**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q**

**(Mark One)**

**    ****x****                     ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the Quarterly Period EndedSeptember 30, 2006**

**or**

**    ****o****                        ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**For the transition period from                     to                     **

**Commission file number 0-50514**

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**SUPERIORESSEX INC.**

(Exact name of registrant as specified in its charter)

| **Delaware**                                                    |   | **20-0282396**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **150  Interstate North Parkway Atlanta, Georgia**              |   | **30339**                             |
| (Address of  principal executive offices)                       |   | (Zip code)                            |

 

**770-657-6000**

Registrant’s telephone number, including area code

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Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days. Yes xNo o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act(Check one):
| Large accelerated filer o | Accelerated filer x | Non-accelerated filer o |
|--------------------------------|--------------------------|------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

o Yes xNo

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Section 12, 13 or 15(d) of the Securities ExchangeAct of 1934 subsequent to the distribution of securities under a plan confirmedby a court. Yes x  No o

As ofNovember 3, 2006, the registrant had 20,403,799 shares of common stock,$0.01 par value, outstanding.

 

 

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**PART I. FINANCIAL INFORMATION**

In this QuarterlyReport on Form 10-Q, the following terms have the meanings indicatedbelow:

·                  Unless thecontext otherwise requires, the terms “we,” “us” and “our,” as well as the term“Superior Essex,” refer to Superior Essex Inc. and its subsidiaries on andafter November 10, 2003, the effective date of the plan of reorganizationof Superior TeleCom Inc. and its subsidiaries

·                  “COMEX” refersto Commodity Exchange Inc., a subsidiary of the New York Mercantile Exchange,Inc. that operates the principal U.S. copper futures and options tradingmarket.

·                  “Essex Group”refers to Essex Group, Inc., a wholly owned subsidiary of EssexInternational.

·                  “EssexInternational” refers to Essex International Inc., a wholly ownedsubsidiary of Superior Essex Holding Corp.

·                  “Essex Nexans”refers to our 60% owned corporate joint venture, Essex Nexans Europe S.A.S. andits subsidiaries

·                  “LME” refers tothe London Metal Exchange, which operates the principal European copper futuresand options trading market.

·                  “Superior EssexCommunications” refers to Superior Essex Communications LP.

·                  “Superior EssexHolding” refers to Superior Essex Holding Corp., a wholly owned subsidiary ofSuperior Essex Inc. and the sole limited partner of Superior EssexCommunications LP.

·                  “SuperiorTeleCom,” unless the context otherwise requires, refers to SuperiorTeleCom Inc. and its subsidiaries and the business carried on by themprior to November 10, 2003.

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**Forward-Looking Statements**

This Form 10-Q contains “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended, or the Exchange Act. These forward-looking statements are based oncurrent expectations, estimates and forecasts about us, our future performance,the industries in which we operate and our liquidity. In addition, otherwritten and oral statements that constitute forward-looking statements may bemade by us or on our behalf. Such forward-looking statements include statementsregarding expected financial results and other planned events, including, butnot limited to, anticipated liquidity and capital expenditures. Words such as “anticipate,”“assume,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek,” “target,” “goal,”variations of such words and similar expressions are intended to identify suchforward-looking statements. These statements are not guarantees of futureperformance and involve certain risks, uncertainties and assumptions that aredifficult to predict. Therefore, actual future events or results may differmaterially from these statements. These risks and uncertainties include theimpact of the following:

·                  General economic, business and industry conditions;

·                  Increases and volatility in the price of copper andour ability to adjust our product pricing for such changes in copper costs;

·                  Spending reductions by the telecommunicationsindustry;

·                  Competition, including from other wire and cablemanufacturers and other alternative sources and technologies such as fiberoptics;

·                  Increases or decreases in sales due to contractlosses or gains as expirations, renewals and rebidding efforts occur;

·                  Rapid product and technology development,particularly in the telecommunications industry;

·                  Market acceptance of new products and continuingproduct demand;

·                  Production and timing of customer orders;

·                  The migration of magnet wire demand to China andother countries;

·                  Fluctuations in the supply, availability and pricingof non-copper principal raw materials, natural gas, fuel and freight;

·                  Our significant level of indebtedness and debtcovenant requirements;

·                  The potential need for and availability ofadditional sources of capital and liquidity, including the effects of increasedcopper prices on working capital;

·                  Our ability to integrate the operations of ourEuropean magnet wire joint venture and attain the expected benefits of thetransaction and to identify, finance and integrate other acquisitions;

·                  Our ability to successfully complete construction ofand operate a magnet wire facility in an emerging market such as China;

·                  Changes in short-term interest rates and foreignexchange rates;

·                  Any deterioration in our labor relations;

·                  The volatility of the market price of our commonstock; and

·                  Other risks and uncertainties, including thoseincluded under the caption “Risk factors” herein and under the caption “Riskfactors” in our Annual Report on Form 10K for the year ended December 31, 2005.

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Forward-lookingstatements should be considered in light of various important factors,including those set forth elsewhere in this Form 10-Q and our otherfilings with the Securities and Exchange Commission (“SEC”). Moreover, wecaution you not to place undue reliance on these forward-looking statements,which speak only as of the date they were made. We do not undertake anyobligation to publicly release any revisions to these forward-lookingstatements to reflect events or circumstances after the date of thisForm 10-Q or to reflect the occurrence of unanticipated events. Allsubsequent forward-looking statements attributable to us or any person actingon our behalf are expressly qualified in their entirety by the cautionarystatements contained or referred to in this Form 10-Q and in our otherfilings with the SEC.

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**ITEM1. FINANCIAL STATEMENTS**

**SUPERIOR ESSEX INC. ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except share data)**

**(unaudited)**
| ** **                                                                                                                                                                | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                |       |                         |       |                        |       |
| Current assets:                                                                                                                                                           |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                 |       | $                            | 37,491     |                        | $          | 8,184 |   |
| Accounts receivable (less allowance for doubtful  accounts of $6,900 and $5,151 at September 30, 2006 and  December 31, 2005, respectively)                     |       | 395,414                      |       | 259,615                     |       |
| Inventories, net                                                                                                                                                          |       | 289,909                      |       | 238,355                     |       |
| Other current assets                                                                                                                                                      |       | 34,176                       |       | 35,385                      |       |
| Total current assets                                                                                                                                                      |       | 756,990                      |       | 541,539                     |       |
| Property, plant  and equipment, net                                                                                                                                       |       | 250,423                      |       | 240,732                     |       |
| Intangible and  other long-term assets, net                                                                                                                               |       | 39,385                       |       | 45,921                      |       |
| Total assets                                                                                                                                                              |       | $                            | 1,046,798  |                        | $          | 828,192 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                             |       |                         |       |                        |       |
| Current  liabilities:                                                                                                                                                     |       |                         |       |                        |       |
| Short-term borrowings                                                                                                                                                     |       | $                            | 29,363     |                        | $          | 34,119 |   |
| Current portion of long-term debt                                                                                                                                         |       | 474                          |       | 499                         |       |
| Accounts payable                                                                                                                                                          |       | 183,056                      |       | 143,931                     |       |
| Accrued expenses                                                                                                                                                          |       | 121,606                      |       | 92,426                      |       |
| Total current liabilities                                                                                                                                                 |       | 334,499                      |       | 270,975                     |       |
| Long-term debt                                                                                                                                                            |       | 288,246                      |       | 279,226                     |       |
| Other long-term  liabilities, primarily pension obligations                                                                                                               |       | 46,172                       |       | 51,516                      |       |
| Total liabilities                                                                                                                                                         |       | 668,917                      |       | 601,717                     |       |
| Minority  interest in consolidated subsidiaries                                                                                                                           |       | 26,483                       |       | 20,822                      |       |
| Stockholders’  equity:                                                                                                                                               |       |                         |       |                        |       |
| Preferred stock, $.01 par value; 7,000,000 shares  authorized, none issued or outstanding                                                                                 |       | —                       |       | —                      |       |
| Common stock, $.01 par value; 33,000,000 shares  authorized; 20,487,158 and 17,294,848 shares issued at September 30,  2006 and December 31, 2005, respectively |       | 205                          |       | 173                         |       |
| Capital in excess of par value (note 1)                                                                                                                                   |       | 262,495                      |       | 175,928                     |       |
| Accumulated other comprehensive income (loss)                                                                                                                             |       | 107                          |       | (4,361                      | )          |
| Retained earnings                                                                                                                                                         |       | 90,582                       |       | 39,957                      |       |
| Equity-based unearned compensation (note 1)                                                                                                                               |       | —                       |       | (4,920                      | )          |
| Treasury stock, at cost (95,303 shares and 66,793  shares at September 30, 2006 and December 31, 2005, respectively)                                                      |       | (1,991                       | )          | (1,124                      | )          |
| Total stockholders’ equity                                                                                                                                           |       | 351,398                      |       | 205,653                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                          |       | $                            | 1,046,798  |                        | $          | 828,192 |   |

 

The accompanying notes are an integral part of these condensed consolidatedfinancial statements

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**SUPERIOR ESSEX INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, except per share data)**

**(unaudited)**
| ** **                                                                                                                       | ** ** | **Three Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                                       | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Net sales                                                                                                                        |       | $                                                    | 796,289    |   | $ | 439,120 |   |
| Cost of goods  sold                                                                                                              |       | 723,935                                              |       | 396,242 |   |
| Gross profit                                                                                                                     |       | 72,354                                               |       | 42,878 |   |
| Selling, general  and administrative expenses                                                                                    |       | (37,525                                              | )          | (25,982 | ) |
| Restructuring  and other charges                                                                                                 |       | (117                                                 | )          | (89 | ) |
| Asset impairment  charge (note 4)                                                                                                |       | (2,000                                               | )          | — |   |
| Operating income                                                                                                                 |       | 32,712                                               |       | 16,807 |   |
| Interest expense                                                                                                                 |       | (7,123                                               | )          | (6,987 | ) |
| Other income  (expense), net                                                                                                     |       | 519                                                  |       | (357 | ) |
| Income before income taxes and minority interest                                                                                 |       | 26,108                                               |       | 9,463 |   |
| Income tax  benefit (expense), including a $4,505 benefit in 2005 from resolution of  preconfirmation tax contingencies (note 1) |       | (10,273                                              | )          | 2,399 |   |
| Income before minority interest                                                                                                  |       | 15,835                                               |       | 11,862 |   |
| Minority  interest in earnings of subsidiaries                                                                                   |       | (1,128                                               | )          | — |   |
| Net income                                                                                                                       |       | $                                                    | 14,707     |   | $ | 11,862 |   |
| Net income per  share of common stock:                                                                                           |       |                                                 |       |   |   |
| Basic                                                                                                                            |       | $                                                    | 0.74       |   | $ | 0.71 |   |
| Diluted                                                                                                                          |       | 0.72                                                 |       | 0.70 |   |
| Weighted average  shares outstanding:                                                                                            |       |                                                 |       |   |   |
| Basic                                                                                                                            |       | 19,805                                               |       | 16,673 |   |
| Diluted                                                                                                                          |       | 20,348                                               |       | 17,031 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements

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**SUPERIOR ESSEX INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, except per share data)**

**(unaudited)**
| ** **                                                                                                             | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Net sales                                                                                                              |       | $                                                   | 2,266,176  |   | $ | 1,272,354 |   |
| Cost of goods  sold                                                                                                    |       | 2,048,674                                           |       | 1,143,185 |   |
| Gross profit                                                                                                           |       | 217,502                                             |       | 129,169 |   |
| Selling, general  and administrative expenses                                                                          |       | (111,375                                            | )          | (76,145 | ) |
| Restructuring  and other charges                                                                                       |       | (1,095                                              | )          | (721 | ) |
| Asset impairment  charges (note 4)                                                                                     |       | (2,000                                              | )          | (2,306 | ) |
| Gain on sale of  product line (note 5)                                                                                 |       | —                                              |       | 10,355 |   |
| Operating income                                                                                                       |       | 103,032                                             |       | 60,352 |   |
| Interest expense                                                                                                       |       | (23,212                                             | )          | (21,469 | ) |
| Gain on sale of  investment (note 5)                                                                                   |       | 5,788                                               |       | — |   |
| Other income  (expense), net                                                                                           |       | 656                                                 |       | (161 | ) |
| Income before income taxes, minority interest and  extraordinary gain                                                  |       | 86,264                                              |       | 38,722 |   |
| Income tax  expense, including a $4,505 benefit in 2005 from resolution of  preconfirmation tax contingencies (note 1) |       | (33,201                                             | )          | (9,845 | ) |
| Income before minority interest and extraordinary  gain                                                                |       | 53,063                                              |       | 28,877 |   |
| Minority  interest in earnings of subsidiaries                                                                         |       | (3,309                                              | )          | — |   |
| Income before extraordinary gain                                                                                       |       | 49,754                                              |       | 28,877 |   |
| Extraordinary  gain (net of minority interest of $581) - (note 5)                                                      |       | 871                                                 |       | — |   |
| Net income                                                                                                             |       | $                                                   | 50,625     |   | $ | 28,877 |   |
| Net income per  share of common stock:                                                                                 |       |                                                |       |   |   |
| Basic:                                                                                                                 |       |                                                |       |   |   |
| Income before extraordinary gain                                                                                       |       | $                                                   | 2.76       |   | $ | 1.74 |   |
| Extraordinary gain                                                                                                     |       | 0.05                                                |       | — |   |
| Net income                                                                                                             |       | $                                                   | 2.81       |   | $ | 1.74 |   |
| Diluted:                                                                                                               |       |                                                |       |   |   |
| Income before extraordinary gain                                                                                       |       | $                                                   | 2.68       |   | $ | 1.70 |   |
| Extraordinary gain                                                                                                     |       | 0.05                                                |       | — |   |
| Net income                                                                                                             |       | $                                                   | 2.73       |   | $ | 1.70 |   |
| Weighted average  shares outstanding:                                                                                  |       |                                                |       |   |   |
| Basic                                                                                                                  |       | 18,008                                              |       | 16,634 |   |
| Diluted                                                                                                                |       | 18,524                                              |       | 16,954 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements

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**SUPERIOR ESSEX INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

**(unaudited)**
| ** **                                                                                | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                                    |       |                                                |       |   |   |
| Net income                                                                                |       | $                                                   | 50,625     |   | $ | 28,877 |   |
| Adjustments to reconcile net income to net cash used  for operating activities:           |       |                                                |       |   |   |
| Depreciation and amortization                                                             |       | 20,836                                              |       | 17,394 |   |
| Amortization of deferred financing costs and discount                                     |       | 1,634                                               |       | 1,615 |   |
| Asset impairment charges (note 4)                                                         |       | 2,000                                               |       | 2,306 |   |
| Gain on sale of investment (note 5)                                                       |       | (5,788                                              | )          | — |   |
| Gain on sale of product line (note 5)                                                     |       | —                                              |       | (10,355 | ) |
| Minority interest in earnings of subsidiary                                               |       | 3,309                                               |       | — |   |
| Extraordinary gain (net of minority interest)                                             |       | (871                                                | )          | — |   |
| Cash settlement of derivatives                                                            |       | 2,485                                               |       | — |   |
| Change in operating assets and liabilities:                                               |       |                                                |       |   |   |
| Accounts receivable, net                                                                  |       | (126,965                                            | )          | (34,516 | ) |
| Inventories, net                                                                          |       | (45,339                                             | )          | (3,719 | ) |
| Other current and non-current assets                                                      |       | 429                                                 |       | 6,527 |   |
| Accounts payable, accrued expenses and other  liabilities                                 |       | 55,374                                              |       | 22,208 |   |
| Other, net                                                                                |       | 4,868                                               |       | 1,860 |   |
| Cash flows  provided by (used for) operating activities                                   |       | (37,403                                             | )          | 32,197 |   |
| Cash flows from  investing activities:                                                    |       |                                                |       |   |   |
| Capital expenditures                                                                      |       | (26,996                                             | )          | (13,055 | ) |
| SDS acquisition, net of cash acquired (note 5)                                            |       | (947                                                | )          | — |   |
| Proceeds from sale of investment (note 5)                                                 |       | 8,500                                               |       | — |   |
| Belden asset acquisition contingent payment                                               |       | —                                              |       | (10,000 | ) |
| Proceeds from sale of product line (note 5)                                               |       | —                                              |       | 11,563 |   |
| Capitalized Nexans’ acquisition costs                                                |       | —                                              |       | (2,438 | ) |
| Other                                                                                     |       | 68                                                  |       | 56 |   |
| Cash flows used  for investing activities                                                 |       | (19,375                                             | )          | (13,874 | ) |
| Cash flows from  financing activities:                                                    |       |                                                |       |   |   |
| Repayments of borrowings under senior secured  revolving credit facility, net             |       | (13,049                                             | )          | (30,000 | ) |
| Borrowings (repayments) on Essex Nexans and other  short-term borrowings, net             |       | 6,665                                               |       | (785 | ) |
| Proceeds from long-term borrowings                                                        |       | 7,545                                               |       | — |   |
| Repayments of long-term debt                                                              |       | (261                                                | )          | — |   |
| Proceeds from common stock offering, net                                                  |       | 80,794                                              |       | — |   |
| Proceeds from exercise of stock options                                                   |       | 3,248                                               |       | 836 |   |
| Excess tax benefits resulting from exercise of stock  options and vesting of stock awards |       | 958                                                 |       | — |   |
| Cash flows  provided by (used for) financing activities                                   |       | 85,900                                              |       | (29,949 | ) |
| Effect of  exchange rate changes on cash                                                  |       | 185                                                 |       | (274 | ) |
| Net increase  (decrease) in cash and cash equivalents                                     |       | 29,307                                              |       | (11,900 | ) |
| Cash and cash  equivalents at beginning of period                                         |       | 8,184                                               |       | 18,312 |   |
| Cash and cash  equivalents at end of period                                               |       | $                                                   | 37,491     |   | $ | 6,412 |   |
| Supplemental  disclosures:                                                                |       |                                                |       |   |   |
| Cash paid for interest                                                                    |       | $                                                   | 15,772     |   | $ | 13,681 |   |
| Cash paid for  income taxes, net                                                          |       | $                                                   | 29,642     |   | $ | 5,039 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements

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**SUPERIOR ESSEX INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**September 30, 2006**

**(unaudited)**

**1.****             General**

***Basis of presentation***

Theaccompanying balance sheet as of December 31, 2005, which has been derived fromaudited financial statements, and the unaudited consolidated financialstatements as of September 30, 2006 and for the three and nine months endedSeptember 30, 2006 and 2005, have been prepared in accordance with therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, as amended, and, therefore, do not include all disclosures required byaccounting principles generally accepted in the United States for completefinancial statements. However, in the opinion of management, these statementsreflect all adjustments (which consist only of normal recurring accruals)necessary for a fair presentation of the results of operations for the relevantperiods. Results for the three and nine months ended September 30, 2006 are notnecessarily indicative of the results to be expected for the entire fiscalyear. These financial statements should be read in conjunction with the auditedconsolidated financial statements and notes thereto included in SuperiorEssex Inc.’s Annual Report on Form 10-K for the year endedDecember 31, 2005.

TheCompany is a manufacturer and supplier of communications wire and cableproducts to telephone companies, CATV companies, distributors and systemsintegrators, and magnet wire and fabricated insulation materials to majororiginal equipment manufacturers, or OEMs, for use in motors, transformers,generators and electrical controls and, through its distribution operations, toOEMs and the motor repair industry. The Company also converts coppercathode to copper rod for internal consumption and for sale to other wire andcable manufacturers and OEMs. The Company currently operates manufacturingfacilities in the United States, the United Kingdom, France, Germany, Portugaland Mexico.

***Stock-Based Compensation Plans***

EffectiveJanuary 1, 2006 the Company adopted Statement of Financial Accounting Standards(“SFAS”) No. 123(R), *Share-Based Payment.*SFAS No. 123(R) requires all entities to recognize compensation expense in anamount equal to the fair value of share-based payments (e.g. stock options andunvested stock awards) granted to employees. SFAS No. 123(R) also requiresrecognition of compensation expense based on the grant date fair value for theunvested portion of outstanding options and awards granted prior to theadoption date. Prior to the adoption of SFAS No. 123(R) the Company applied theintrinsic-value based method of accounting prescribed by Accounting PrinciplesBoard (“APB”) Opinion No. 25, *Accountingfor Stock Issued to Employees*, and related interpretations includingFinancial Accounting Standards Board (“FASB”) Interpretation No. 44, *Accounting for Certain Transactions involving StockCompensation, an interpretation of APB Opinion No. 25*, toaccount for stock-based compensation plans. Under this method, compensationexpense was recorded only if the market price of the underlying stock on thedate of grant exceeded the exercise price. The Company adopted SFAS No. 123(R)using the modified prospective method and accordingly, results from priorperiods have not been restated. The adoption of SFAS 123(R) resulted in adecrease in income before income taxes, minority interest and extraordinarygain, net income and net income per diluted common share of $0.3 million, $0.2million and $0.01, respectively, for the three months ended September 30, 2006and $0.7 million, $0.4 million and $0.02, respectively, for the nine monthsended September 30, 2006. Additionally, as a result of the initial adoption ofSFAS 123(R), contra-equity balances for unearned stock-based compensation of$4.9 million at December 31, 2005 were reclassified to capital in excess of parvalue and accrued liabilities of $1.3 million at December 31, 2005 related tounexercised stock options were credited to capital in excess of par value.Compensation expense attributable to all stock-based compensation plans isrecognized on a straight-line basis over the related vesting period. TheCompany’s policy is to issue authorized but unissued shares to satisfy stockoption exercises.

