasurer (principal financial and accounting officer)
March 15, 2005
* Andrew D. Africk
Director
March 15, 2005
* Denys Gounot
Director
March 15, 2005
* James F. Guthrie
Director
March 15, 2005
* Andrew P. Hines
Director
March 15, 2005
* Perry J. Lewis III
Director
March 15, 2005
*By:
BARBARA L. BLACKFORD Barbara L. Blackford
Attorney-in-fact
SUPERIOR ESSEX INC. AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 2004, Period November 11, 2003 to December 31, 2003,
Period January 1, 2003 to November 10, 2003, and Year Ended December 31, 2002
(in thousands)
(a)Payments for restructuring liabilities
(b)Write-offs net of recoveries
S-1
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits, Financial Statement Schedules
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
SIGNATURES