SFASNo. 123, *Accounting for Stock-Based Compensation*,established accounting and disclosure requirements using a fair-value basedmethod of accounting for stock-based employee compensation plans for periodsprior to the adoption of SFAS 123(R). As allowed by SFAS No. 123, prior to2006 the Company elected to continue to apply the intrinsic-value based methodof accounting

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described above, and adopted only the disclosurerequirements of SFAS No. 123. The following table illustrates the effecton net income if the fair-value based method had been applied to alloutstanding awards for the three and nine months ended September 30, 2005 (inthousands except per share data):
| ** **                                                                                                                   | ** ** | **Three Months  Ended  September 30,  2005** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Net income, as  reported                                                                                                     |       | $                                                      | 11,862     |                                                  | $          | 28,877 |   |
| Add stock-based  employee compensation expense included in reported net income, net of tax                                   |       | 429                                                    |       | 1,225                                                 |       |
| Deduct total  stock-based employee compensation expense determined under fair-value based  method for all awards, net of tax |       | (617                                                   | )          | (1,711                                                | )          |
| Pro forma net  income                                                                                                        |       | $                                                      | 11,674     |                                                  | $          | 28,391 |   |
| Net income per  share:                                                                                                       |       |                                                   |       |                                                  |       |
| As reported:                                                                                                                 |       |                                                   |       |                                                  |       |
| Basic                                                                                                                        |       | $                                                      | 0.71       |                                                  | $          | 1.74 |   |
| Diluted                                                                                                                      |       | 0.70                                                   |       | 1.70                                                  |       |
| Pro forma:                                                                                                                   |       |                                                   |       |                                                  |       |
| Basic                                                                                                                        |       | 0.70                                                   |       | 1.71                                                  |       |
| Diluted                                                                                                                      |       | 0.69                                                   |       | 1.68                                                  |       |

 

Options topurchase 24,195 and 223,400 shares of common stock with a weighted averageBlack Scholes fair value per option of $12.26 and $8.62 were granted during thenine months ended September 30, 2006 and 2005, respectively. The fair value foroptions granted during the following periods was estimated at the date of grantusing the Black Scholes option pricing model and the following weighted averageassumptions:

|                          | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------|------------|-----------------------------------------------------|------------|
| ** **               | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Volatility               |       | 40                                                  | %          | 43 | % |
| Dividend yield           |       | 0                                                   | %          | 0 | % |
| Risk-free  interest rate |       | 4.9                                                 | %          | 4.1 | % |
| Expected life (years)    |       | 6.2                                                 |       | 6.2 |   |

 

Theexpected volatility is estimated using the historical daily volatility of theCompany’s stock as well as the historical volatilities of publicly-traded stockof certain of the Company’s competitors. The Company has not made any dividendpayments on its common stock and does not intend to declare cash dividends onits stock in the foreseeable future. The risk-free interest rate is based onU.S. Treasury yields in effect at the time of grant for the expected term ofthe stock options. The expected term was determined using the “simplified”method, as prescribed by the Securities and Exchange Commission’s StaffAccounting Bulletin No. 107.

***Stockholders’ Equity***

OnJune 12, 2006 the Company completed an underwritten public offering of2,700,000 shares of its common stock. Net proceeds from the sale afterunderwriting discounts and related expenses were approximately $76.5 millionand were used to pay down borrowings outstanding under the senior securedrevolving credit facility. On July 11, 2006, the underwriters’ exercised theirover-allotment option to purchase an additional 151,145 shares of the Company’scommon stock. Net proceeds from the exercise of the over-allotment option afterunderwriting discounts and related expenses were approximately $4.3 million.

***Income Taxes***

During the third quarterof 2005, the Company filed an election with the Internal Revenue Service toelect to treat its U.K. subsidiary as a “flow through” entity for U.S. incomepurposes.  This election is commonlyreferred to as a “check-the-box election”. As a result of this election, theCompany recognized a loss related to its U.K. subsidiary on its 2005 U.S.consolidated income tax

10

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return. Accordingly, income tax expense for the three and nine months endedSeptember 30, 2005 reflects a benefit of approximately $2.0 millionattributable to this loss.

The Company isroutinely audited by federal, state and foreign taxing authorities.  Theoutcome of these audits may result in the Company being assessed taxes inaddition to amounts previously paid.  Additionally, the Company is subjectto claims filed by various taxing authorities in connection with SuperiorTeleCom’s bankruptcy. Accordingly, the Company records a liability for the expected outcomeof such potential assessments and claims.  These liabilities aredetermined based upon the Company’s best estimate of assessments or claims bythe Internal Revenue Service (“IRS”) or other taxing authorities resulting fromexisting tax exposures and claims and are adjusted, from time to time, basedupon changing facts and circumstances. During the third quarter of 2005,the Company reached a settlement with state taxing authorities with respect tocertain pre-petition claims primarily resulting from state income tax audits ofSuperior TeleCom. As a result of the settlement, the Company recognized anon-cash net tax benefit of $4.1 million (net of Federal income tax of $2.1million) in the third quarter of 2005. In addition the Company settled certainbankruptcy claims with the IRS resulting in a tax benefit of $0.4 millionduring the third quarter of 2005.

***New Accounting Pronouncements***

InJune 2006 the FASB ratified the consensus reached in EITF 06-3, *How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (That Is,Gross versus Net Presentation)*. EITF 06-3 requires disclosure of acompany’s accounting policy with respect to taxes assessed by a governmentalauthority that are directly imposed on a revenue-producing transaction betweena seller and a customer including, but not limited to, sales, use, value added,and some excise taxes. The Company presents such taxes, primarily sales, useand value added taxes, on a net basis.

InJuly 2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*. InterpretationNo. 48 prescribes a consistent recognition threshold and measurement attribute,as well as establishes criteria for subsequently recognizing, derecognizing andmeasuring uncertain tax positions for financial statement purposes. TheInterpretation also requires expanded disclosure with respect to theuncertainty in income taxes. Interpretation No. 48 is effective for fiscalyears beginning after December 15, 2006. The Company has not completed itsevaluation of the impact of Interpretation No. 48 on its financial statements.

InSeptember 2006, the FASB issued Statement No. 158, *Employers’**Accounting for DefinedBenefit Pension and Other Postretirement Plans, an amendment of FASB StatementsNo. 87, 88, 106 and 132(R)*. Statement 158 requires an employerto recognize a net liability or asset and an offsetting adjustment toaccumulated other comprehensive income for the underfunded or overfunded statusof defined benefit pension and other postretirement benefit plans. Statement158 requires prospective application, and the recognition and disclosurerequirements are effective for years ending after December 15, 2006.Additionally, Statement 158 requires employers to measure plan assets andobligations at their year-end balance sheet date. The Company will implementStatement 158 in the fourth quarter of 2006 and does not believe thatimplementation of Statement 158 will have a material effect on its financialposition or results of operations.

**2.****             Inventories, net**

AtSeptember 30, 2006 and December 31, 2005, the components ofinventories were as follows:

|                 | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **      | ** ** | **(in thousands)**      | ** ** |
| Raw materials   |       | $                            | 47,022     |                        | $          | 32,530 |   |
| Work in process |       | 93,706                       |       | 56,304                      |       |
| Finished goods  |       | 289,808                      |       | 207,280                     |       |
|            |       | 430,536                      |       | 296,114                     |       |
| LIFO reserve    |       | (140,627                     | )          | (57,759                     | )          |
|            |       | $                            | 289,909    |                        | $          | 238,355 |   |

 

Inventoriesvalued using the LIFO method amounted to $128.1 million and$119.7 million at September 30, 2006 and December 31, 2005,respectively.

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**3.****             Comprehensive income**

Thecomponents of comprehensive income for the three and nine months endedSeptember 30, 2006 and 2005 were as follows:

|                                                                                                                                                                                                | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                                                                                                     | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                                                                                                                                                                     | ** ** | **(in thousands)**                              | ** ** |
| Net income                                                                                                                                                                                     |       | $                                                    | 14,707     |   | $ | 11,862 |   |
| Foreign currency  translation adjustment                                                                                                                                                       |       | 854                                                  |       | (466 | ) |
| Unrealized  holding gains on derivatives during the period, net of income tax of $837 and  $1,059 for the three months ended September 30, 2006 and 2005, respectively                    |       | 1,314                                                |       | 1,655 |   |
| Less  reclassification adjustment for gains on derivatives included in net income,  net of income tax of $2,611 and $710 for the three months ended September 30,  2006 and 2005, respectively |       | (4,084                                               | )          | (1,110 | ) |
| Net change in unrealized gains on derivatives                                                                                                                                                  |       | (2,770                                               | )          | 545 |   |
| Other                                                                                                                                                                                          |       | 140                                                  |       | (4 | ) |
| Comprehensive income                                                                                                                                                                           |       | $                                                    | 12,931     |   | $ | 11,937 |   |

 

|                                                                                                                                                                                                 | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                                                                      | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                                                                                                                                                      | ** ** | **(in thousands)**                             | ** ** |
| Net income                                                                                                                                                                                      |       | $                                                   | 50,625     |   | $ | 28,877 |   |
| Foreign currency  translation adjustment                                                                                                                                                        |       | 2,764                                               |       | (1,150 | ) |
| Unrealized  holding gains on derivatives during the period, net of income tax of $7,194  and $1,559 for the nine months ended September 30, 2006 and 2005,  respectively                   |       | 11,249                                              |       | 2,448 |   |
| Less  reclassification adjustment for gains on derivatives included in net income,  net of income tax of $6,224 and $1,557 for the nine months ended September  30, 2006 and 2005, respectively |       | (9,734                                              | )          | (2,436 | ) |
| Net change in unrealized gains on derivatives                                                                                                                                                   |       | 1,515                                               |       | 12 |   |
| Other                                                                                                                                                                                           |       | 189                                                 |       | (21 | ) |
| Comprehensive income                                                                                                                                                                            |       | $                                                   | 55,093     |   | $ | 27,718 |   |

 

The components of accumulated other comprehensiveincome (loss) at September 30, 2006 and December 31, 2005 were asfollows:

|                                                                                                                                                      | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                           | ** ** | **(in thousands)**      | ** ** |
| Foreign currency  translation adjustment                                                                                                             |       | $                            | 3,134      |                        | $          | 370 |   |
| Unrealized gain  on derivatives, net of deferred tax of $3,035 and $2,065 at September 30,  2006 and December 31, 2005, respectively            |       | 4,746                        |       | 3,231                       |       |
| Additional  minimum pension liability, net of deferred tax of $5,026 and $5,090 at  September 30, 2006 and December 31, 2005, respectively |       | (7,854                       | )          | (7,965                      | )          |
| Other                                                                                                                                                |       | 81                           |       | 3                           |       |
|                                                                                                                                                 |       | $                            | 107        |                        | $          | (4,361 | ) |

 

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**4.****             Restructuring and other charges and assetimpairments**

EssexNexans recorded a restructuring reserve of $0.9 million during 2006 withrespect to planned workforce reductions at one of its manufacturing facilitiesin Germany. The reserve was recorded as part of the continued refinement of theinitial purchase price allocation to the assets and liabilities acquired in theEssex Nexans acquisition (see Note 5) and did not impact operating results.Essex Nexans also recorded a restructuring reserve of $1.0 million as part ofthe initial purchase price allocation in connection with the acquisition of SDS(see Note 5). During the nine months ended September 30, 2006, Essex Nexansrecorded a provision of $0.9 million which was charged to operations related toworkforce reductions at the Company’s U.K. magnet wire operations. Allrestructuring activities are expected to be completed in 2006. A summary of thechanges in the restructuring reserves for the nine months ended September 30,2006 is as follows (in thousands):

|                                 | ** ** | **Germany**             | ** ** | **SDS** | ** ** | **U.K.** | ** ** | **Total** | ** ** |
|---------------------------------|------------|-------------------------|------------|---------|------------|----------|------------|-----------|------------|
| ** **                      | ** ** | **(in thousands)** | ** ** |
| Balance at  December 31, 2005   |       | $                       | —     |    | $          | —   |       | $         | 134        |   | $ | 134 |   |
| Essex Nexans transaction        |       | 911                     |       | —  |       | —   |       | 911       |       |
| SDS acquisition                 |       | —                  |       | 989     |       | —   |       | 989       |       |
| Increases charged to operations |       | —                  |       | —  |       | 865      |       | 865       |       |
| Payments                        |       | (284                    | )          | (437    | )          | (1,013   | )          | (1,734    | )          |
| Foreign currency effects        |       | 52                      |       | 63      |       | 14       |       | 129       |       |
| Balance at September  30, 2006  |       | $                       | 679        |    | $          | 615      |       | $         | —     |   | $ | 1,294 |   |

 

Inaddition to the amounts above, restructuring and other charges for the ninemonths ended September 30, 2006 included $0.3 million of ongoing facility exitcosts primarily related to the prior year closure of an insulationmanufacturing facility in our North American magnet wire and distributionsegment and $0.3 million of professional fees incurred in connection withthe administration of Superior TeleCom’s plan of reorganization. These chargeswere offset by a $0.4 million gain on the favorable settlement of an employeerelated dispute in our European magnet wire and distribution segment.Restructuring and other charges for the nine months ended September 30, 2005consisted of $0.5 million of facility exit costs related to closure of aninsulation manufacturing facility in Athens, Georgia and $0.2 million ofprofessional fees related to the administration of the plan of reorganization.The facility exit costs primarily consisted of future lease payments net of estimatedsublease rentals.

Duringthe third quarter of 2006 the Company recorded an impairment charge of $2.0million related to an owned warehouse which was closed in the first quarter of2006 and classified as held for sale. The impairment charge was recorded as aresult of ongoing evaluations of current market conditions in the area wherethe property is located. The warehouse was previously operated by the NorthAmerican magnet wire and distribution segment.

Duringthe first quarter of 2005 the Company recorded an impairment charge of$2.3 million related to property, plant and equipment of the Company’sU.K. subsidiary. The Company evaluated the long-lived assets of its U.K.subsidiary for impairment as of March 31, 2005 after consideration ofdeterioration in the European magnet wire market in the first quarter of 2005,the loss of a major customer in 2005 and negotiated reductions in the valueascribed to the U.K. net assets in connection with the Essex Nexans acquisition(see Note 5). The impairment test was based on probability weightedestimated cash flows associated with such assets. The fair value of the assetswas based on appraised value determined primarily by comparison to prices forsimilar assets. The U.K. operation is included in the European magnet wire anddistribution segment.

**5.****             Acquisitions and dispositions**

***Essex Nexansacquisition***

OnOctober 21, 2005, the Company acquired Nexans’ magnet wire operations inEurope through formation of a corporate joint venture, Essex Nexans, a Frenchholding company, combining the Company’s U.K. magnet wire business and Nexans’European magnet wire and enamel businesses (the “Essex Nexans Transaction”).The Company owns 60% of Essex Nexans and Nexans has a 40% minority ownership.The Contribution and Formation Agreement (the “Agreement”) governing thetransaction, provided for certain post-closing adjustments based on the finalnet book values of the acquired net assets. Essex Nexans made a provisionalpayment of $2.5 million to Nexans in December 2005. The post-closingadjustments were finalized in April 2006 resulting in a refund of $1.0 millionof the provisional payments from Nexans to Essex Nexans.

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The Agreement provides for the Company to payadditional contingent cash consideration to Nexans of up to €3.0 million($3.8 million) if Essex Nexans achieves certain specified levels ofAdjusted EBITDA (as defined in the Agreement) for the year endedDecember 31, 2006. The preliminary fair value of the net assets acquiredexceeded the purchase price and therefore the full amount of the contingentpayment was accrued by the Company as of October 21, 2005.

In connection with the transaction, Essex Nexansentered into agreements to purchase a substantial majority of its copper rodand pre-drawn copper wire requirements from Nexans. The purchase agreementsexpire on December 31, 2008 with automatic one year renewals unlesscancelled by either party upon six months prior notice in the case of copperrod and twelve months prior notice in the case of drawn copper wire. Totalpurchases pursuant to these agreements amounted to $230.8 million for thenine months ended September 30, 2006.

The transaction was accounted for as a purchase of theNexans magnet wire and enamel businesses and a partial sale of the Company’sU.K. subsidiary. The operations of Essex Nexans are included in theconsolidated results of operations of the Company from the date of acquisition.The Company is in the process of finalizing certain asset and liabilityvaluations and therefore the allocation of the acquisition cost is subject torefinement and adjustment.

***SDS acquisition***

On January 4, 2006, Essex Nexans acquired all of theoutstanding capital stock of Societe de Distribution et de Services (“SDS”)from Nexans for a cash payment of $1.2 million. SDS is engaged in the businessof distributing magnet wire and related products in France. The assets acquiredand liabilities assumed in the SDS acquisition and the pro forma results ofoperations reflecting the SDS acquisition are not significant. In connectionwith the acquisition, Essex Nexans recorded a restructuring reserve of $1.0million related primarily to workforce reductions and the closure of certain ofSDS’s leased warehouse locations. Nexans has agreed to reduce the purchaseprice for certain restructuring costs incurred by Essex Nexans up to a maximumof $1.2 million. The acquisition of SDS was accounted for as a purchase and theresults of operations of SDS have been included in the Company’s results ofoperations from the date of acquisition. The preliminary allocation of theacquisition cost resulted in unallocated negative goodwill of $1.5 millionwhich has been reflected as an extraordinary gain (net of minority interest of$0.6 million) in the statement of operations for the nine months endedSeptember 30, 2006. The Company is in the process of finalizing certain assetand liability valuations and therefore the allocation of the acquisition cost,including the amount of unallocated negative goodwill, is subject to refinementand adjustment.

***Essex Electricdisposition***

InJanuary 2006 the Company sold its investment in the common stock of EssexElectric Inc. together with its warrant to purchase additional shares of EssexElectric Inc. to The Alpine Group, Inc. for a cash payment of $8.5 million. Asa result of the transaction the Company recognized a pre-tax gain of $5.8million. Following the sale the Company no longer has any equity interest inEssex Electric Inc.

***US Seal disposition***

OnMarch 4, 2005, the Company sold accounts receivable and inventory totalingapproximately $1.2 million together with related trademarks and servicenames constituting the business conducted by the Company under the US Sealtrade name for a net total purchase price of $11.6 million. A gain of$10.4 million was recognized on the sale. In connection with the sale, theCompany also signed a non-exclusive distribution agreement to act as adistributor for certain of the US Seal products for a period of five years. TheCompany believes the expected revenues under the distribution agreementrepresent a significant continuation of the direct cash flows of the disposedUS Seal product line and accordingly, the disposition is not reported as adiscontinued operation in accordance with SFAS No. 144, *Accounting for the Impairment and Disposal ofLong-Lived Assets* and EITF Issue No. 03-13. The US Seal productline is included in the North American magnet wire and distribution segment.

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**6.****             Debt**

AtSeptember 30, 2006 and December 31, 2005, short-term borrowings and long-termdebt consist of the following:

|                                                                                                                             | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                  | ** ** | **(in thousands)**      | ** ** |
| Short-term  borrowings:                                                                                                     |       |                         |       |                        |       |
| Senior secured revolving credit facility                                                                                    |       | $                            | —     |                        | $          | 13,049 |   |
| Essex Nexans factoring agreement                                                                                            |       | 29,363                       |       | 21,070                      |       |
|                                                                                                                        |       | $                            | 29,363     |                        | $          | 34,119 |   |
| Long-term debt:                                                                                                             |       |                         |       |                        |       |
| Short-term borrowings refinanced - senior secured  revolving credit facility                                                |       | $                            | —     |                        | $          | — |   |
| 9% senior notes (net of discount of $5,444 and  $5,987 at September 30, 2006 and December 31, 2005, respectively) |       | 251,656                      |       | 251,113                     |       |
| Series A redeemable preferred stock of Superior  Essex Holding                                                              |       | 5,000                        |       | 5,000                       |       |
| 8.975% subordinated note of Essex Nexans                                                                                    |       | 14,363                       |       | 13,416                      |       |
| Other                                                                                                                       |       | 17,701                       |       | 10,196                      |       |
|                                                                                                                        |       | 288,720                      |       | 279,725                     |       |
| Less current portion of long-term debt                                                                                      |       | 474                          |       | 499                         |       |
| Total long-term debt                                                                                                        |       | $                            | 288,246    |                        | $          | 279,226 |   |

 

OnApril 14, 2006, Superior Essex Communications and Essex Group, as borrowers,entered into an amendment and restatement of their existing senior securedrevolving credit facility. The amended and restated senior secured revolvingcredit facility, among other things:

·              increased theborrowing limit from $175 million to $225 million;

·              extended thematurity date from November 10, 2007 to April 13, 2011;

·              reduced theapplicable interest margin charged over short-term index rates; the margin,determined quarterly based on average availability, now ranges from 1.00% to2.00% for LIBOR based loans and 0% to 0.75% for base rate loans; and

·              provided greaterflexibility with respect to certain restrictive covenants.

Interest on theamended and restated senior secured credit facility accrues on outstandingborrowings at an annual rate equal to, at the borrowers’ option, LIBOR or abase rate, plus, in each case, an applicable margin as discussed above.Obligations under the amended and restated senior secured credit facility aresecured by substantially all domestic assets of the Company and 65% of thevoting stock of certain of the Company’s foreign subsidiaries. Availabilityunder the amended and restated senior secured credit facility is subject to aborrowing base equal to the lesser of (1) $225 million less outstanding lettersof credit and (2) a specified percentage of eligible accounts receivable andinventory less reserves. The specified percentage for accounts receivable is85% of the value of the eligible accounts receivable. The specified percentagefor inventory is the lesser of (a) $110 million or (b) the lower of (x) 65% ofthe value of eligible inventory and (y) 85% multiplied by the net orderlyliquidation percentage then applicable multiplied by the value of the eligibleinventory. Certain of the reserves that reduce availability are not fixed andmay be increased or imposed by the administrative agent for the amended andrestated senior secured credit facility at its reasonable credit judgment. Theborrowers are obligated to pay an unused commitment fee of 0.25% per annum onthe unused amount of the maximum committed amounts and a fee of 0.125% perannum on the outstanding face amount of outstanding letters of credit. Undrawnavailability under the amended and restated senior secured credit facility was$224.2 million as of September 30, 2006. Based on the terms of the amended andrestated senior secured credit facility and the provisions of Statement ofFinancial Accounting Standards No. 6, *Classificationof Short-Term Obligations Expected to Be Refinanced*, the balance ofthe senior secured credit facility has been reclassified as long-term debt asof September 30, 2006.

Theamended and restated senior secured credit facility contains covenants whichmay limit Superior Essex Communications’ and Essex Group’s and theirsubsidiaries’ ability to (i) pay dividends, redeem capital stock or make otherrestricted

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payments, (ii) sell or dispose of assets, (iii) incuradditional indebtedness or permit liens to exist on Company property, (iv)engage in transactions with affiliates and (v) make additional investments oracquisitions. Capital expenditures, distributions, acquisitions and assetdispositions are not limited so long as no event of default exists and theborrowers meet certain availability and liquidity conditions specified in theamended and restated senior secured credit facility.

InJuly 2006 Essex Nexans amended its factoring agreement to increase the maximumavailable advances from €35 million to €55 million ($69.9 million) until May31, 2007. The maximum amount of advances was reduced to 88% of assignedreceivables. Interest on advances in excess of €35 million bear interest at theEuropean Overnight Index Average rate plus 0.67%.

InJuly 2006 the Company’s subsidiary, Essex Magnet Wire (Suzhou) Ltd., enteredinto a construction loan agreement with China Construction Bank to providefinancing for construction of the Company’s Greenfield manufacturing facilityin Suzhou, China. The agreement permits the borrower to make draws beginningJuly 21, 2006 of up to 96 million Yuan Renminbi ($12.2 million). Interest onamounts drawn under the agreement is payable monthly at a floating rate,adjusted annually, equal to 90% of the benchmark interest rate set by thePeople’s Bank of China. The loan is secured by a mortgage on the land, facilityand equipment and is repayable in two annual installments beginning July 2010.The loan is not guaranteed by the Company or any of its subsidiaries. The totalamount drawn and outstanding at September 30, 2006 was $7.6 million.

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

**7.****             Income per share**

Thecomputation of basic and diluted net income and income before extraordinarygain per share for the three and nine months ended September 30, 2006 and 2005is as follows:
| ** **                           | ** ** | **Three Months Ended September 30**               | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                                              | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **Net  Income**                                                       | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** |
| ** **                           | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Basic net income  per common share   |       | $                                                                     | 14,707     |   | 19,805 |   | $ | 0.74 |   | $ | 11,862 |   | 16,673 |   | $ | 0.71 |   |
| Effect of  dilutive securities       |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Restricted stock  awards             |       | —                                                                |       | 249 |   |   |   | — |   | 152 |   |   |   |
| Stock options                        |       | —                                                                |       | 294 |   |   |   | — |   | 206 |   |   |   |
| Diluted net income per  common share |       | $                                                                     | 14,707     |   | 20,348 |   | $ | 0.72 |   | $ | 11,862 |   | 17,031 |   | $ | 0.70 |   |

 
| ** **                                                 | ** ** | **Nine Months Ended September 30**                | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                                              | ** ** | **2005** | ** ** |
| ** **                                                 | ** ** | **Income  Before  Extraordinary  Gain**                               | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** | **Income  Before  Extraordinary  Gain** | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** |
| ** **                                                 | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Basic income  before extraordinary gain per common share   |       | $                                                                     | 49,754     |   | 18,008 |   | $ | 2.76 |   | $ | 28,877 |   | 16,634 |   | $ | 1.74 |   |
| Effect of  dilutive securities                             |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Restricted stock  awards                                   |       | —                                                                |       | 232 |   |   |   | — |   | 141 |   |   |   |
| Stock options                                              |       | —                                                                |       | 267 |   |   |   | — |   | 179 |   |   |   |
| Warrants                                                   |       | —                                                                |       | 17 |   |   |   | — |   | — |   |   |   |
| Diluted income before  extraordinary gain per common share |       | $                                                                     | 49,754     |   | 18,524 |   | $ | 2.68 |   | $ | 28,877 |   | 16,954 |   | $ | 1.70 |   |

 

Atotal of 24,195 and 868,421 anti-dilutive weighted average shares with respectto outstanding stock options, restricted stock awards and Superior Essex’swarrants have been excluded from the computation of diluted income per sharefor the three months

16

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ended September 30, 2006 and 2005, respectively.Warrants issued in connection with Superior TeleCom’s plan of reorganization topurchase 868,421 shares of the Company’s common stock expired unexercised onMay 10, 2006. A total of 391,763 and 942,638 anti-dilutive weighted averageshares with respect to outstanding stock options, restricted stock awards andSuperior Essex’s warrants have been excluded from the computation of dilutedincome per share for the nine months ended September 30, 2006 and 2005,respectively. Additionally, 193,620 shares contingently issuable pursuant toperformance awards granted in March 2006 (see Note 8) have been excluded fromthe computation of basic and diluted income per share for the three and ninemonths ended September 30, 2006 as the performance conditions have not beensatisfied.

**8.****             Stock-based compensation plans**

In connection with the plan of reorganization, theCompany adopted the Superior Essex Inc. 2003 Stock Incentive Plan (the “2003Plan”) pursuant to which a committee of the Company’s board of directors wereauthorized to grant stock options or restricted stock awards to employees,non-employee directors and certain service providers. The 2003 Plan permittedgrants of awards or options to purchase up to 1,833,333 shares of authorizedbut unissued common stock, stock held in treasury or both. Stock options underthe 2003 Plan could be granted with an exercise price less than, equal to orgreater than the stock’s fair market value at the date of grant. The term ofstock options granted under the 2003 Plan could not exceed 10 years.

In May 2005 the shareholders of the Companyapproved the Superior Essex Inc. 2005 Incentive Plan (the “2005 Plan”) pursuantto which a committee of the Company’s board of directors may grant stockoptions, stock appreciation rights, restricted stock, restricted stock units,deferred stock units, performance awards, dividend and interest equivalents andcash-based awards to eligible employees, officers, non-employee directors andconsultants. Stock options can be granted under the 2005 Plan with an exerciseprice equal to or greater than the stock’s fair market value at the date ofgrant. The term of stock options granted may not exceed 10 years. A totalof 500,000 shares of common stock are reserved for issuance under the 2005Plan. In addition, unissued awards and any shares underlying currentlyoutstanding options or awards granted under the 2003 Plan which expireunexercised are available for issuance under the 2005 Plan. As a result ofadoption of the 2005 Plan, no further grants or awards may be made pursuant tothe 2003 Plan.

In March 2006 the Company’s board of directors grantedperformance share awards to certain of the Company’s executive officers underthe 2005 Plan. Under the terms of the award, the executives may vest in up to193,620 shares of the Company’s common stock on December 31, 2007 contingentupon meeting specified performance goals with respect to return on net assetsand core business revenues (as defined in the award) for the year endedDecember 31, 2007. Compensation expense related to the performance share awardsis based on the grant date fair value of the award and the estimated number ofshares that will ultimately vest. Compensation expense is subject to futureadjustment based upon changes in expected performance.

Total compensation cost related to all stock-basedcompensation plans was $2.0 million and $0.7 million for the three months endedSeptember 30, 2006 and 2005, respectively. Total compensation cost related toall stock-based compensation plans was $5.2 million and $2.0 million for thenine months ended September 30, 2006 and 2005, respectively. The total incometax benefit recognized with respect to all stock-based compensation plans was$0.7 million and $0.3 million for the three months ended September 30, 2006 and2005, respectively. The total income tax benefit recognized with respect to allstock-based compensation plans was $1.9 million and $0.8 million for the ninemonths ended September 30, 2006 and 2005, respectively. As of September 30,2006, there was $7.7 million of unrecognized compensation cost related to theCompany’s stock-based compensation plans which is expected to be recognizedover a weighted average period of 1.9 years.

17

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Thefollowing table summarizes stock option activity for the nine months endedSeptember 30, 2006:

|                                    | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term  (in years)** | ** ** | **Aggregate  Intrinsic  Value  (in thousands)** | ** ** |
|------------------------------------|------------|------------|------------|----------------------------------------|------------|----------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | ** ** | ** ** | ** **                             | ** ** | ** **                                                           | ** ** | ** **                                           | ** ** |
| Outstanding at  December 31, 2005  |       | 1,059,000  |       | $                                      | 14.24      |                                                                 |       |                                                 |       |   |
| Granted                            |       | 24,195     |       | 25.75                                  |       |                                                                 |       |                                                 |       |
| Exercised                          |       | (257,618   | )          | 12.61                                  |       |                                                                 |       |                                                 |       |
| Forfeitures                        |       | (15,658    | )          | 16.72                                  |       |                                                                 |       |                                                 |       |
| Outstanding at  September 30, 2006 |       | 809,919    |       | $                                      | 15.05      |                                                                 | 7.8        |                                                 | $          | 15,551 |   |
| Exercisable at  September 30, 2006 |       | 303,124    |       | $                                      | 13.58      |                                                                 | 7.5        |                                                 | $          | 6,266 |   |

 

Thetotal intrinsic value of options exercised during the nine months endedSeptember 30, 2006 and 2005 was $4.9 million and $0.6 million, respectively.The Company’s policy is to issue authorized but unissued shares upon theexercise of options.

Thefollowing table summarizes the status of the Company’s unvested share awards,including the performance share awards discussed above, for the nine monthsended September 30, 2006:

|                                                                | ** ** | **Shares  Outstanding** | ** ** | **Weighted Average  Grant Date  Fair Value** | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                     | ** ** | ** **              | ** ** | ** **                                                  | ** ** |
| Nonvested share  awards outstanding at December 31, 2005  |       | 498,750                 |       | $                                                           | 13.39      |   |
| Granted                                                        |       | 296,117                 |       | 25.55                                                       |       |
| Vested                                                         |       | (94,094                 | )          | 13.81                                                       |       |
| Forfeited                                                      |       | (10,160                 | )          | 18.77                                                       |       |
| Nonvested share awards  outstanding at September 30, 2006 |       | 690,613                 |       | $                                                           | 18.47      |   |

 

Thetotal fair value of share awards vesting during the nine months ended September30, 2006 and 2005 was $2.8 million and $0.7 million, respectively.

**9.             Employee benefits**

Thecomponents of net periodic benefit cost of the Company’s defined benefit pensionplans for the three and nine months ended September 30, 2006 and 2005 arepresented below.

|                                                              | ** ** | **Three Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                                   | ** ** | **(in thousands)**                              | ** ** |
| **Components  of net periodic benefit cost:**                | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Service cost                                                 |       | $                                                    | 623        |   | $ | 694 |   |
| Interest cost                                                |       | 2,012                                                |       | 1,835 |   |
| Expected return  on plan assets                              |       | (2,042                                               | )          | (1,926 | ) |
| Amortization of  prior service costs and unrecognized losses |       | 135                                                  |       | 22 |   |
|                                                         |       | $                                                    | 728        |   | $ | 625 |   |

 

18

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|                                                              | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                   | ** ** | **(in thousands)**                             | ** ** |
| **Components of net periodic  benefit cost:**                | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Service cost                                                 |       | $                                                   | 1,905      |   | $ | 1,762 |   |
| Interest cost                                                |       | 6,048                                               |       | 5,477 |   |
| Expected return on plan  assets                              |       | (6,101                                              | )          | (5,779 | ) |
| Amortization of prior  service costs and unrecognized losses |       | 403                                                 |       | 60 |   |
|                                                         |       | $                                                   | 2,255      |   | $ | 1,520 |   |

 

TheCompany’s cash contributions to the defined benefit plans amounted to $7.0million and $3.2 million during the nine months ended September 30,2006 and 2005, respectively. The Company expects to make additional cashcontributions of $1.6 million during the remainder of 2006.

**10.          Derivative financial instruments**

The Company, to a limitedextent, uses or has used forward fixed price contracts and derivative financialinstruments to manage commodity price, interest rate and foreign currencyexchange risks. The Company does not hold or issue financial instruments forinvestment or trading purposes. The Company is exposed to credit risk in theevent of nonperformance by counterparties for foreign exchange forwardcontracts, metal forward price contracts and metals futures contracts but theCompany does not anticipate nonperformance by any of these counterparties. Theamount of such exposure is generally limited to any unrealized gains within theunderlying contracts.

 

***Commodity price risk management***

Thecost of copper, the Company’s most significant raw material, has historicallybeen subject to considerable volatility. To manage the risk associated withsuch volatility, the Company enters into futures contracts to match the metalcomponent of customer product pricing with the cost component of the inventoryshipped. These futures contracts have been designated as cash flow hedges withunrealized gains and losses recorded in other comprehensive income. Gains andlosses are reclassified into earnings, as a component of cost of goods sold,when the hedged sales transactions are reflected in the income statement. Hedgeineffectiveness, which is not significant, is immediately recognized inearnings. The Company’s commodities futures purchase contracts are summarizedas follows at September 30, 2006:

 

| Type       | ** ** | **Notional  Amount**                    | ** ** | **Maturity  Date** | ** ** | **Weighted  Average  Settlement Rate** | ** ** | **Fair Value  Gain (Loss)** | ** ** |
|------------|------------|-----------------------------------------|------------|--------------------|------------|---------------------------------------------|------------|---------------------------------------|------------|
| ** ** | ** ** | **(in thousands  of pounds)** | ** ** | ** **         | ** ** | ** **                                  | ** ** | **(in thousands)**                    | ** ** |
| ** ** | ** ** | ** **                              | ** ** | ** **         | ** ** | ** **                                  | ** ** | ** **                            | ** ** |
| Copper     |       | 3,350                                   |       | 2006               |       | $                                           | 3.46       |                                  | $          | 3,771 |   |
| Copper     |       | 4,875                                   |       | 2007               |       | 3.40                                        |       | 4,010                                 |       |
|       |       |                                    |       |               |       |                                        |       | $                                     | 7,781      |   |
|            |            |                                         |            |                    |            |                                             |            |                                       |            |  |  |

 

Substantiallyall of the unrealized gains on commodity futures outstanding at September 30,2006 are expected to be reclassified in earnings within the next twelve monthsto match the copper component of product pricing for outstanding customerorders.

EssexNexans enters into commodity futures contracts to match the copper component ofcustomer product pricing with the cost component of the inventory shipped. Thefutures contracts are intended to minimize the risks associated with forwardproduct pricing for customers and changing copper prices. These contractsgenerally have maturities of less than two months and represent economic hedgesbut have not been designated as hedges for accounting purposes. Accordingly,gains and losses on these contracts are recorded in income as a component ofcost of goods sold. Essex Nexans had no open copper futures positions atSeptember 30, 2006.

19

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***Interest rate risk management***

Inorder to limit the Company’s exposure to rising interest rates with respect toborrowings under its variable rate senior secured revolving credit facility,the Company has entered into interest rate cap agreements. The followinginterest rate cap agreements were outstanding as of September 30, 2006:

 

| Type               | ** ** | **Notional  Amount**    | ** ** | **Interest Rate** | ** **   | **Cap Rate** | ** ** | **Expiration Date** | ** **    | **Fair Value**     | ** ** |
|--------------------|------------|-------------------------|------------|------------------------|--------------|-------------------|------------|--------------------------|---------------|-------------------------|------------|
| ** **         | ** ** | **(in thousands)** | ** ** | ** **             | ** **   | ** **        | ** ** | ** **               | ** **    | **(in thousands)** | ** ** |
| ** **         | ** ** | ** **              | ** ** | ** **             | ** **   | ** **        | ** ** | ** **               | ** **    | ** **              | ** ** |
| Interest rate  cap |       | $                       | 30,000     |                   | 30-day LIBOR |              | 7.0        | %                        | December 2006 |                    | $          | — |   |
| Interest rate cap  |       | 15,000                  |       | 30-day LIBOR           |         | 5.0               | %          | April 2007               |          | 28                      |       |
|                    |            |                         |            |                        |              |                   |            |                          |               |                         |            |  |  |

 

***Foreign currency exchange risk management***

TheCompany engages in the sale of products which result in accounts receivabledenominated in foreign currencies. The Company enters into foreign currencyforward exchange contracts to hedge against fluctuations in the value ofcertain of these receivables. Changes in the fair value of these contracts arereflected in current earnings. At September 30, 2006, the Company hadoutstanding foreign currency forward exchange contracts to exchange 8.9 millionCanadian dollars for $8.0 million in November 2006. The fair value of theforward exchange contracts was insignificant at September 30, 2006.

**11.          Commitments and contingencies**

TheCompany is involved in lawsuits, claims, investigations and proceedings,including those described below, consisting of commercial, employment, employeebenefits, environmental and other matters which arise in the ordinary course ofbusiness. In accordance with SFAS No. 5, “Accounting for Contingencies,” theCompany records a liability when management believes it is both probable that aliability has been incurred and the amount of loss can be reasonably estimated.Management believes it has adequate provisions for any such matters. TheCompany reviews these provisions at least quarterly and adjusts theseprovisions to reflect the impact of negotiations, settlement, rulings, adviceof legal counsel and other information and events pertaining to a particularmatter. Litigation is inherently unpredictable. However, management believes ithas valid defenses with respect to all legal matters against the Company andits subsidiaries and does not believe any such matters, either individually orin the aggregate, will have a material adverse effect on its business,financial condition, liquidity or results of operations.

 

Since approximately 1990, Essex International andcertain subsidiaries have been named as defendants in a number of productliability lawsuits brought by electricians, other skilled tradesmen and othersclaiming injury, in a substantial majority of cases, from exposure to asbestosfound in electrical wire products produced many years ago. Litigation againstvarious past insurers of Essex International who had previously refused todefend and indemnify Essex International against these lawsuits was settledduring 1999. Under the settlement, Essex International was reimbursed forsubstantially all of its costs and expenses incurred in the defense of theselawsuits, and the insurers have undertaken to defend, are currently directlydefending and, if it should become necessary, will indemnify EssexInternational against those asbestos lawsuits, subject to the terms and limitsof the respective policies. Under the plan of reorganization, certain of theclaimants in these actions will be able to assert claims under applicableinsurance coverage and other similar arrangements. Management believes thatEssex International’s liability, if any, in these matters will not have amaterial adverse effect either individually, or in the aggregate, upon theCompany’s business, financial condition, liquidity or results of operations.There can be no assurance, however, that future developments will not alterthis conclusion.

On January 18, 2002, United TechnologiesCorporation, or United Technologies, brought a third party claim against EssexInternational in a civil action in Massachusetts. United Technologies had beensued by an insurer for, among other things, approximately $3.1 million incompensatory damages for retrospective premiums for 1999, 2000 and 2001relating to certain events that allegedly occurred while Essex Group was asubsidiary of United Technologies. United Technologies’ third party complaintagainst Essex International contended, among other things, that EssexInternational had agreed, in the stock purchase agreement datedJanuary 15, 1988, to pay such premiums and sought a declaratory judgment,contribution and indemnification for any such retrospective premiums thatUnited Technologies might have to pay the insurer. On January 13, 2003,the court granted the insurer’s motion for summary judgment against UnitedTechnologies and Essex International’s motion to dismiss with prejudice UnitedTechnologies’ claim against it. United Technologies thereafter indicated anintention to appeal the ruling dismissing the action against EssexInternational. However, before Essex International’s time to respond, on March 3,2003, Superior TeleCom and certain of its 

20

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U.S. subsidiaries filedvoluntary petitions for relief under Chapter 11 of the United States BankruptcyCode in the Unites States Bankruptcy Court for the District of Delaware (the“Bankruptcy Court:”). The United Technologies proceedings were stayed by thefiling of Superior TeleCom’s bankruptcy proceedings. United Technologies andthe insurer filed proofs of claim in connection with Superior TeleCom’sbankruptcy. On August 22, 2006, the Bankruptcy Court entered an order approvinga stipulation that, inter alia, resolved the United Technologies claim inSuperior TeleCom’s bankruptcy case, released—except for the allowed claim in the bankruptcy case—UnitedTechnologies’ claims for retrospective premium adjustments on policies issuedby the insurer, and provided for the dismissal of United Technologies’ thirdparty complaint with prejudice. Consequently, the United Technologies’ claimsfor retrospective premium adjustments have been addressed in the bankruptcyclaims resolution process and will not have a material adverse effect eitherindividually, or in the aggregate, on the Company’s business, financialcondition, liquidity or results of operations. 

The Company’s operations are subject to environmentallaws and regulations in each of the jurisdictions in which it owns or operatesfacilities governing, among other things, emissions into the air, discharges towater, the use, handling and disposal of hazardous substances and theinvestigation and remediation of soil and groundwater contamination bothon-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 ofhistoric activities, including certain activities attributable to SuperiorTeleCom’s (or one of its subsidiaries) and the Company’s operations and thoseoccurring prior to the use of a facility by Superior TeleCom or the Company.Off-site liability includes clean-up responsibilities and response costsincurred by others at various sites, under federal or state statutes, for whichSuperior TeleCom (or one of its subsidiaries) has been identified by the UnitedStates Environmental Protection Agency, or state environmental agency, as aPotentially Responsible Party (“PRP”), or the equivalent. Management believesall such matters related to previously owned facilities, off-site disposallocations or fines existing at the time of filing have been addressed in thebankruptcy claims resolution process.

A liability for environmental remediation and otherenvironmental costs is accrued when it is considered probable and the costs canbe reasonably estimated. The Company has accrued amounts with respect toenvironmental matters that management believes were adequate at September 30,2006. These accruals are not material to the Company’s operations or financialposition.

TheCompany accepts certain customer orders for future delivery at fixed prices. Ascopper is the most significant raw material used in the manufacturing process,the Company enters into forward purchase fixed price commitments for copper toproperly match its cost to the value of the copper to be billed to thecustomers. At September 30, 2006, the Company had forward fixed pricecopper purchase commitments for delivery of 21.2 million pounds through September2007 for $67.9 million. Additionally at September 30, 2006, the Companyhas forward purchase fixed price commitments for 1.7 million pounds of aluminumthrough August 2007 and 540,000 MMBTUs of natural gas through February 2007amounting to $2.1 million and $5.2 million, respectively.

 

**12.          Business segments**

Reportable segments are strategic businesses thatoffer different products and services to different customers. These segmentsare communications cable, North American magnet wire and distribution (formerlymagnet wire and distribution), European magnet wire and distribution and copperrod. The communications cable segment includes copper and fiber optic outsideplant wire and cable for voice and data transmission in telecommunicationsnetworks and copper and fiber optic datacom or premises wire and cable for usewithin homes and offices for local area networks, Internet connectivity andother applications. The North American magnet wire and distribution segmentmanufactures and markets magnet wire and related products to major OEMs for usein motors, transformers and electrical coils and controls primarily in NorthAmerica. The North American magnet wire and distribution segment alsodistributes magnet wire and fabricated insulation products manufactured by theCompany and related accessory products purchased from third parties to smallOEMs and motor repair facilities. The European magnet wire and distributionsegment consists of Essex Nexans and manufactures and markets magnet wire foruse in motors, transformers and electrical coils and controls primarily inEurope. Essex Nexans also produces enamels that are used both for internalconsumption in the production of magnet wire and for sale to third parties.Prior to the formation of Essex Nexans, the Company’s U.K. magnet wireoperations were included in the North American magnet wire and distributionsegment. The Company’s U.K. magnet wire operations are currently reported withthe European magnet wire and distribution segment and, accordingly, all priorperiod segment information has been restated to reflect the current segmentreporting structure. The copper rod segment includes sales of copper rodproduced by the Company’s North American continuous casting units to externalcustomers. The copper rod segment also produces copper rod for internalprocessing which is recorded by the consuming segment at cost as a component ofcost of goods sold. Corporate and other charges consist primarily of parentcompany and executive payroll costs, including stock-based compensationcharges, corporate headquarters costs and corporate professional fees andcompliance costs. The components of restructuring and other charges and assetimpairments are discussed in Note 4.

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TheCompany’s chief operating decision maker evaluates segment performance based ona number of factors with operating income, excluding corporate and other costs,restructuring and other charges and asset impairments, being the most critical.Accordingly, corporate and other costs, restructuring and other charges, assetimpairments and gain on sale of product line are not allocated to the Company’sreportable segments.

Financialinformation with respect to reportable segments is presented below. Corporateand other items shown below are provided to reconcile to the accompanyingconsolidated statements of operations.

 
| ** **                                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | **(in thousands)**                              | ** ** |
| Net sales:                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Communications cable                                  |       | $                                                    | 229,527    |                                                | $          | 177,636 |   | $ | 653,235 |   | $ | 507,212 |   |
| North American magnet wire and distribution           |       | 278,074                                              |       | 180,730                                             |       | 785,951 |   | 530,523 |   |
| European magnet wire and distribution                 |       | 160,826                                              |       | 7,942                                               |       | 473,705 |   | 25,798 |   |
| Copper rod                                            |       | 127,862                                              |       | 72,812                                              |       | 353,285 |   | 208,821 |   |
|                                                  |       | $                                                    | 796,289    |                                                | $          | 439,120 |   | $ | 2,266,176 |   | $ | 1,272,354 |   |
| Operating income  (loss):                             |       |                                                 |       |                                                |       |   |   |   |   |
| Communications cable                                  |       | $                                                    | 26,360     |                                                | $          | 14,692 |   | $ | 77,167 |   | $ | 41,306 |   |
| North American magnet wire and distribution           |       | 10,118                                               |       | 7,989                                               |       | 32,830 |   | 28,501 |   |
| European magnet wire and distribution                 |       | 5,379                                                |       | (1,051                                              | )          | 16,259 |   | (2,658 | ) |
| Copper rod                                            |       | (194                                                 | )          | (109                                                | )          | (77 | ) | (7 | ) |
| Corporate and other                                   |       | (6,834                                               | )          | (4,625                                              | )          | (20,052 | ) | (14,118 | ) |
| Gain on sale of product line                          |       | —                                               |       | —                                              |       | — |   | 10,355 |   |
| Restructuring and other charges and asset impairments |       | (2,117                                               | )          | (89                                                 | )          | (3,095 | ) | (3,027 | ) |
|                                                  |       | $                                                    | 32,712     |                                                | $          | 16,807 |   | $ | 103,032 |   | $ | 60,352 |   |

 

 
| ** **                                  | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **(in thousands)**      | ** ** |
| Total assets:                               |       |                         |       |                        |       |
| Communications cable                        |       | $                            | 371,303    |                        | $          | 309,301 |   |
| North American magnet wire and distribution |       | 374,972                      |       | 290,701                     |       |
| European magnet wire and distribution       |       | 237,450                      |       | 182,533                     |       |
| Copper rod                                  |       | 54,489                       |       | 39,450                      |       |
| Corporate and other                         |       | 8,584                        |       | 6,207                       |       |
|                                        |       | $                            | 1,046,798  |                        | $          | 828,192 |   |

 

**13.          Supplemental guarantor information**

The 9%senior unsecured notes were issued by Superior Essex Communications and EssexGroup, as joint and several obligors. The notes are jointly and severallyguaranteed by the Company and each of its existing and future domesticrestricted subsidiaries (as defined in the indenture governing the notes). Allof the Company’s current domestic subsidiaries, other than IP Licensing LLP,are restricted subsidiaries. The following consolidating information presentsinformation about the Company (the “Parent”), the issuers, guarantorsubsidiaries and non-guarantor subsidiaries. Investments in subsidiaries arepresented on the equity method. Intercompany transactions are eliminated inconsolidation.

22

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| ** **                                      | ** ** | **September 30, 2006** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **Parent**                       | ** ** | **Issuers** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| ** **                                      | ** ** | **(in thousands)**          | ** ** |
| **ASSETS**                                      | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets:                                 |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                                | (392       | ) | $ | 26,870 |   | $ | 100 |   | $ | 10,913 |   | $ | — |   | $ | 37,491 |   |
| Accounts receivable, net                        |       | —                           |       | 249,454 |   | 4,826 |   | 141,134 |   | — |   | 395,414 |   |
| Inventories, net                                |       | —                           |       | 207,182 |   | 17,451 |   | 65,276 |   | — |   | 289,909 |   |
| Other current assets                            |       | 3,854                            |       | 19,942 |   | 375 |   | 11,793 |   | (1,788 | ) | 34,176 |   |
| Total current assets                            |       | 3,462                            |       | 503,448 |   | 22,752 |   | 229,116 |   | (1,788 | ) | 756,990 |   |
| Property, plant  and equipment, net             |       | 537                              |       | 195,830 |   | 15,686 |   | 38,370 |   | — |   | 250,423 |   |
| Intangible and  other long-term assets          |       | 8,699                            |       | 35,200 |   | 3 |   | 3,684 |   | (8,201 | ) | 39,385 |   |
| Investment in  subsidiaries                     |       | 262,417                          |       | 98,049 |   | 218,465 |   | — |   | (578,931 | ) | — |   |
| Intercompany  accounts                          |       | 102,169                          |       | — |   | 18,057 |   | — |   | (120,226 | ) | — |   |
| Total assets                                    |       | $                                | 377,284    |   | $ | 832,527 |   | $ | 274,963 |   | $ | 271,170 |   | $ | (709,146 | ) | $ | 1,046,798 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**  | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current  liabilities:                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Short-term borrowings                           |       | $                                | —     |   | $ | — |   | $ | — |   | $ | 29,363 |   | $ | — |   | $ | 29,363 |   |
| Current portion of long-term debt               |       | —                           |       | — |   | — |   | 474 |   | — |   | 474 |   |
| Accounts payable                                |       | 4,627                            |       | 113,443 |   | 3,513 |   | 61,473 |   | — |   | 183,056 |   |
| Accrued expenses                                |       | 17,537                           |       | 53,739 |   | 653 |   | 52,970 |   | (3,293 | ) | 121,606 |   |
| Total current liabilities                       |       | 22,164                           |       | 167,182 |   | 4,166 |   | 144,280 |   | (3,293 | ) | 334,499 |   |
| Long term-debt,  less current portion           |       | —                           |       | 258,656 |   | 5,000 |   | 24,590 |   | — |   | 288,246 |   |
| Other long-term  liabilities                    |       | 3,722                            |       | 35,390 |   | 3,380 |   | 10,376 |   | (6,696 | ) | 46,172 |   |
| Intercompany  accounts                          |       | —                           |       | 104,141 |   | — |   | 16,085 |   | (120,226 | ) | — |   |
| Total liabilities                               |       | 25,886                           |       | 565,369 |   | 12,546 |   | 195,331 |   | (130,215 | ) | 668,917 |   |
| Minority  interest in consolidated subsidiaries |       | —                           |       | — |   | — |   | 26,483 |   | — |   | 26,483 |   |
| Stockholders’  equity                      |       | 351,398                          |       | 267,158 |   | 262,417 |   | 49,356 |   | (578,931 | ) | 351,398 |   |
|                                            |       | $                                | 377,284    |   | $ | 832,527 |   | $ | 274,963 |   | $ | 271,170 |   | $ | (709,146 | ) | $ | 1,046,798 |   |

 

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| ** **                                      | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **Parent**                      | ** ** | **Issuers** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| ** **                                      | ** ** | **(in thousands)**         | ** ** |
| **ASSETS**                                      | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets:                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                               | 69         |   | $ | 395 |   | $ | 125 |   | $ | 7,595 |   | — |   | $ | 8,184 |   |
| Accounts receivable, net                        |       | —                          |       | 167,744 |   | 2,613 |   | 89,258 |   | — |   | 259,615 |   |
| Inventories, net                                |       | —                          |       | 165,688 |   | 12,519 |   | 60,148 |   | — |   | 238,355 |   |
| Other current assets                            |       | 2,643                           |       | 17,008 |   | 369 |   | 15,365 |   | — |   | 35,385 |   |
| Total current assets                            |       | 2,712                           |       | 350,835 |   | 15,626 |   | 172,366 |   | — |   | 541,539 |   |
| Property, plant  and equipment, net             |       | 613                             |       | 203,325 |   | 17,082 |   | 19,712 |   | — |   | 240,732 |   |
| Intangible and  other long-term assets          |       | 11,067                          |       | 36,940 |   | 2 |   | 6,097 |   | (8,185 | ) | 45,921 |   |
| Investment in  subsidiaries                     |       | 210,849                         |       | 71,488 |   | 183,231 |   | — |   | (465,568 | ) | — |   |
| Intercompany  accounts                          |       | 10,040                          |       | — |   | 5,303 |   | — |   | (15,343 | ) | — |   |
| Total assets                                    |       | $                               | 235,281    |   | $ | 662,588 |   | $ | 221,244 |   | $ | 198,175 |   | $ | (489,096 | ) | $ | 828,192 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**  | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current  liabilities:                           |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Short-term borrowings                           |       | $                               | —     |   | $ | 13,049 |   | $ | — |   | $ | 21,070 |   | — |   | $ | 34,119 |   |
| Current portion of long-term debt               |       | —                          |       | — |   | — |   | 499 |   | — |   | 499 |   |
| Accounts payable                                |       | 4,483                           |       | 93,321 |   | 1,779 |   | 44,348 |   | — |   | 143,931 |   |
| Accrued expenses                                |       | 22,894                          |       | 32,271 |   | 237 |   | 37,024 |   | — |   | 92,426 |   |
| Total current liabilities                       |       | 27,377                          |       | 138,641 |   | 2,016 |   | 102,941 |   | — |   | 270,975 |   |
| Long term-debt,  less current portion           |       | —                          |       | 258,113 |   | 5,000 |   | 16,113 |   | — |   | 279,226 |   |
| Other long-term  liabilities                    |       | 2,251                           |       | 43,859 |   | 3,379 |   | 10,212 |   | (8,185 | ) | 51,516 |   |
| Intercompany  accounts                          |       | —                          |       | 6,297 |   | — |   | 9,046 |   | (15,343 | ) | — |   |
| Total liabilities                               |       | 29,628                          |       | 446,910 |   | 10,395 |   | 138,312 |   | (23,528 | ) | 601,717 |   |
| Minority  interest in consolidated subsidiaries |       | —                          |       | — |   | — |   | 20,822 |   | — |   | 20,822 |   |
| Stockholders’  equity                      |       | 205,653                         |       | 215,678 |   | 210,849 |   | 39,041 |   | (465,568 | ) | 205,653 |   |
|                                            |       | $                               | 235,281    |   | $ | 662,588 |   | $ | 221,244 |   | $ | 198,175 |   | $ | (489,096 | ) | $ | 828,192 |   |

 

24

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| ** **                                                                            | ** ** | **Three Months Ended September 30, 2006** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **Parent**                                                         | ** ** | **Issuers** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| ** **                                                                            | ** ** | **(in thousands)**                                            | ** ** |
| Net sales                                                                             |       | $                                                                  | 6,950      |   | $ | 630,306 |   | $ | 69,193 |   | $ | 166,429 |   | $ | (76,589 | ) | $ | 796,289 |   |
| Cost of goods  sold                                                                   |       | —                                                             |       | 577,387 |   | 62,959 |   | 153,228 |   | (69,639 | ) | 723,935 |   |
| Gross profit                                                                          |       | 6,950                                                              |       | 52,919 |   | 6,234 |   | 13,201 |   | (6,950 | ) | 72,354 |   |
| Selling, general  and administrative expenses                                         |       | (6,823                                                             | )          | (29,455 | ) | (287 | ) | (7,910 | ) | 6,950 |   | (37,525 | ) |
| Restructuring  and other charges                                                      |       | (84                                                                | )          | (33 | ) | — |   | — |   | — |   | (117 | ) |
| Asset impairment  charge                                                              |       | —                                                             |       | (2,000 | ) | — |   | — |   | — |   | (2,000 | ) |
| Operating income                                                                      |       | 43                                                                 |       | 21,431 |   | 5,947 |   | 5,291 |   | — |   | 32,712 |   |
| Interest expense                                                                      |       | (38                                                                | )          | (6,286 | ) | (119 | ) | (680 | ) | — |   | (7,123 | ) |
| Other income  (expense), net                                                          |       | (5                                                                 | )          | 556 |   | 10 |   | (42 | ) | — |   | 519 |   |
| Income before income taxes, equity in earnings of  subsidiaries and minority interest |       | —                                                             |       | 15,701 |   | 5,838 |   | 4,569 |   | — |   | 26,108 |   |
| Income tax  expense                                                                   |       | —                                                             |       | (5,827 | ) | (2,248 | ) | (2,198 | ) | — |   | (10,273 | ) |
| Equity in  earnings of subsidiaries                                                   |       | 14,707                                                             |       | 4,913 |   | 11,117 |   | — |   | (30,737 | ) | — |   |
| Minority  interest in earnings of subsidiaries                                        |       | —                                                             |       | — |   | — |   | (1,128 | ) | — |   | (1,128 | ) |
| Net income                                                                            |       | $                                                                  | 14,707     |   | $ | 14,787 |   | $ | 14,707 |   | $ | 1,243 |   | $ | (30,737 | ) | $ | 14,707 |   |

 
| ** **                                                                | ** ** | **Three Months Ended September 30, 2005** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **Parent**                                                         | ** ** | **Issuers** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| ** **                                                                | ** ** | **(in thousands)**                                            | ** ** |
| Net sales                                                                 |       | $                                                                  | 4,759      |   | $ | 430,013 |   | $ | 43,187 |   | $ | 12,343 |   | $ | (51,182 | ) | $ | 439,120 |   |
| Cost of goods  sold                                                       |       | —                                                             |       | 395,478 |   | 35,121 |   | 12,067 |   | (46,424 | ) | 396,242 |   |
| Gross profit                                                              |       | 4,759                                                              |       | 34,535 |   | 8,066 |   | 276 |   | (4,758 | ) | 42,878 |   |
| Selling, general  and administrative expenses                             |       | (4,614                                                             | )          | (25,432 | ) | (251 | ) | (443 | ) | 4,758 |   | (25,982 | ) |
| Restructuring  and other charges                                          |       | (74                                                                | )          | (15 | ) | — |   | — |   | — |   | (89 | ) |
| Operating income  (loss)                                                  |       | 71                                                                 |       | 9,088 |   | 7,815 |   | (167 | ) | — |   | 16,807 |   |
| Interest expense                                                          |       | —                                                             |       | (6,856 | ) | (119 | ) | (12 | ) | — |   | (6,987 | ) |
| Other income  (expense), net                                              |       | (71                                                                | )          | (250 | ) | 18 |   | (54 | ) | — |   | (357 | ) |
| Income (loss) before income taxes and equity in  earnings of subsidiaries |       | —                                                             |       | 1,982 |   | 7,714 |   | (233 | ) | — |   | 9,463 |   |
| Benefit  (provision) for income taxes                                     |       | —                                                             |       | 5,681 |   | (2,970 | ) | (312 | ) | — |   | 2,399 |   |
| Equity in  earnings of subsidiaries                                       |       | 11,862                                                             |       | 4,279 |   | 7,118 |   | — |   | (23,259 | ) | — |   |
| Net income  (loss)                                                        |       | $                                                                  | 11,862     |   | $ | 11,942 |   | $ | 11,862 |   | $ | (545 | ) | $ | (23,259 | ) | $ | 11,862 |   |

 

25

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| ** **                                                                                                     | ** ** | **Nine Months Ended September 30, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **Parent**                                                        | ** ** | **Issuers** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| ** **                                                                                                     | ** ** | **(in thousands)**                                           | ** ** |
| Net sales                                                                                                      |       | $                                                                 | 20,313     |   | $ | 1,778,817 |   | $ | 182,367 |   | $ | 490,086 |   | $ | (205,407 | ) | $ | 2,266,176 |   |
| Cost of goods  sold                                                                                            |       | —                                                            |       | 1,616,989 |   | 166,225 |   | 450,554 |   | (185,094 | ) | 2,048,674 |   |
| Gross profit                                                                                                   |       | 20,313                                                            |       | 161,828 |   | 16,142 |   | 39,532 |   | (20,313 | ) | 217,502 |   |
| Selling, general  and administrative expenses                                                                  |       | (20,018                                                           | )          | (87,975 | ) | (788 | ) | (22,907 | ) | 20,313 |   | (111,375 | ) |
| Restructuring  and other charges                                                                               |       | (279                                                              | )          | (363 | ) | — |   | (453 | ) | — |   | (1,095 | ) |
| Asset impairment  charge                                                                                       |       | —                                                            |       | (2,000 | ) | — |   | — |   | — |   | (2,000 | ) |
| Operating income                                                                                               |       | 16                                                                |       | 71,490 |   | 15,354 |   | 16,172 |   | — |   | 103,032 |   |
| Interest expense                                                                                               |       | (13                                                               | )          | (21,115 | ) | (356 | ) | (1,728 | ) | — |   | (23,212 | ) |
| Gain on sale of  investment                                                                                    |       | 5,788                                                             |       | — |   | — |   | — |   | — |   | 5,788 |   |
| Other income  (expense), net                                                                                   |       | (3                                                                | )          | 808 |   | 39 |   | (188 | ) | — |   | 656 |   |
| Income before income taxes, equity in earnings of  subsidiaries, minority interest and extraordinary item |       | 5,788                                                             |       | 51,183 |   | 15,037 |   | 14,256 |   | — |   | 86,264 |   |
| Income tax  expense                                                                                            |       | (2,257                                                            | )          | (18,601 | ) | (5,790 | ) | (6,553 | ) | — |   | (33,201 | ) |
| Equity in  earnings of subsidiaries                                                                            |       | 47,094                                                            |       | 14,752 |   | 37,847 |   | — |   | (99,693 | ) | — |   |
| Minority  interest in earnings of subsidiaries                                                                 |       | —                                                            |       | — |   | — |   | (3,309 | ) | — |   | (3,309 | ) |
| Extraordinary  gain                                                                                            |       | —                                                            |       | — |   | — |   | 871 |   | — |   | 871 |   |
| Net income                                                                                                     |       | $                                                                 | 50,625     |   | $ | 47,334 |   | $ | 47,094 |   | $ | 5,265 |   | $ | (99,693 | ) | $ | 50,625 |   |

 
| ** **                                                                | ** ** | **Nine Months Ended September 30, 2005** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **Parent**                                                        | ** ** | **Issuers** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| ** **                                                                | ** ** | **(in thousands)**                                           | ** ** |
| Net sales                                                                 |       | $                                                                 | 14,396     |   | $ | 1,257,797 |   | $ | 108,736 |   | $ | 38,212 |   | (146,787 | ) | $ | 1,272,354 |   |
| Cost of goods  sold                                                       |       | —                                                            |       | 1,137,503 |   | 100,614 |   | 37,460 |   | (132,392 | ) | 1,143,185 |   |
| Gross profit                                                              |       | 14,396                                                            |       | 120,294 |   | 8,122 |   | 752 |   | (14,395 | ) | 129,169 |   |
| Selling, general  and administrative expenses                             |       | (14,085                                                           | )          | (74,158 | ) | (775 | ) | (1,522 | ) | 14,395 |   | (76,145 | ) |
| Restructuring  and other charges                                          |       | (242                                                              | )          | (479 | ) | — |   | — |   | — |   | (721 | ) |
| Asset impairment  charge                                                  |       | —                                                            |       | — |   | — |   | (2,306 | ) | — |   | (2,306 | ) |
| Gain on sale of  product line                                             |       | —                                                            |       | 10,355 |   | — |   | — |   | — |   | 10,355 |   |
| Operating income (loss)                                                   |       | 69                                                                |       | 56,012 |   | 7,347 |   | (3,076 | ) | — |   | 60,352 |   |
| Interest expense                                                          |       | —                                                            |       | (21,168 | ) | (278 | ) | (23 | ) | — |   | (21,469 | ) |
| Other income  (expense), net                                              |       | (69                                                               | )          | (73 | ) | 35 |   | (54 | ) | — |   | (161 | ) |
| Income (loss) before income taxes and equity in  earnings of subsidiaries |       | —                                                            |       | 34,771 |   | 7,104 |   | (3,153 | ) | — |   | 38,722 |   |
| Income tax  expense                                                       |       | —                                                            |       | (6,188 | ) | (2,732 | ) | (925 | ) | — |   | (9,845 | ) |
| Equity in  earnings of subsidiaries                                       |       | 28,877                                                            |       | 532 |   | 24,505 |   | — |   | (53,914 | ) | — |   |
| Net income (loss)                                                         |       | $                                                                 | 28,877     |   | $ | 29,115 |   | $ | 28,877 |   | $ | (4,078 | ) | $ | (53,914 | ) | $ | 28,877 |   |
|                                                                           |            |                                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

26

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| ** **                                                   | ** ** | **Nine Months Ended September 30, 2006** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **Parent**                                                        | ** ** | **Issuers** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| ** **                                                   | ** ** | **(in thousands)**                                           | ** ** |
| Cash flows  provided by (used for) operating activities      |       | $                                                                 | (1,679     | ) | $ | (39,324 | ) | $ | 5,701 |   | $ | (2,101 | ) | — |   | $ | (37,403 | ) |
| Cash flows from  investing activities:                       |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures                                         |       | (69                                                               | )          | (9,935 | ) | (7 | ) | (16,985 | ) | — |   | (26,996 | ) |
| SDS acquisition, net of cash acquired                        |       | —                                                            |       | — |   | — |   | (947 | ) | — |   | (947 | ) |
| Proceeds from sale of investment                             |       | 8,500                                                             |       | — |   | — |   | — |   | — |   | 8,500 |   |
| Investment in subsidiaries                                   |       | —                                                            |       | (8,900 | ) | — |   | — |   | 8,900 |   | — |   |
| Dividends received                                           |       | —                                                            |       | — |   | 238 |   | — |   | (238 | ) | — |   |
| Other                                                        |       | —                                                            |       | 68 |   | — |   | — |   | — |   | 68 |   |
| Cash flows  provided by (used for) investing activities      |       | 8,431                                                             |       | (18,767 | ) | 231 |   | (17,932 | ) | 8,662 |   | (19,375 | ) |
| Cash flows from  financing activities:                       |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Repayments of senior secured revolving credit  facility, net |       | —                                                            |       | (13,049 | ) | — |   | — |   | — |   | (13,049 | ) |
| Essex Nexans short-term borrowings, net                      |       | —                                                            |       | — |   | — |   | 6,665 |   | — |   | 6,665 |   |
| Proceeds from long-term borrowings                           |       | —                                                            |       | — |   | — |   | 7,545 |   | — |   | 7,545 |   |
| Repayments of long-term debt                                 |       | —                                                            |       | — |   | — |   | (261 | ) | — |   | (261 | ) |
| Proceeds from common stock offering,net                      |       | 80,794                                                            |       | — |   | — |   | — |   | — |   | 80,794 |   |
| Proceeds from exercise of stock options                      |       | 3,248                                                             |       | — |   | — |   | — |   | — |   | 3,248 |   |
| Capital contributions                                        |       | —                                                            |       | — |   | — |   | 2,225 |   | (2,225 | ) | — |   |
| Dividends paid                                               |       | —                                                            |       | (238 | ) | — |   | — |   | 238 |   | — |   |
| Other                                                        |       | 958                                                               |       | — |   | — |   | — |   | — |   | 958 |   |
| Intercompany accounts                                        |       | (92,213                                                           | )          | 97,853 |   | (5,957 | ) | 6,992 |   | (6,675 | ) | — |   |
| Cash flows  provided by (used for) financing activities      |       | (7,213                                                            | )          | 84,566 |   | (5,957 | ) | 23,166 |   | (8,662 | ) | 85,900 |   |
| Effect of  exchange rate changes on cash                     |       | —                                                            |       | — |   | — |   | 185 |   | — |   | 185 |   |
| Net increase  (decrease) in cash and cash equivalents        |       | (461                                                              | )          | 26,475 |   | (25 | ) | 3,318 |   | — |   | 29,307 |   |
| Cash and cash  equivalents at beginning of period            |       | 69                                                                |       | 395 |   | 125 |   | 7,595 |   | — |   | 8,184 |   |
| Cash and cash  equivalents at end of period                  |       | $                                                                 | (392       | ) | $ | 26,870 |   | $ | 100 |   | $ | 10,913 |   | — |   | $ | 37,491 |   |

 

27

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| ** **                                              | ** ** | **Nine Months Ended September 30, 2005** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **Parent**                                                        | ** ** | **Issuers** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| ** **                                              | ** ** | **(in thousands)**                                           | ** ** |
| Cash flows  provided by operating activities            |       | $                                                                 | 843        |   | $ | 29,228 |   | $ | 764 |   | $ | 1,362 |   | $ | — |   | $ | 32,197 |   |
| Cash flows from  investing activities:                  |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures                                    |       | (248                                                              | )          | (11,421 | ) | (916 | ) | (470 | ) | — |   | (13,055 | ) |
| Belden asset acquisition contingent payment             |       | —                                                            |       | (10,000 | ) | — |   | — |   | — |   | (10,000 | ) |
| Capitalized Nexans’ acquisition costs              |       | (2,438                                                            | )          | — |   | — |   | — |   | — |   | (2,438 | ) |
| Proceeds from sale of product line                      |       | —                                                            |       | 11,563 |   | — |   | — |   | — |   | 11,563 |   |
| Investment in subsidiaries                              |       | —                                                            |       | (1,800 | ) | — |   | — |   | 1,800 |   | — |   |
| Dividends received                                      |       | —                                                            |       | — |   | 238 |   | — |   | (238 | ) | — |   |
| Other                                                   |       | 22                                                                |       | 34 |   | — |   | — |   | — |   | 56 |   |
| Cash flows used  for investing activities               |       | (2,664                                                            | )          | (11,624 | ) | (678 | ) | (470 | ) | 1,562 |   | (13,874 | ) |
| Cash flows from  financing activities:                  |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Short-term borrowings (repayments), net                 |       | —                                                            |       | (30,000 | ) | — |   | (785 | ) | — |   | (30,785 | ) |
| Proceeds from exercise of stock options                 |       | 836                                                               |       | — |   | — |   | — |   | — |   | 836 |   |
| Capital contributions                                   |       | —                                                            |       | — |   | — |   | 1,800 |   | (1,800 | ) | — |   |
| Dividends paid                                          |       | —                                                            |       | (238 | ) | — |   | — |   | 238 |   | — |   |
| Intercompany accounts                                   |       | 38                                                                |       | 537 |   | 5 |   | (580 | ) | — |   | — |   |
| Cash flows  provided by (used for) financing activities |       | 874                                                               |       | (29,701 | ) | 5 |   | 435 |   | (1,562 | ) | (29,949 | ) |
| Effect of  exchange rate changes on cash                |       | —                                                            |       | (1,098 | ) | — |   | 824 |   | — |   | (274 | ) |
| Net increase  (decrease) in cash and cash equivalents   |       | (947                                                              | )          | (13,195 | ) | 91 |   | 2,151 |   | — |   | (11,900 | ) |
| Cash and cash  equivalents at beginning of period       |       | 106                                                               |       | 18,097 |   | 43 |   | 66 |   | — |   | 18,312 |   |
| Cash and cash  equivalents at end of period             |       | $                                                                 | (841       | ) | $ | 4,902 |   | $ | 134 |   | $ | 2,217 |   | $ | — |   | $ | 6,412 |   |

 

 

28

----

 

**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

**General**

Wecurrently manufacture a portfolio of wire and cable products grouped into thefollowing segments: (i) our communications cable segment; (ii) ourNorth American magnet wire and distribution segment (formerly magnet wire anddistribution); (iii) our European magnet wire and distribution segment and(iv) our copper rod segment. Our communications cable segment includescopper and fiber optic outside plant wire and cable for voice and datatransmission in telecommunications networks and copper and fiber optic datacomand premises wire and cable for use within homes and offices for local areanetworks, internet connectivity and other applications. Our North Americanmagnet wire and distribution segment manufactures and markets magnet wire andrelated products to major OEMs for use in motors, transformers and electricalcoils and controls primarily in North America. Our North American magnet wireand distribution segment also distributes magnet wire and fabricated insulationproducts manufactured by us and related accessory products purchased from thirdparties to OEMs and motor repair facilities. Our European magnet wire anddistribution segment consists of the operations of the joint venture formed in2005 in connection with the acquisition of Nexans’ European magnet wirebusiness as discussed below. Our European magnet wire and distribution segmentmanufactures and markets magnet wire for use in motors, transformers andelectrical coils and controls primarily in Europe as well as enamels that areused both for internal consumption in the production of magnet wire and forsale to third parties. Prior to the formation of Essex Nexans our U.K. magnetwire operations were included in the North American magnet wire anddistribution segment. Our U.K. magnet wire operations are currently reportedwithin the European magnet wire and distribution segment and, accordingly, allprior period segment information has been restated to reflect the currentsegment reporting structure. Our copper rod segment includes sales of copperrod produced by our North American continuous casting units to externalcustomers. Our copper rod segment also produces copper rod for internal processingwhich is recorded by the consuming segment at cost as a component of cost ofgoods sold.

Industrysegment financial data for the three and nine months ended September 30,2006 and 2005 is included in Note 12 to the accompanying condensedconsolidated financial statements.

**Operating Environment**

Copperis the primary raw material we use in the manufacture of our wire and cableproducts. Foreign economies have been consuming an increasing proportion ofworldwide copper production resulting in periodic reductions of copper stocklevels held in COMEX and LME warehouses and sold through merchants. Thesemacro-economic and other factors have contributed to extremely high andvolatile copper prices and periodic shortages of supply of copper. Over thepast several years, the spot price of copper has escalated rapidly, increasingfrom an average COMEX daily spot price of $0.88 per pound in October 2003,to $2.17 per pound in December 2005. Copper prices have increased evenmore rapidly during 2006, with the COMEX daily spot price for copper increasingto an average of $3.54 per pound for quarter ended September 30, 2006 andfluctuating from a low of $2.13 per pound to a high of $4.08 per pound duringthe nine months ended September 30, 2006. Copper LME prices have experiencedsimilar increases and fluctuations.

Whilewe have not experienced a material negative impact on our results of operationsto date as a result of rising copper prices or supply shortages, as describedbelow under “Risk factors—Risks to our business related to copper”, this recentand, in our experience, unprecedented increase in copper prices along with thepotential for dramatic increases and decreases in future copper prices, mayhave adverse effects on our business, including the following:

·                  Exposing our businesses to potential losses  and additional copper hedging risks 

·                  Reducing customer demand for our products

·                  Increasing our need for working capital to financeinventory and receivables

We engage in hedging andcopper purchase strategies in an attempt to limit the commodity price riskassociated with copper and we amended our senior secured revolving creditfacility in April 2006 to increase our available credit to meet our increasingworking capital needs. In June and July of 2006 we completed an underwrittenpublic offering of 2,851,145 shares of our common 

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stock and used the netproceeds of approximately $80.8 million to pay down borrowings outstandingunder our senior secured revolving credit facility. However, there is noassurance that these measures will be sufficient to mitigate the impact ofrising or volatile copper prices. The high level of copper prices and themagnitude of copper price changes increase our exposure to hedging risks.Furthermore, our markets have rarely experienced copper costs at current levelsand there can be no assurance that continued high copper prices will not haveother unanticipated negative impacts. Although we have not experienced anyshortages during recent years that have had a significant impact on ouroperations, no assurance can be given that we will be able to procure adequatesupplies of copper and copper rod to meet our future production needs.Furthermore, supply shortages or disruptions may cause us to procure our copperrod from less cost effective sources and may have a negative impact on ourresults of operations.

 

In addition to copper, raw materials we use in themanufacture of our products include aluminum, steel, optical fibers, plastics,such as polyethylene and polyvinyl chloride and various chemicals and chemicalcompounds used in the production of enamels. The natural disasters that hit theGulf Coast region of the United States in 2005 had a significant effect on rawmaterial producers located in the region or those which rely on oil and naturalgas or raw materials produced in the region. In 2005 certain of our rawmaterial suppliers declared force majeure and instituted significant surchargesfor energy and other costs. Crude oil prices have continued to increase,reaching record levels in 2006. The increased cost of oil has resulted inincreased production and freight costs and periodic shortages in theavailability of shipping resources. The markets for these key raw materials andresources are extremely tight and are forecasted to remain so for the nearterm. There can be no assurance that we will be able to procure adequatesupplies of our essential raw materials to meet our future needs or that we canincrease prices for our products in amounts sufficient to offset increases inthe costs of raw materials, energy and freight. 

**EssexNexans Acquisition**

On October 21, 2005, we acquired Nexans’ magnetwire operations in Europe through formation of a corporate joint venture, EssexNexans, a French holding company, combining our U.K. magnet wire business andNexans’ European magnet wire and enamel businesses. We own 60% of the jointventure and Nexans has a 40% minority ownership. We believe the acquisitionenhances our ability to serve our global customer base, provides synergies withrespect to our U.K. magnet wire business and increases our geographicdiversification. The acquired operations are included in our results ofoperation from the date of acquisition. See Note 5 to the accompanyingcondensed consolidated financial statements.

**Resultsof Operations**

In discussing our resultsof operations below, we present supplemental sales information adjusted to aconstant $2.00/lb COMEX cost of copper, or copper-adjusted sales, which is afinancial measure that is not calculated in accordance with accountingprinciples generally accepted in the United States of America, or a non-GAAPfinancial measure. A non-GAAP financial measure is defined as a numericalmeasure of a company’s financial performance, financial position or cash flowsthat (i) excludes amounts, or is subject to adjustments that have the effect ofexcluding amounts, that are included in the most directly comparable measurecalculated and presented in accordance with GAAP in the statement ofoperations, balance sheet or statement of cash flows; or (ii) includes amounts,or is subject to adjustments that have the effect of including amounts, thatare excluded from the comparable measure so calculated and presented. Webelieve sales adjusted for a constant cost of copper is a useful measure to aidin analyzing period-to-period sales revenues, particularly in periods ofchanging copper prices. Sales adjusted for a constant cost of copper as used byus may not be comparable to similarly titled measures of other companies.

 

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***Three Month Period Ended September 30,2006 Compared to the Three Month Period Ended September 30, 2005***

*Net sales*

Thefollowing table provides net sales and supplemental copper adjusted salesinformation for the three months ended September 30, 2006 and 2005:

 
| ** **                                          | ** ** | **Actual**                                           | ** ** | **Copper-adjusted** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|---------------------|------------|
| ** **                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **%**               | ** ** | **Three Months Ended  September 30,** | ** ** | **%** | ** ** |
| ** **                                          | ** ** | **2006**                                             | ** ** | **2005**            | ** ** | **Change** | ** ** | **2006** | ** ** | **2005** | ** ** | **Change** | ** ** |
| Net sales:                                          |       |                                                 |       |                |       |   |   |   |   |   |   |   |   |
| Communications cable                                |       | $                                                    | 229,527    |                | $          | 177,636 |   | 29 | % | $ | 188,220 |   | $ | 197,497 |   | (5 | )% |
| North American magnet wire and distribution         |       | 278,074                                              |       | 180,730             |       | 54 | % | 209,992 |   | 202,028 |   | 4 | % |
| European magnet wire and distribution               |       | 160,826                                              |       | 7,942               |       | * |   | 118,407 |   | 8,922 |   | * |   |
| Copper rod                                          |       | 127,862                                              |       | 72,812              |       | 76 | % | 74,380 |   | 84,630 |   | (12 | )% |
|                                                |       | 796,289                                              |       | 439,120             |       | 81 | % | 590,999 |   | 493,077 |   | 20 | % |
| Constant cost of copper adjustment                  |       | —                                               |       | —              |       |   |   | 205,290 |   | (53,957 | ) |   |   |
| Total                                               |       | $                                                    | 796,289    |                | $          | 439,120 |   | 81 | % | $ | 796,289 |   | $ | 439,120 |   | 81 | % |
| Average daily  COMEX spot price per pound of copper |       | $                                                    | 3.54       |                | $          | 1.70 |   | 108 | % |   |   |   |   |   |   |

----

*                    Comparisonsare not meaningful due to the inclusion of entities acquired in the EssexNexans transaction for periods subsequent to October 21, 2005. 

Consolidatedsales for the three months ended September 30, 2006 were $796.3 million, anincrease of 81% as compared to consolidated sales of $439.1 million for thequarter ended September 30, 2005. Sales for the 2006 quarter were significantlyimpacted by the increase in copper prices and the effects of the Essex Nexanstransaction. Sales adjusted for a constant cost of copper increased 20% for thequarter ended September 30, 2006. Sales in our European magnet wire anddistribution segment attributable to the entities acquired in the Essex Nexanstransaction amounted to $148.2 million ($109.7 million on a copper-adjustedbasis) for the three months ended September 30, 2006. The impact of the EssexNexans transaction was to increase consolidated net sales and sales adjustedfor a constant cost of copper by 34% and 22%, respectively.The remaining 2% decreasein consolidated sales adjusted for a constant cost of copper is due to revenue decreasesin both our communications cable and copper rod segments partially offset by increasesin sales by our North American magnet wire and distribution segment.

Salesfor our communications cable segment for the September 30, 2006 quarter were$229.5 million, an increase of 29%, as compared to sales of $177.6 million forthe quarter ended September 30, 2005. Sales adjusted for a constant cost ofcopper decreased 5%. The copper-adjusted decrease reflects a decline incopper OSP unit volume primarily attributable to a comparative decline inhurricane restoration demand, which we believe was largely completed in thesecond quarter of 2006, reduced demand from our telephone customers, which webelieve is at least partially due to higher copper costs and adjustments toannual capital budget allocations, and overall market related decreases due toa slowdown in residential construction and the overall decline in thedeployment of copper OSP in favor of fiber optic cable. These decreases incopper OSP unit volumes were partially offset by improved pricing of our copperOSP products, primarily related to non-copper price adjustments with respect toour contract and distribution customers, as well as price increases andimproved product mix in copper and fiber optic premise products

Salesfor our North American magnet wire and distribution segment were $278.1 millionfor the quarter ended September 30, 2006, an increase of 54% as compared to theprior year. On a copper-adjusted basis, sales for the three months ended September30, 2006 increased 4% from the same quarter in the prior year. The copper-adjustedincrease results primarily from the current year impact of 2005 market sharegains at certain major customers as well as strengthening in our motor,transformer and generator end-markets. Additionally, sales for the three monthsended September 30, 2006 include some benefit from product price improvementand price surcharges. These increases were offset somewhat by reduced demand inthe automotive and appliance end markets, particularly with respect to ourdistribution business. Sales for the quarter ended September 30, 2006 were alsonegatively impacted by 

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demand slowdown inthe later half of September 2006 which we believe is due to inventorycorrections by our industrial based customers. 

Sales for the Europeanmagnet wire and distribution segment were $160.8 million for the three monthsended September 30, 2006 compared to $7.9 million for the three months ended September30, 2005, an increase of $152.9 million. On a copper-adjusted basis,sales increased $109.5 million for the three months ended September 30, 2006compared to the prior year quarter. The increase was attributable to the EssexNexans transaction. Sales for the 2006 quarter include $148.2 million ($109.7million on a copper-adjusted basis) related to the entities acquired inthe Essex Nexans transaction in October 2005. The third quarter istypically a slow seasonal quarter for the European magnet wire and distributionsegment due to the summer holiday season.

 

Copperrod sales for the three months ended September 30, 2006 were $127.9 millioncompared to $72.8 million for the comparable 2005 period. On a copper-adjustedbasis, sales for our copper rod segment decreased by 12% for the three monthsended September 30, 2006 compared to the prior year period. The copper-adjusteddecrease in the 2006 quarter reflects the loss of a major customer in the firstquarter of 2006 as well as decreased market demand due to weakness in theautomotive and residential construction end markets. Copper rod segment salesconsist primarily of external sales of processed copper rod that cannot be usedfor internal production and allow for fixed cost recovery at gross profitmargins that are generally intended to break even.****Copper rod volumes fluctuate from period to period due tochanges in internal consumption needs and external market conditions.

*Gross profit*

Forthe three months ended September 30, 2006, gross profit was $72.4 million, anincrease of 69% as compared to the prior year quarter primarily due to copperadjusted gross profit margin (computed as gross profit divided bycopper-adjusted sales) improvements in our communications cable and NorthAmerican magnet wire and distribution segments and gross profit of $13.0million attributable to the entities acquired in the Essex Nexans transaction.The gross profit margin in the 2006 quarter was 9.1% compared to 9.8% for thesame quarter in 2005. The gross profit margin declined as a result of increasedcopper prices. Gross profit margin on a copper-adjusted basis was 12.2%for the three months ended September 30, 2006 compared to 8.7% for the threemonths ended September 30, 2005. The increase in copper-adjusted gross marginis attributable to improved product pricing and mix, particularly in ourcommunications cable segment, manufacturing cost reductions and an estimated$10.5 million benefit related to the significant upward volatility in copperprices experienced during 2006. We estimate that approximately one-half of thiscopper related benefit was associated with our communications cable segment andone-half was associated with our North American and European magnet wire anddistribution segments. A portion of the copper-related benefit is due to lowercopper-cost flow through compared to product pricing. This was particularly thecase in the distribution market, as more timely copper-based price adjustmentscombined with a shortening of product order lead times for products resulted incopper-related gains on shipments of inventories accounted for on a FIFO basis.Additionally, on certain of our magnet wire products we do achieve a modest mark-upon the component of the product cost related to copper. The balance of thecopper-related benefit is attributable to the inverted forward pricing curve inthe COMEX copper futures market experienced during much of 2006 which favorablyimpacted certain of our forward buying and hedging arrangements. Ourcommunications cable and North American and European magnet wire anddistribution segments all experienced improved copper-adjusted gross marginsfor the quarter ended September 30, 2006 compared to the quarter ended September30, 2005, including the effects of the copper-related benefit discussed above.Considering the relative stabilization of copper price levels during the thirdquarter of 2006, we do not expect significant future copper-related grossmargin benefits in our communications cable segment and we expect futurebenefits in our North American and European magnet wire and distributionsegments, if any, to be reduced from those achieved in the third quarter of2006. If copper prices decrease significantly we may experience losses. See“Risk Factors — Risks to Our Business Related to Copper”.

*Selling, general and administrative expenses*

Selling,general and administrative expenses (SG&A expense) for the three monthperiod ended September 30, 2006 were $37.5 million as compared to SG&Aexpense of $26.0 million for the three months ended September 30, 2005.SG&A expense for the three months ended September 30, 2006 included $6.6million attributable to the entities acquired in the Essex Nexans transaction.The remaining increase of $4.9 million is attributable to a number of factorsincluding normal salary and benefit increases, including incentive basedcompensation, ($1.8 million), stock-based compensation and supplementalexecutive retirement plan charges ($1.3 million), group insurance and pensioncosts ($0.8 million), start-up costs associated with our Greenfieldproject in China ($0.6 million) and the impact of increased sales and relatedsales costs and commissions, primarily in our communications cable segment.

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*Impairment and restructuring and other charges*

Duringthe third quarter of 2006 we recorded an impairment charge of $2.0 millionrelated to an owned warehouse which was closed in the first quarter of 2006 andclassified as held for sale. The impairment charge was recorded as a result ofongoing evaluations of current market conditions in the area where the propertyis located. The warehouse was previously operated by the North American magnetwire and distribution segment.

Restructuringand other charges of $0.1 million and $0.1million for the three months ended September30, 2006 and 2005, respectively, consisted primarily of professional feesincurred in connection with the administration of Superior TeleCom’s plan ofreorganization. 

*Operating income*

Thefollowing table sets forth information regarding our operating income bysegment for the three months ended September 30, 2006 and 2005. We measure oursegment operating performance based primarily on segment operating income,excluding restructuring and other charges and asset impairments.

 

|                                                        | ** ** | **2006**                | ** ** | **2005** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                             | ** ** | **(in thousands)** | ** ** |
| Operating income  (loss)                               |       |                    |       |     |       |
| Communications cable                                   |       | $                       | 26,360     |     | $          | 14,692 |   |
| North American magnet wire and distribution            |       | 10,118                  |       | 7,989    |       |
| European magnet wire and distribution                  |       | 5,379                   |       | (1,051   | )          |
| Copper rod                                             |       | (194                    | )          | (109     | )          |
| Corporate and other                                    |       | (6,834                  | )          | (4,625   | )          |
| Restructuring and other charges and asset  impairments |       | (2,117                  | )          | (89      | )          |
|                                                   |       | $                       | 32,712     |     | $          | 16,807 |   |

 

Operatingincome for the communications cable segment increased $11.7 million for thethree months ended September 30, 2006 compared to the 2005 quarter due toincreased gross profit primarily attributable to improvements incopper-adjusted gross margin percentage as discussed above. Communicationscable gross profit increases were partially offset by an increase in SG&Aexpense of $1.3 million due primarily to higher sales costs andcommissions in 2006 associated with increased sales and normal compensation andbenefits increases.

Operatingincome for our North American magnet wire and distribution segment for thethree months ended September 30, 2006 increased $2.1 million compared tothe three months ended September 30, 2005 due to increased gross profitprimarily attributable to improvements in copper-adjusted gross marginpercentage as discussed above partially offset by higher SG&A expense of$0.7 million comprised principally of higher employee compensation and benefitrelated costs and start-up costs associated with the Greenfield operation inChina.

Theoperating loss for our European magnet wire and distribution segment for thethree months ended September 30, 2005 reflects the results of our U.K. magnetwire business which sustained break even gross margins for the three monthsended September 30, 2005 due to reduced sales volumes and pricing. Operatingincome for the three months ended September 30, 2006 includes $6.4 millionattributable to the entities acquired in the Essex Nexans transaction.

Thecopper rod segment had an operating loss of $0.2 million for the three monthsended September 30, 2006 compared to an operating loss of $0.1 million for thesame period in 2005. As previously discussed, copper rod sales allow for fixedcost recovery at gross profit margins that are generally intended to breakeven.

Corporateand other charges consist primarily of corporate payroll and parent companycosts, stock-based compensation charges, corporate headquarters costs andcorporate professional fees and compliance costs. The increase in corporate andother costs for the three months ended September 30, 2006 compared to the threemonths ended September 30, 2005 is primarily due to increased incentive andstock-based compensation and group insurance costs.

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Consolidatedoperating income for the three months ended September 30, 2006 includedrestructuring and other charges and asset impairments of $2.1 million comparedto $0.1 million of such charges in the three months ended September 30, 2005,the components of which are discussed above.

*Interest expense and other income (expense)*

Interest expense for thequarter ended September 30, 2006 was $7.1 million compared to interest expenseof $7.0 million for the three months ended September 30, 2005. Interest expensefor the three months ended September 30, 2006 consists primarily of interest onour 9% senior notes and $0.7 million related to borrowings by Essex Nexans. Wehad no borrowings outstanding under our senior secured revolving creditagreement during the quarter ended September 30, 2006 due to application of theproceeds from our equity offering in June 2006. Other income for the threemonths ended September 30, 2006 reflects interest income of $0.3 million earnedon positive average cash balances of more than $30 million during the quarter.

 

*Income tax expense*

Oureffective income tax rate for the three months ended September 30, 2006 was 39%.The effective tax rate for the three months ended September 30, 2006 exceedsthe U.S. statutory rate of 35% due primarily to the effects of state taxes. Werecorded a net tax benefit of $2.4 million for the three months ended September30, 2005. The tax benefit for the 2005 quarter includes a $4.1 million non-cashnet benefit attributable to a settlement with state taxing authorities withrespect to certain pre-petition claims primarily resulting from state incometax audits of Superior TeleCom and a $0.4 million benefit due to settlement ofcertain bankruptcy claims with the IRS. In addition, during the third quarter of 2005 we filed anelection with the Internal Revenue Service to elect to treat our U.K.subsidiary as a “flow through” entity for U.S. income purposes.  This election is commonly referred to as a“check-the-box election”. As a result of this election, we recognized a loss onour 2005 U.S. consolidated income tax return. Accordingly, income tax expensefor the three months ended September 30, 2005 reflects a benefit of approximately$2.0 million attributable to this loss. Our effective tax rate for the threemonths ended September 30, 2005 excluding these benefits was 44% whichexceeds the U.S. statutory rate of 35% due to the effects of state taxes and avaluation allowance established with respect to operating losses incurred byour U.K. subsidiary.

***Nine Month Period Ended September 30,2006 Compared to the Nine Month Period Ended September 30, 2005***

Thefollowing table provides net sales and supplemental copper adjusted salesinformation for the nine months ended September 30, 2006 and 2005:

 
| ** **                                     | ** ** | **Actual**                                          | ** ** | **Copper-adjusted** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------|------------|
| ** **                                     | ** ** | **Nine Months Ended  September 30,** | ** ** | **%**               | ** ** | **Nine Months Ended  September 30,** | ** ** | **%** | ** ** |
| ** **                                     | ** ** | **2006**                                            | ** ** | **2005**            | ** ** | **Change** | ** ** | **2006** | ** ** | **2005** | ** ** | **Change** | ** ** |
| Net sales:                                     |       |                                                |       |                |       |   |   |   |   |   |   |   |   |
| Communications cable                           |       | $                                                   | 653,235    |                | $          | 507,212 |   | 29 | % | $ | 594,313 |   | $ | 574,916 |   | 3 | % |
| North American magnet wire and distribution    |       | 785,951                                             |       | 530,523             |       | 48 | % | 658,174 |   | 614,424 |   | 7 | % |
| European magnet wire and distribution          |       | 473,705                                             |       | 25,798              |       | * |   | 384,367 |   | 30,568 |   | * |   |
| Copper rod                                     |       | 353,285                                             |       | 208,821             |       | 69 | % | 237,704 |   | 262,800 |   | (10 | )% |
|                                           |       | 2,266,176                                           |       | 1,272,354           |       | 78 | % | 1,874,558 |   | 1,482,708 |   | 26 | % |
| Constant cost of copper adjustment             |       | —                                              |       | —              |       |   |   | 391,618 |   | (210,354 | ) |   |   |
| Total                                          |       | $                                                   | 2,266,176  |                | $          | 1,272,354 |   | 78 | % | $ | 2,266,176 |   | $ | 1,272,354 |   | 78 | % |
| Average daily  COMEX price per pound of copper |       | $                                                   | 3.06       |                | $          | 1.57 |   | 95 | % |   |   |   |   |   |   |

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*                    Comparisonsare not meaningful due to the inclusion of entities acquired in the EssexNexans transaction for periods subsequent to October 21, 2005.

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Consolidatedsales for the nine months ended September 30, 2006 were $2,266.2 million, anincrease of 78% as compared to consolidated sales of $1,272.4 million for the ninemonths ended September 30, 2005. Sales for the 2006 period were significantlyimpacted by the increase in copper prices and the effects of the Essex Nexanstransaction. Sales adjusted for a constant cost of copper increased 26% for thenine months ended September 30, 2006. Sales in our European magnet wire anddistribution segment attributable to the entities acquired in the Essex Nexanstransaction amounted to $435.6 million ($353.2 million on a copper-adjustedbasis) for the nine months ended September 30, 2006. The impact of the EssexNexans transaction was to increase consolidated net sales and sales adjustedfor a constant cost of copper by 34% and 24%, respectively. The remaining 2%increase in consolidated sales adjusted for a constant cost of copper is due torevenue growth in both the communications cable and North American magnet wireand distribution segments partially offset by reductions in sales of our copperrod segment.

Salesfor our communications cable segment for the nine months ended September 30,2006 were $653.2 million, an increase of 29%, as compared to sales of $507.2million for the nine months ended September 30, 2005. Sales adjusted for a constantcost of copper increased 3%. The copper-adjusted increase reflects priceincreases in our copper OSP products, primarily related to non-copper priceadjustments with respect to our contract and distribution customers, as well asprice increases and improved product mix in copper and fiber optic premiseproducts. These increases were partially offset by declines in copper OSP unitvolume attributable to overall market related decreases, particularly withrespect to sales to our international customers. 

Sales for our NorthAmerican magnet wire and distribution segment were $786.0 million for the ninemonths ended September 30, 2006, an increase of 48% as compared to the prioryear. On a copper-adjusted basis, sales for the nine months ended September30, 2006 increased 7% from the same period in the prior year. The copper-adjustedincrease results primarily from the current year impact of 2005 market sharegains at certain major customers as well as strengthening in our motor,transformer and generator end-markets, including demand due to hurricane-relatedreplacement and repair. Additionally, sales for the nine months ended September30, 2006 include some benefit from product price improvement and pricesurcharges. These increases were offset somewhat by reduced demand in theautomotive and appliance end markets.

 

Salesfor the European magnet wire and distribution segment were $473.7 million forthe nine months ended September 30, 2006 compared to $25.8 million for the ninemonths ended September 30, 2005, an increase of $447.9 million. On a copper-adjustedbasis, sales increased $353.8 million for the nine months ended September 30,2006 compared to the prior year period. The increase was largely attributableto the Essex Nexans transaction. Sales for the 2006 period include $435.6million ($353.2 million on a copper-adjusted basis) related to theentities acquired in the Essex Nexans transaction in October 2005.

Copperrod sales for the nine months ended September 30, 2006 were $353.3 millioncompared to $208.8 million for the comparable 2005 period. On a copper-adjustedbasis, sales for our copper rod segment decreased by 10% for the nine monthsended September 30, 2006 compared to the prior year period. The copper-adjusteddecrease in 2006 reflects the loss of a major customer in the first quarter of2006 as well as decreased market demand due to weakness in the automotive andresidential construction end markets. Copper rod segment sales consistprimarily of external sales of processed copper rod that cannot be used for internalproduction and allow for fixed cost recovery at gross profit margins that aregenerally intended to break even.****Copperrod volumes fluctuate from period to period due to changes in internalconsumption needs and external market conditions.

*Gross profit*

Forthe nine months ended September 30, 2006, gross profit was $217.5 million, anincrease of 68% as compared to the nine months ended September 30, 2005primarily due to copper-adjusted gross profit margin improvements in ourcommunications cable and North American magnet wire and distribution segmentsand gross profit of $37.9 million attributable to the entities acquired in theEssex Nexans transaction. The gross profit margin for the nine months ended September30, 2006 was 9.6% compared to 10.2% for the same period in 2005. The grossprofit margin declined as a result of increased copper prices. Gross profitmargin on a copper-adjusted basis was 11.6% for the nine months ended September30, 2006 compared to 8.7% for the nine months ended September 30, 2005. Theincrease in copper-adjusted gross margin is attributable to improved productpricing and mix, particularly in our communications cable segment, improvedcost absorption as a result of higher production and estimated benefits of$27.5 million related to the extreme upward volatility in copper pricesexperienced during 2006. We estimate that approximately one-half of this copperrelated benefit was associated with our communications cable segment andone-half was associated with our North American and European magnet wire anddistribution segments. As discussed above, the copper related benefit is due tolower copper-cost flow through compared to product pricing, mark-ups on thecomponent of the product cost related to copper and the inverted forwardpricing curve in the COMEX copper futures market experienced during much of2006 which favorably impacted certain of our forward buying and hedgingarrangements. Our communications cable and North American and European magnetwire and 

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distribution segmentsall experienced improved copper-adjusted gross margins for the nine monthsended September 30, 2006 compared to the nine months ended September 30, 2005,including the effects of the copper-related benefit discussed above. Copper-adjustedgross profit margin for our North American magnet wire and distributionbusiness for the nine months ended September 30, 2006 were negatively impactedby the effects of inflationary non-copper cost increases related primarily tohigher energy costs, freight costs and non-copper raw materials and changes inproduct mix, in particular increased sales of lower margin aluminum productsrepresenting, to some degree, substitution for copper in response to theincrease in copper prices. Considering the relative stabilization of copperprice levels during the third quarter of 2006, we do not expect significant futurecopper-related gross margin benefits in our communications cable segment and weexpect future benefits in our North American and European magnet wire anddistribution segments, if any, to be reduced from those achieved in the firstnine months of 2006.  If copper pricesdecrease significantly we may experience losses. See “Risk Factors — Risks toOur Business Related to Copper”.

*Selling, general and administrative expenses*

SG&A expense for the ninemonth period ended September 30, 2006 was $111.4 million as compared toSG&A expense of $76.1 million for the nine months ended September 30, 2005.SG&A expense for the nine months ended September 30, 2006 included $20.0 millionattributable to the entities acquired in the Essex Nexans transaction. Theremaining increase of $15.3 million is attributable to a number of factorsincluding normal salary and benefit increases, including incentive-basedcompensation ($5.4 million), stock-based compensation andsupplemental executive retirement plan charges ($3.5 million), group insuranceand pension costs ($2.4 million), start-up costs associated with our Greenfieldproject in China ($1.0 million) and the impact of increased sales volume andrelated sales costs and commissions in our communications cable segment.

 

*Impairment and restructuring and other charges*

In thenine months ended September 30, 2006, Essex Nexans recorded a provision of$0.9 million related to workforce reductions at its U.K. magnet wireoperation (formerly included in the North American magnet wire and distributionsegment). In addition, restructuring and other charges for the nine monthsended September 30, 2006 included $0.3 million of ongoing facility exit costsprimarily related to the prior year closure of an insulation manufacturingfacility in our North American magnet wire and distribution segment and $0.3 millionof professional fees incurred in connection with the administration of SuperiorTeleCom’s plan of reorganization. These charges were offset by a $0.4 milliongain on the favorable settlement of an employee related dispute in our Europeanmagnet wire and distribution segment. Restructuring and other charges for the ninemonths ended September 30, 2005 consisted of $0.5 million of facility exitcosts related to closure of an insulation manufacturing facility in Athens,Georgia and $0.2 million of professional fees related to theadministration of plan of reorganization. The facility exit costs primarilyconsisted of future lease payments net of estimated sublease rentals.

Duringthe third quarter of 2006 we recorded an impairment charge of $2.0 millionrelated to an owned warehouse which was closed in the first quarter of 2006 andclassified as held for sale. The impairment charge was recorded as a result ofongoing evaluations of current market conditions in the area where the propertyis located. The warehouse was previously operated by the North American magnetwire and distribution segment.

Duringthe first quarter of 2005 we recorded an impairment charge of $2.3 millionrelated to property, plant and equipment of our U.K. subsidiary. We evaluatedthe long-lived assets of our U.K. subsidiary for impairment as ofMarch 31, 2005 after consideration of deterioration in the European magnetwire market in the first quarter of 2005, the loss of a major customer in 2005and negotiated reductions in the value ascribed to the U.K. net assets inconnection with the Essex Nexans acquisition. The impairment test was based onprobability weighted estimated cash flows associated with such assets. The fairvalue of the assets was based on appraised value determined primarily bycomparison to prices for similar assets. The U.K. operation is currently includedin the European magnet wire and distribution segment.

*Gain on sale of product line*

InMarch 2005, we sold accounts receivable and inventory totalingapproximately $1.2 million together with related trademarks and servicenames constituting the business conducted by us under the US Seal trade namefor a total purchase price of $11.6 million. A gain of $10.4 millionwas recognized on the sale. In connection with the sale, we also signed anon-exclusive distribution agreement to act as a distributor for certain of theUS Seal products for a period of five years. We believe the expected revenuesunder the distribution agreement represent a significant continuation of thedirect cash flows of the disposed US Seal product 

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line. The US Sealproduct line was included in the North American magnet wire and distributionsegment and revenues and expenses associated with the distribution agreementcontinue to be reported in that segment.

*Operating income*

Thefollowing table sets forth information regarding our operating income bysegment for the nine months ended September 30, 2006 and 2005. We measure oursegment operating performance based primarily on segment operating income,excluding restructuring and other charges and asset impairments.

 

|                                                        | ** ** | **2006**                | ** ** | **2005** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                             | ** ** | **(in thousands)** | ** ** |
| Operating income  (loss)                               |       |                    |       |     |       |
| Communications cable                                   |       | $                       | 77,167     |     | $          | 41,306 |   |
| North American magnet wire and distribution            |       | 32,830                  |       | 28,501   |       |
| European magnet wire and distribution                  |       | 16,259                  |       | (2,658   | )          |
| Copper rod                                             |       | (77                     | )          | (7       | )          |
| Corporate and other                                    |       | (20,052                 | )          | (14,118  | )          |
| Gain on sale of product line                           |       | —                  |       | 10,355   |       |
| Restructuring and other charges and asset  impairments |       | (3,095                  | )          | (3,027   | )          |
|                                                   |       | $                       | 103,032    |     | $          | 60,352 |   |

 

Operatingincome for the communications cable segment increased $35.9 million for the ninemonths ended September 30, 2006 compared to the 2005 period due to increasedgross profit primarily attributable to improvements in copper-adjusted grossmargin percentage as discussed above. Communications cable gross profitincreases were partially offset by an increase in SG&A expense of $3.7 milliondue primarily to higher sales costs and commissions in 2006 associated withincreased sales and normal compensation and benefits increases.

Operatingincome for our North American magnet wire and distribution segment increased$4.3 million for the nine months ended September 30, 2006 compared to the2005 period due primarily to increased gross profit attributable toimprovements in copper-adjusted gross margin percentage as discussed abovepartially offset by increased  SG&Aexpense of $3.4 million comprised principally of higher employee compensationand benefit related costs, start-up expenses related to our Greenfield facilityin China and information systems implementation costs.

Theoperating loss for our European magnet wire and distribution segment for the ninemonths ended September 30, 2005 reflects the results of our U.K. magnet wirebusiness which sustained negative gross margins for the nine months ended September30, 2005 due to reduced sales volumes and pricing. Operating income for the ninemonths ended September 30, 2006 includes $18.0 million attributable to theentities acquired in the Essex Nexans transaction. Operating income for theEuropean magnet wire and distribution segment for the nine months ended September 30,2006 was negatively impacted by bad debt expense of $1.0 million relatedto the bankruptcy of a major customer.

Thecopper rod segment’s operating loss was essentially flat for the nine monthsended September 30, 2006 compared to the nine months ended September 30, 2005.As discussed above, copper rod sales allow for fixed cost recovery at grossprofit margins that are generally intended to break even.

Corporateand other charges consist primarily of corporated payroll and parent companycosts, stock-based compensation charges, corporate headquarters costs andcorporate professional fees and compliance costs. The increase in corporate andother costs for the nine months ended September 30, 2006 compared to the ninemonths ended September 30, 2005 is primarily due to increased compensation andbenefits costs related to salary increases, incentive and stock-basedcompensation and group insurance costs.

Consolidatedoperating income for the nine months ended September 30, 2005 includedrestructuring and other charges and asset impairment charges of $3.0 millioncompared to $3.1 million of such charges in the nine months ended September 30,2006, the components of which are discussed above. Additionally, consolidatedoperating income for nine months ended September 30, 2005 included a gain of$10.4 million on the sale of a product line as discussed above.

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*Interest expense and other income (expense)*

Interestexpense increased from $21.5 million for the nine months ended September 30,2005 to $23.2 million for the nine months ended September 30, 2006 dueprimarily to interest of $1.7 million in 2006 related to borrowings by EssexNexans. Interest expense during the nine months ended September 30, 2006 wasfavorably impacted by the fact that we had no borrowings outstanding under oursenior secured revolving credit agreement during the quarter ended September30, 2006 as a result of the application of the proceeds from our equityoffering in June 2006. Other income for the nine months ended September 30,2006 reflects interest income of $0.5 million earned on positive average cashbalances of more than $30 million during the third quarter.

*Income tax expense*

Oureffective income tax rate for the nine months ended September 30, 2006 was 38%.The effective tax rate for the nine months ended September 30, 2006 exceeds theU.S. statutory rate of 35% primarily due to the effects of state taxes. Oureffective income tax rate for the nine months ended September 30, 2005 was25%. Tax expense for the nine months ended September 30, 2005 is net of a $4.1million non-cash net benefit attributable to a settlement with state taxingauthorities with respect to certain pre-petition claims primarily resultingfrom state income tax audits of Superior TeleCom and a $0.4 million benefit dueto settlement of certain bankruptcy claims with the IRS. In addition, during the thirdquarter of 2005 we filed an election with the Internal Revenue Service to electto treat our U.K. subsidiary as a “flow through” entity for U.S. incomepurposes.  This election is commonlyreferred to as a “check-the-box election”. As a result of this election, werecognized a loss on our 2005 U.S. consolidated income tax return. Accordingly,income tax expense for the nine months ended September 30, 2005 reflects abenefit of approximately $2.0 million attributable to this loss. These benefitsaccounted for a reduction of 17% in the effective tax rate for the nine monthsended September 30, 2005. Our effective tax rate for the nine months endedSeptember 30, 2005 excluding these benefits was 42% which differs from the U.S.statutory rate of 35% due to the effects of state taxes and a valuationallowance established with respect to operating losses incurred by our U.K.subsidiary.

*Gain on sale of investment*

InJanuary 2006 we sold our investment in the common stock of Essex Electric Inc.together with our warrant to purchase additional shares of Essex Electric Inc.to The Alpine Group, Inc. for a cash payment of $8.5 million. As a result ofthe transaction we recognized a pre-tax gain of $5.8 million. Following thesale, we no longer have any equity interest in Essex Electric Inc.

*Extraordinary gain*

OnJanuary 4, 2006, Essex Nexans acquired all of the outstanding capitalstock of Societe de Distribution et de Services, or SDS, from Nexans. Theacquisition of SDS was accounted for as a purchase. The preliminary allocationof the acquisition cost resulted in unallocated negative goodwill of$1.5 million which has been reflected as an extraordinary gain (net ofminority interest of $0.6 million) in the statement of operations for the ninemonths ended September 30, 2006.

**Liquidityand Capital Resources**

***Cash from Operating Activities***

We reported cash used byoperating activities of $37.4 million for the nine months ended September30, 2006 compared to cash provided by operating activities of $32.2 millionfor the nine months ended September 30, 2005. Cash from operating activitiesfor the nine months ended September 30, 2006 and 2005 includes net workingcapital increases of $116.6 million and $9.5 million, respectively, whichreflect normal seasonal build in accounts receivable and inventory and theimpact of substantially higher copper costs. We estimate that higher coppercosts have increased our working capital by approximately $100 million sinceDecember 31, 2005. The seasonal increase in our working capital results fromincreased production, inventory stocking levels and related sales attributableto historically higher customer demand levels in March through October.Conversely, our sales volumes are generally lower in our fourth and early firstquarters due primarily to cold weather related reduction in demand from ourcommunications cable segment customers and the impact of year end holidayrelated plant shutdowns of major OEM customers of our North American andEuropean magnet wire and distribution segments. Based on normal seasonal trendsand current copper prices we expect to generate positive cash flow fromoperations during the fourth quarter of 2006.

 

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***Capital Resources***

*Common stock offering*

OnJune 12, 2006 we completed an underwritten public offering of 2,700,000 sharesof our common stock. Net proceeds from the sale after underwriting discountsand related expenses were approximately $76.5 million and were used to pay downborrowings outstanding under the senior secured revolving credit facility. OnJuly 11, 2006, the underwriters’ exercised their over-allotment option topurchase an additional 151,145 shares of our common stock. Net proceeds from theexercise of the over-allotment option after underwriting discounts and relatedexpenses were approximately $4.3 million.

*Senior Notes*

At September30, 2006, we had total debt of $318.1 million of which $251.7 consisted of 9%senior notes due in 2012. The 9% senior notes were issued jointly by SuperiorEssex Communications and Essex Group in an aggregate principal amount of $257.1million due in April 2012, with interest payable semi-annually in cash onApril 15 and October 15 of each year. The 9% senior notes were issuedat an original issue discount of $7.1 million. The 9% senior notes arefully and unconditionally guaranteed by us and each of our existing and futuredomestic restricted subsidiaries.

Uponthe occurrence of specific kinds of changes in control or asset sales asspecified in the indenture governing the 9% senior notes, holders of the 9%senior notes will have the right to require us to purchase all or a portion ofthe outstanding 9% senior notes at a purchase price equal to 101% of the principalamount thereof plus accrued interest.

Theindenture governing the 9% senior notes contains covenants which restrict ourability 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 intotransactions with affiliates; and merge, consolidate or sell substantially allof our assets.

*Preferred stock of our subsidiary*

Holdersof the 5,000,000 outstanding shares of the series A preferred stock issuedby our subsidiary, Superior Essex Holding, are entitled to receive cumulativecash dividends at a rate of 91/2% perannum per share, payable semi-annually. The series A preferred stock ranksjunior to all other classes of preferred stock of Superior Essex Holding. Theseries A preferred stock is mandatorily redeemable in November 2013at $1 per share plus accrued and unpaid dividends. The series A preferredstock contains certain other mandatory and optional redemption provisions. Eachshare of series A preferred stock shall have one vote with respect to allmatters submitted to stockholders for a vote, provided however, that holders ofthe series A preferred stock shall not be entitled to vote generally fordirectors.

*Senior secured revolving credit facility*

OnApril 14, 2006, Superior Essex Communications and Essex Group, as borrowers,entered into an amendment and restatement of their existing senior securedrevolving credit facility. The amended and restated senior secured revolvingcredit facility, among other things:

·              increasedthe borrowing limit from $175 million to $225 million;

·              extendedthe maturity date from November 10, 2007 to April 13, 2011;

·              reducedthe applicable interest margin charged over short-term index rates; the margin,determined quarterly based on average availability, now ranges from 1.00% to2.00% for LIBOR based loans and 0% to 0.75% for base rate loans; and

·              providedgreater flexibility with respect to certain restrictive covenants.

Interest on the amendedand restated senior secured credit facility accrues on outstanding borrowingsat an annual rate equal to, at the borrowers’ option, LIBOR or a base rate,plus, in each case, an applicable margin as discussed above. Obligations underthe amended 

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and restated seniorsecured credit facility are secured by substantially all domestic assets of theCompany and 65% of the voting stock of the Company’s foreign subsidiaries otherthan Essex Nexans. Availability under the amended and restated senior securedcredit facility is subject to a borrowing base equal to the lesser of (1) $225million less outstanding letters of credit and (2) a specified percentage ofeligible accounts receivable and inventory less reserves. The specified percentagefor accounts receivable is 85% of the value of the eligible accounts receivable.The specified percentage for inventory is the lesser of (a) $110 million or (b)the lower of (x) 65% of the value of eligible inventory and (y) 85% multipliedby the net orderly liquidation percentage then applicable multiplied by thevalue of the eligible inventory. Certain of the reserves that reduceavailability are not fixed and may be increased or imposed by theadministrative agent for the amended and restated senior secured creditfacility at its reasonable credit judgment. The borrowers are obligated to payan unused commitment fee of 0.25% per annum on the unused amount of the maximumcommitted amounts and a fee of 0.125% per annum on the outstanding face amountof outstanding letters of credit. Undrawn availability under the amended andrestated senior secured credit facility was $224.2 million as of September 30,2006.

 

Theamended and restated senior secured credit facility contains covenants whichmay limit Superior Essex Communications’ and Essex Group’s and theirsubsidiaries’ ability to (i) pay dividends, redeem capital stock or make otherrestricted payments, (ii) sell or dispose of assets, (iii) incur additionalindebtedness or permit liens to exist on Company property, (iv) engage intransactions with affiliates and (v) make additional investments oracquisitions. Capital expenditures, distributions and asset dispositions arenot limited so long as no event of default exists and the borrowers meet certainavailability and liquidity conditions specified in the amended and restatedsenior secured credit facility.

*Essex Nexans*

Essex Nexans has a factoring agreement with athird-party French financial institution (the “Factor”) pursuant to which EssexNexans may assign its eligible accounts receivable to the Factor. Essex Nexanscan request advances in anticipation of customer collections on the assignedreceivables.  In July 2006, Essex Nexansamended the agreement to increase the amount of maximum available advances by€20 million to €55 million ($69.9 million) until May 31, 2007. Interest ispayable on the net outstanding advances at the European Overnight Index Average(“EONIA”) rate plus 0.47% per annum for advances up to €35 million and at theEONIA rate plus 0.67% for advances in excess of €35 million. The amount ofadvances available to Essex Nexans is limited to 88% (80% if EBITDA is lessthan zero for any year, equity of the joint venture is 10% or less of totalassets or social charges due to governmental agencies and all othermiscellaneous taxes exceed 5% of sales) of assigned receivables up to a maximumof €55 million ($69.9 million). Borrowings of $29.4 million were outstandingunder the factoring agreement as of September 30, 2006 and undrawn availabilityunder the agreement was $34.2 million. The factoring agreement expires inOctober 2008. The factoring agreement may be terminated by the Factor ifNexans ceases to own 38% to 42% of Essex Nexans. Neither Superior Essex nor anyof its domestic subsidiaries are guarantors under the factoring agreement

In connection with theEssex Nexans acquisition, Essex Nexans entered into a subordinated note payableto Nexans in the amount of €11.3 million ($14.4 million). The subordinated notepayable is unsecured and bears interest at 8.975% per annum payable quarterly.A total of €3.8 million ($4.8 million) in principal is due September 30,2009 and the remainder matures September 30, 2010. The maturity of thesubordinated note will be accelerated if we exercise our option to purchaseNexans’ minority interest in Essex Nexans. The subordinated note is notguaranteed by Superior Essex or any of its domestic subsidiaries.

EssexNexans has been designated an unrestricted subsidiary under our 9% senior noteindenture and is not considered a subsidiary for purposes of our amended andrestated senior secured credit facility. As a result, creditors of Essex Nexansmay not have recourse to any assets of Superior Essex or our othersubsidiaries, and Essex Nexans has no responsibility for debts or obligationsincurred by Superior Essex or our other subsidiaries. Transactions with EssexNexans, including capital contributions, are generally subject to the samerestrictions as transactions with unrelated third parties, except that thosetransactions must also satisfy affiliate transaction tests. Further, operatingprofit from Essex Nexans is not generally included in determining whetherfinancial tests for indenture and senior credit facility purposes have beensatisfied, such as debt incurrence or restricted investment tests, unless cashfrom those operating profits is transferred to us.

*EssexMagnet Wire (Suzhou) Ltd.*

InJuly 2006 our subsidiary, Essex Magnet Wire (Suzhou) Ltd., entered into aconstruction loan agreement with China Construction Bank to provide financingfor construction of the Company’s Greenfield manufacturing facility in Suzhou,China. The agreement permits the borrower to make draws beginning July 21, 2006of up to 96 million Yuan Renminbi ($12.2 million). Interest on amounts drawnunder the agreement is payable monthly at a floating rate, adjusted annually,equal to 90% of the benchmark 

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interest rate setby the People’s Bank of China. The loan is secured by a mortgage on the land, facilityand equipment and is repayable in two annual installments beginning July 2010.The total amount drawn and outstanding at September 30, 2006 was $7.6 million.

***Liquidity***

Our principal cash requirementsgenerally include funding of our working capital, interest payments on oursenior secured revolving credit facility and the 9% senior notes, dividendpayments on our subsidiary’s series A preferred stock, interest paymentson the Essex Nexans factoring agreement and subordinated note, capitalexpenditures currently estimated at approximately $20 million to $30 millionannually (excluding investments in China discussed below), the Nexanscontingent payment and obligations related to our defined benefit pensionplans. Copper prices have increased rapidly during 2006, with the COMEX dailyspot price for copper increasing from an average of $2.17 per pound in December 2005to an average of $3.54 per pound for the quarter ended September 30, 2006 andfluctuating from a low of $2.13 per pound to a high of $4.08 per pound duringthe nine months ended September 30, 2006. Significant increases in the price ofcopper and the resultant increase in accounts receivable and, to a lesserdegree, inventory, impacts our working capital funding requirements. As discussedabove, we have experienced significant increases in our working capitalrequirements in 2006 as a result of increases in copper prices and expect suchincreases to continue based on current copper price levels. We have amended oursenior secured revolving credit facility to increase our borrowing capacity inlight of rising and volatile copper costs. See “Risk factors—Risks to ourbusiness related to copper.”

 

We arecurrently constructing a Greenfield manufacturing facility near Shanghai, Chinawhich we expect to be operational in the fourth quarter of 2006, with12 million pounds of capacity online by the end of the year. The capitalexpenditure requirements for this first phase of the project are estimated tobe approximately $27 million, of which $14.9 million have been expended asof September 30, 2006. We currently plan to add 12 million additionalpounds of capacity to the facility in 2007 at an estimated capital cost of $5to $8 million. 

The Essex Nexans joint venture Contribution andFormation Agreement provides for us to pay additional contingent cashconsideration to Nexans of up to €3.0 million ($3.8 million) if EssexNexans achieves certain specified levels of Adjusted EBITDA (as defined in theContribution and Formation Agreement) for the year ended December 31,2006. The shareholders agreement governing the Essex Nexans joint ventureprovides that Nexans will have the right to require us to purchase its 40%interest in Essex Nexans at a price equal to Nexans’ initial allocated equityvalue plus 40% of (i) the cumulative net income (adjusted for certainitems as specified in the shareholders agreement) of Essex Nexans, and(ii) any post-closing capital contributions minus any post-closing distributions,but only if Adjusted EBITDA of Essex Nexans exceeds €14.0 million ($17.8million) in 2008, 2009 or 2010. The purchase price may be increased by up to€10 million ($12.7 million) if Essex Nexans achieves certain Adjusted EBITDAthresholds as specified in the shareholders agreement. The put right isexercisable for one year following the completion of audited financialstatements demonstrating that the Adjusted EBITDA threshold was met during2008, 2009 or 2010. At our option, the put price may be paid in cash by us orEssex Nexans or by issuance of our common stock (or a combination thereof). Ifwe elect to pay the put price in our common stock, the portion of the put pricepayable in our common stock is subject to certain limitations specified in theshareholders agreement, including a general limit of 7.5% of our outstandingcommon stock, with any excess put price payable in cash. Furthermore, theportion of the put price paid in our common stock will be increased by 5% (or15% if certain conditions are not met with regard to the registration of suchshares).

We believe that cash provided by operations andborrowing availability under our amended and restated senior secured revolvingcredit facility together with our cash on hand ($37.5 million at September 30,2006), the Essex Nexans factoring agreement and the China construction loanwill be sufficient to meet our obligations and fund our working capitalrequirements for the foreseeable future.

***New Accounting Pronouncements***

InJune 2006 the FASB ratified the consensus reached in EITF 06-3, *How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (That Is,Gross versus Net Presentation)*. EITF 06-3 requires disclosure of acompany’s accounting policy with respect to taxes assessed by a governmentalauthority that are directly imposed on a revenue-producing transaction betweena seller and a customer including, but are not limited to, sales, use, valueadded, and some excise taxes. We present such taxes, primarily sales, use andvalue added taxes, on a net basis.

InJuly 2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*. InterpretationNo. 48 prescribes a consistent recognition threshold and measurement attribute,as well as establishes criteria for subsequently recognizing, 

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derecognizing andmeasuring uncertain tax positions for financial statement purposes. TheInterpretation also requires expanded disclosure with respect to theuncertainty in income taxes. Interpretations No. 48 is effective for fiscalyears beginning after December 15, 2006. We have not completed our evaluationof the impact of Interpretation No. 48 on our financial statements.

InSeptember 2006, the FASB issued Statement No. 158, *Employers’**Accounting for DefinedBenefit Pension and Other Postretirement Plans, an amendment of FASB StatementsNo. 87, 88, 106 and 132(R)*. Statement 158 requires an employerto recognize a net liability or asset and an offsetting adjustment toaccumulated other comprehensive income for the underfunded or overfunded statusof defined benefit pension and other postretirement benefit plans. Statement158 requires prospective application, and the recognition and disclosurerequirements are effective for years ending after December 15, 2006.Additionally, Statement 158 requires employers to measure plan assets andobligations at their year-end balance sheet date. We will implement Statement158 in the fourth quarter of 2006 and do not believe that implementation ofStatement 158 will have a material effect on our financial position or resultsof operations.

**ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We, toa limited extent, use or have used forward fixed price contracts and derivativefinancial instruments to manage commodity price, interest rate and foreigncurrency exchange risks. We do not hold or issue financial instruments forinvestment or trading purposes. We are exposed to credit risk in the event ofnonperformance by counterparties for foreign exchange forward contracts, metalforward price contracts and metals futures contracts but we do not anticipatenonperformance by any of these counterparties. The amount of such exposure isgenerally limited to any unrealized gains within the underlying contracts.

***Commodity price risk management***

Thecost of copper, our most significant raw material, has historically beensubject to considerable volatility. To manage the risk associated with suchvolatility, we enter into futures contracts to match the metal component ofcustomer product pricing with the cost component of the inventory shipped.These futures contracts have been designated as cash flow hedges withunrealized gains and losses recorded in other comprehensive income. Gains andlosses are reclassified into earnings, as a component of cost of goods sold,when the hedged sales transactions are reflected in the income statement. Hedgeineffectiveness, which is not significant, is immediately recognized inearnings. Our commodities futures purchase contracts are summarized as followsat September 30, 2006:

 

| Type       | ** ** | **Notional  Amount**                    | ** ** | **Maturity  Date** | ** ** | **Weighted  Average  Settlement Rate** | ** ** | **Fair Value  Gain (Loss)** | ** ** |
|------------|------------|-----------------------------------------|------------|--------------------|------------|---------------------------------------------|------------|---------------------------------------|------------|
| ** ** | ** ** | **(in thousands  of pounds)** | ** ** | ** **         | ** ** | ** **                                  | ** ** | **(in thousands)**                    | ** ** |
| ** ** | ** ** | ** **                              | ** ** | ** **         | ** ** | ** **                                  | ** ** | ** **                            | ** ** |
| Copper     |       | 3,350                                   |       | 2006               |       | $                                           | 3.46       |                                  | $          | 3,771 |   |
| Copper     |       | 4,875                                   |       | 2007               |       | 3.40                                        |       | 4,010                                 |       |
|       |       |                                    |       |               |       |                                        |       | $                                     | 7,781      |   |
|            |            |                                         |            |                    |            |                                             |            |                                       |            |  |  |

 

Substantiallyall of the unrealized gains on commodity futures outstanding at September 30,2006 are expected to be reclassified in earnings within the next twelve monthsto match the copper component of product pricing for outstanding customerorders.

EssexNexans enters into commodity futures contracts to match the copper component ofcustomer product pricing with the cost component of the inventory shipped. Thefutures contracts are intended to minimize the risks associated with forwardproduct pricing for customers and changing copper prices. These contractsgenerally have maturities of less than two months and represent economic hedgesbut have not been designated as hedges for accounting purposes. Accordingly,gains and losses on these contracts are recorded in income as a component ofcost of goods sold. Essex Nexans had no open copper futures positions at September 30,2006.

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***Interest rate risk management***

Inorder to limit our exposure to rising interest rates with respect to borrowingsunder our variable rate senior secured revolving credit facility, we haveentered into interest rate cap agreements. The following interest rate capagreements were outstanding as of September 30, 2006:

 

| Type               | ** ** | **Notional  Amount**    | ** ** | **Interest Rate** | ** **   | **Cap Rate** | ** ** | **Expiration Date** | ** **    | **Fair Value**     | ** ** |
|--------------------|------------|-------------------------|------------|------------------------|--------------|-------------------|------------|--------------------------|---------------|-------------------------|------------|
| ** **         | ** ** | **(in thousands)** | ** ** | ** **             | ** **   | ** **        | ** ** | ** **               | ** **    | **(in thousands)** | ** ** |
| ** **         | ** ** | ** **              | ** ** | ** **             | ** **   | ** **        | ** ** | ** **               | ** **    | ** **              | ** ** |
| Interest rate  cap |       | $                       | 30,000     |                   | 30-day LIBOR |              | 7.0        | %                        | December 2006 |                    | $          | — |   |
| Interest rate cap  |       | 15,000                  |       | 30-day LIBOR           |         | 5.0               | %          | April 2007               |          | 28                      |       |
|                    |            |                         |            |                        |              |                   |            |                          |               |                         |            |  |  |

 

***Foreign currency exchange risk management***

We engage in the sale ofproducts which result in accounts receivable denominated in foreign currencies.We enter into foreign currency forward exchange contracts to hedge againstfluctuations in the value of certain of these receivables. Changes in the fairvalue of these contracts are reflected in current earnings. At September 30,2006, we had outstanding foreign currency forward exchange contracts to exchange8.9 million Canadian dollars for $8.0 million in November 2006. Thefair value of the forward exchange contracts was insignificant at September 30,2006. 

 

***Purchase commitments***

 

We accept certain customer orders for future deliveryat fixed prices. As copper is the most significant raw material used in themanufacturing process, we enter into forward purchase fixed price commitmentsfor copper to properly match our cost to the value of the copper to be billedto the customers. At September 30, 2006, we had forward fixed price copperpurchase commitments for delivery of 21.2 million pounds through September2007 for $67.9 million. Additionally at September 30, 2006, we had forwardpurchase fixed price commitments for 1.7 million pounds of aluminum throughAugust 2007 and 540,000 MMBTUs of natural gas through February 2007 amountingto $2.1 million and $5.2 million, respectively.

 

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**ITEM4. CONTROLS AND PROCEDURES**

***Evaluation of Controls and Procedures***

As of the end of theperiod covered by this Quarterly Report on Form 10-Q, we carried out anevaluation of the effectiveness of the design and operation of our disclosurecontrols and procedures, including internal controls over financial reporting,under the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer. Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures have been designed and are beingoperated in a manner that provides reasonable assurance that the informationrequired to be disclosed by us in reports filed under the Securities ExchangeAct of 1934, as amended, is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms. Further, the ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures have been designed to ensure that information requiredto be disclosed in reports filed by us under the Securities Exchange Act of1934, as amended, is accumulated and communicated to our management, includingthe Chief Executive Officer and Chief Financial Officer, in a manner to allowtimely decisions regarding the required disclosure. A system of controls, nomatter how well designed and operated, cannot provide absolute assurance thatthe objectives of the system of controls are met, and no evaluation of controlsprovides absolute assurance that all control issues and instances of fraud, ifany, within a company have been detected. Notwithstanding the above, our ChiefExecutive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures are effective at a reasonable assurancelevel.

 

***Changes in Internal Controls Over Financial Reporting***

There have been nochanges in our internal control over financial reporting that occurred duringthe most recent fiscal quarter that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

 

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**PART II. OTHER INFORMATION**

**ITEM1A. RISK FACTORS**

In addition to the other information set forth in thisreport, you should carefully consider the risk factors discussed below andthose discussed in Part I, “Item 1A. Risk Factors” in our AnnualReport on Form 10-K for the year ended December 31, 2005. These riskfactors could materially affect our business, financial condition or futureresults. The risks described in our Annual Report on Form 10-K, as updated andsupplemented below, are not the only risks facing the Company. Additional risksand uncertainties not currently known to us or that we currently deem to beimmaterial also may materially adversely affect our business, financialcondition and/or operating results.

**RISKSTO OUR BUSINESS RELATED TO COPPER**

Copper is theprimary raw material we use in the manufacture of our products. A majority ofour sales are pursuant to customer arrangements which provide for adjustmentsin pricing to take into account changes in the cost of copper. Over the past severalyears, the spot price of copper has escalated rapidly, increasing from anaverage COMEX daily spot price of $0.88 per pound in October 2003, to$2.17 per pound in December 2005. Copper prices have increased even morerapidly during 2006, with the COMEX daily spot price for copper increasing toan average of $3.54 per pound for the quarter ended September 30, 2006 andfluctuating from a low of $2.13 per pound to a high of $4.08 per pound duringthe nine months ended September 30, 2006. Copper LME prices have experiencedsimilar increases and fluctuations. These recent and, in our experience,unprecedented increases in copper prices may have material adverse effects onour business, including those described below:

**Wemay be unable to adequately hedge risks related to volatility, includingdeclines, in copper pricing, which may have a material adverse effect on ourbusiness.**

A majority of ourcommunications cable segment sales are to telecommunications company customerspursuant to multi-year agreements under which the price of the copper componentof our communications cable products is fixed for each quarter based on theaverage daily COMEX spot price for copper during the three-month period endingone month before the end of the prior quarter. Some contracts provide that thecopper component of the purchase price during one month will be based on theaverage daily COMEX spot price for copper for a portion of the prior month. Asa result, the price of the copper component of our product billed to customersmay be different than the current price of copper at the time of sale and wemay not be able to match the price billed with the copper cost component of theinventory shipped. To limit this risk, we forward price copper purchases withour suppliers based on forecasted demand. Volatility in the price of copper,among other factors, may adversely impact our ability to accurately forecastdemand and have a material adverse impact on our results of operations. Forexample, if copper prices decline rapidly, actual demand may be less thanforecasted demand as customers may reduce or delay purchases in anticipation offuture contractual sales price reductions. As a result, the cost of inventory,including the cost of copper acquired under forward purchase agreements, mayexceed the current or expected selling price of the product and may result inreduced profitability or even operating losses. In addition, rapid increases incopper prices can impact operating results in the short term if actual demandexceeds forecasted demand because customers may accelerate orders in advance ofexpected future contractual sales price increases to take advantage of existingcopper prices.

Certain of ourNorth American and European magnet wire business customers frequently fix thecopper cost component of future committed purchases. We utilize COMEX or LMEfixed price futures contracts to minimize the commodity price risk associatedwith these sales. If copper prices decline rapidly, the risk that our customersmay delay or default on their committed purchases may increase. As a result wemay incur losses on our COMEX or LME futures contracts or be required to takedelivery of copper inventory at prices in excess of then-current copperprices.

In addition to theabove, we maintain finished goods inventories, particularly with respect to ourdistribution customers, to meet near term expected demand. Pricing for the saleof these inventories is generally based on current copper prices or the averageCOMEX or LME price for the prior month. Rapid declines in the price of coppermay result in our inventories being carried at costs in excess of netrealizable value and may have an adverse effect on our results of operations.

 

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**Increasesin copper prices may reduce customer demand for our products which may have amaterial adverse effect on our business.**

As our productprices increase due to rises in copper prices, customers, particularly in ourcommunications business, may more quickly exceed their capital budgets for aparticular period and reduce the funds available for the purchase of ourproducts. Additionally, as pricing for our copper-based productsincreases, particularly in our communications business, alternative products,such as fiber optic cable, may become more price competitive with our copperOSP cable and certain other copper-based communications products anddemand for such products may be materially adversely affected.

**Increasesin copper prices will increase our need for working capital.**

As the price ofcopper increases, our working capital requirements increase. Average COMEX copperprices increased to $3.54 and $3.06 per pound for the three and nine monthsended September 30, 2006, respectively, from an average of $1.68 per pound in2005 and $1.29 per pound in 2004. In 2005, we experienced an estimated increasein our working capital financing requirements of approximately $30 to$35 million as a result of increases in copper prices. We have experiencedfurther increases in our working capital requirements in 2006 and expect suchincreases to continue based on current copper price levels. Increases in ourworking capital requirements can materially adversely impact our results ofoperations, our cash flow and our available liquidity to fund other businessneeds. Furthermore, there is no assurance we would be able to financeadditional working capital requirements or finance such working capitalrequirements on favorable terms. If we were unable to obtain financing onfavorable terms, our business and results of operations may be materiallyadversely affected. See “Management’s discussion and analysis of financialcondition and results of operations—Liquidity and capital resources”.

**Increasesin copper prices may increase credit and default risk with respect to ourcustomers.**

Increases in theprice of our products as copper prices rise may place additional demands on theworking capital and liquidity needs of our customers. Accordingly, ourcustomers’ cash flow may be negatively impacted which may have an adverseeffect on the timing and amount of payment of our accounts receivable.

**Shortagesor disruptions in the availability of copper could have a material adverseeffect on our business.**

Foreign economieshave been consuming an increasing proportion of worldwide copper production resultingin a reduction of copper stock levels held in COMEX and LME warehouses and soldthrough merchants. These macro-economic factors, together with labor andother business interruptions experienced by certain copper suppliers, havecontributed to periodic shortages of supply of copper and such shortages mayincrease in the future. Furthermore, there are a limited number of coppersuppliers. If we are unable to maintain good relations with our coppersuppliers or if there are any business interruptions at our copper suppliers,we may not have access to a sufficient supply of copper. Although we have notexperienced any shortages during recent years that have had a significantimpact on our operations, no assurance can be given that we will be able to procureadequate supplies of copper and copper rod to meet our future production needsand customer demand, which could result in a material loss of customers andrevenues and adversely impact our results of operations. In addition, supplyshortages or disruptions or the loss of suppliers may cause us to procure ourcopper rod from less cost effective sources and may have a material adverseeffect on our business, revenues and results of operations.

 

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**OTHERRISKS RELATED TO OUR BUSINESS**

**We may not complete our new China manufacturing facility ontime, or at all, and may not be able to operate the China facilitysuccessfully, any of which may adversely affect our business.**

We arecurrently constructing a wholly owned “Greenfield” manufacturing facility inChina to produce magnet wire for sale to customers with China-basedoperations. We expect the first phase of the facility to be operational in thefourth quarter of 2006, and estimate capital expenditures for this phase of theproject to be approximately $27 million. We currently expect to expand thefacility to add capacity at a further cost of an estimated $5 million to$8 million of additional capital expenditures, which we project will becompleted in 2007. We face all the risks inherent in building a new facility ina new market, particularly in an emerging market like China where we have notpreviously constructed facilities or operated them, including such risks asthose arising from:

·                  unexpected legal, regulatory or governmentalrequirements or approvals;

·                  operating in a market with a less developed supplychain, transportation and distribution infrastructure;

·                  unfavorable political or economic factors;

·                  difficulties in recruiting and retaining personnel;and

·                  managing international operations.

Therecan be no assurance that we will be successful in completing the productionfacilities in China or completing them on the timetable that we currentlyexpect.

**Our customer base in our copper rod segment is highlyconcentrated and a loss of a major customer of our copper rod products couldsubstantially impact the financial performance of that segment.**

Ourcustomer base for our copper rod segment is highly concentrated among a limitednumber of large customers, and, therefore, a limited number of customers accountfor a significant percentage of our revenues in any year in that segment. Inparticular, our largest customer in the copper rod segment accounted for 43%,45% and 36% of the copper rod segment’s net sales for the nine months ended September30, 2006 and the years ended December 31, 2005 and 2004, respectively.This customer, a large automotive industry supplier, has a filed voluntarypetition for business reorganization under chapter 11 of the U.S. BankruptcyCode. If this customer’s financial condition were to deteriorate, resulting inan impairment of its ability to emerge from bankruptcy or continue to purchasecopper rod or make payments for existing purchases our copper rod business, theloss of or reduced demand for products or related services from this customercould have a material adverse effect on our business, revenues and results ofoperations.

**Our revenues, operating income and net income are subject toquarterly and seasonal fluctuations due to the seasonal nature of our business,which makes it more difficult for investors and analysts to make meaningfulcomparisons of our interim quarterly results.**

Weexperience seasonal fluctuations in our revenues, operating income and netincome in the third and fourth fiscal quarters due to the following factors:

·                  seasonal reductions in demand by our communicationscable segment customers during cold weather seasons in North America;

·                  year end holiday related plant shutdowns of majorOEM customers of our magnet wire and distribution segments; and

·                  seasonal decrease in sales volumes in Europe duringthe summer holiday season, which impacts our European magnet wire anddistribution segment.

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Due to the seasonalnature of our business, our interim financial results are typically notindicative of results for the entire fiscal year.

 

**ITEM 5. OTHERINFORMATION**

** **

***Recentdevelopments***

 

                Execution of Limited 10b5-1 Plans 

 

                Mssrs. Carter, Aldridge and Deedy, have initiatedstructured diversification plans to sell a limited portion of their Companystock holdings at specified prices over a fixed period, and in the case ofMssrs. Aldridge and Deedy, exercise a portion of their vested stock options andpay the exercise price and tax withholding related thereto. The plans, adoptedunder Rule 10b5-1 of the Securities Exchange Act of 1934, are designed to avoidany real or perceived conflicts of interest that might arise from these salesdue to these executives involvement with the Company, while enabling theseexecutives to diversity their respective holdings and aid in the executive’stax planning.

 

                Essex Nexans restructuring

 

                In October 2006 Essex Nexans announced plans torationalize certain manufacturing operations at its U.K. magnet wire subsidiaryin light of increasing production costs and continued poor market pricingconditions. Total estimated costs of the rationalization range from $1.0million to $1.2 million and consist primarily of severance payments and relatedbenefits. The plan is expected to be completed by the first quarter of 2007.

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**ITEM6. 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)                                                                                                                                                                                                                                                         |
| 2.3              |       | Contribution and  Formation Agreement dated July 27, 2005 among Superior Essex Inc., Essex  Group, Inc., Nexans, Nexans Participations, Nexans Wires and Lacroix and  Kress GmbH. (incorporated herein by reference to Exhibit 2.3 to the  Quarterly Report on Form 10Q of Superior Essex Inc. for the quarter  ended June 30, 2005)                                                                                                                                                                                                               |
| 2.4              |       | Side Letter dated  October 21, 2005 by and between Superior Essex Inc., Essex  Group, Inc., SE Holding, C.V., Nexans, Nexans Participations,  Lacroix & Kress GmbH and Nexans Wires (incorporated by reference to  Exhibit 10.2 to the Current Report on Form 8-K of Superior Essex  dated October 21, 2005)                                                                                                                                                                                                                              |
| 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).                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.3              |       | Certificate of  Amendment to Amended and Restated Certificate of Incorporation of Superior  Essex Inc. (incorporated herein by reference to Exhibit 3.3 to the  Quarterly Report on Form 10-Q of Superior Essex Inc. for the quarter  ended March 31, 2005)                                                                                                                                                                                                                                                                                                  |
| 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              |       | 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).                                                                                                                                      |
| 4.4              |       | Specimen Common Stock  Certificate (incorporated herein by reference to Exhibit 4.11 to the  Superior Essex Form S-3).                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.5              |       | Third Supplemental  Indenture dated September 12, 2005 among Superior Essex Communications  LP, Essex Group, Inc., certain subsidiary guarantors named therein and  The Bank of New York Trust Company, N.A. (incorporated by reference to  Exhibit 10.1 to the Current Report on Form 8-K of Superior Essex  dated September 12, 2005).                                                                                                                                                                                                           |

 

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| Exhibit   Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1             |       | Amended and Restated Loan and Security Agreement,  dated April 14, 2006, by and among Superior Essex Communications LP, as  a borrower, Essex Group, Inc., as a borrower, the financial institutions  party thereto, as lenders, General Electric Capital Corporation, as  syndication agent, Banc of America Securities LLC and GECC Capital Markets,  Inc. as co-lead arrangers, and Bank of America, N.A. as agent (incorporated  herein by reference to Exhibit 10 to the Current Report on  Form 8-K of Superior Essex dated April 14, 2006). |
| 10.2             |       | 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).                                                                                                                                                                                                                                                                                                                  |
| 10.3             |       | Superior Essex Inc.  2003 Stock Incentive Plan (incorporated herein by reference to  Exhibit 10(e) to the Superior Essex Form 10).                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.4*            |       | Amended and Restated  Employment Agreement, dated March 10, 2006, between Superior Essex and  Stephen M. Carter (incorporated herein by reference to Exhibit 10.1 to  the Current Report on Form 8-K of Superior Essex Inc. dated  March 10, 2006).                                                                                                                                                                                                                                                                                                          |
| 10.5*            |       | Amended and Restated  Employment Agreement, dated March 10, 2006, between Superior Essex and  David S. Aldridge (incorporated herein by reference to Exhibit 10.2 to  the Current Report on Form 8-K of Superior Essex Inc. dated  March 10, 2006).                                                                                                                                                                                                                                                                                                          |
| 10.6*            |       | Amended and Restated  Employment Agreement, dated March 10, 2006, between Superior Essex and  Justin F. Deedy, Jr. (incorporated herein by reference to  Exhibit 10.3 to the Current Report on Form 8-K of Superior Essex  Inc. dated March 10, 2006).                                                                                                                                                                                                                                                                                                  |
| 10.7*            |       | Amended and Restated  Employment Agreement, dated March 10, 2006, between Superior Essex and  H. Patrick Jack (incorporated herein by reference to Exhibit 10.4 to the  Current Report on Form 8-K of Superior Essex Inc. dated March 10,  2006).                                                                                                                                                                                                                                                                                                            |
| 10.8*            |       | Amended and Restated  Employment Agreement, dated March 10, 2006, between Superior Essex Inc.  and Barbara L. Blackford (incorporated herein by reference to  Exhibit 10.5 to the Current Report on Form 8-K of Superior Essex  Inc. dated March 10, 2006).                                                                                                                                                                                                                                                                                                  |
| 10.9*            |       | 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).                                                                                                                                                                                                                                                                                                                                                                          |
| 10.10            |       | 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).                                                                                                                                                                                                                                    |
| 10.11            |       | 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”)).                                                                                                                                                                                                                    |
| 10.12            |       | 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).                                                                                                                                                                                                                                                                                                                                 |
| 10.13            |       | 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”)).                                                                                                                 |

 

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| Exhibit   Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.14            |       | 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).                                                                                                       |
| 10.15            |       | 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”)). |
| 10.16            |       | 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).                                                                                     |
| 10.17            |       | 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).                                        |
| 10.18            |       | 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).                                                        |
| 10.19            |       | 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)                                                                                                                                                |
| 10.20            |       | 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)                                                                                                                            |
| 10.21            |       | Amendment to Consulting  Agreement dated as of July 1, 2005, between DG Network and Superior  Essex Inc. (incorporated herein by reference to the Current Report on  Form 8-K of Superior Essex dated August 1, 2005)                                                                                                                                           |
| 10.22*           |       | 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)                                                                                                                                                                           |
| 10.23*           |       | 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)                                                                                                                                                                       |
| 10.24*           |       | Form of  Non-qualified Stock Option Certificate (incorporated herein by reference to  Exhibit 99.1 to the Current Report on Form 8-K of Superior Essex  Inc. dated April 1, 2005)                                                                                                                                                                          |
| 10.25*           |       | Superior Essex Inc.  2005 Incentive Plan (incorporated herein by reference to Appendix C of the  Company’s Definitive Proxy Statement on Schedule 14A (File  No. 000-50514) filed with the Securities and Exchange Commission on  March 30, 2005)                                                                                                          |
| 10.26*           |       | Superior Essex Inc.  2005 Employee Stock Purchase Plan (incorporated herein by reference to  Appendix D of the Company’s Definitive Proxy Statement on Schedule 14A  (File No. 000-50514) filed with the Securities and Exchange Commission  on March 30, 2005)                                                                                            |
| 10.27*           |       | Form of  Performance Accelerated Restricted Stock Award Certificate (incorporated  herein by reference to Exhibit 99.1 to the Current Report on  Form 8-K of Superior Essex Inc. dated April 20, 2005)                                                                                                                                                     |
| 10.28*           |       | Superior Essex Inc.  2005 Executive Bonus Plan (incorporated herein by reference to  Exhibit 99.3 to the Current Report on Form 8-K of Superior Essex  Inc. dated May 3, 2005)                                                                                                                                                                                  |
| 10.29*           |       | Superior Essex Inc.  2005 Executive Special Recognition Bonus Plan (incorporated herein by  reference to Exhibit 99.4 to the Current Report on Form 8-K of  Superior Essex Inc. dated May 3, 2005)                                                                                                                                                              |

 

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| Exhibit   Number | ** ** | **Description**                                                                                                                                                                                                                                                                                             |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.30*           |       | Amended and Restated Executive Bonus Plan  (incorporated herein by reference to Exhibit 10.2 to the Current Report  on Form 8-K of Superior Essex dated March 29, 2006)                                                                                                                      |
| 10.31            |       | Shareholders Agreement  dated October 21, 2005 by and between Superior Essex Inc., SE Holding,  C.V., Nexans, Nexans Participations and Essex Nexans SAS (incorporated herein  by reference to Exhibit 10.1 to the Current Report on Form 8-K of  Superior Essex dated October 21,2005) |
| 10.32*           |       | Superior Essex Inc.  2005 Amended and Restated Director Compensation Plan (incorporated herein by  reference to Exhibit 99.1 to the Current Report on Form 8-K of  Superior Essex dated October 27, 2005)                                                                                    |
| 10.33*           |       | Form of Director  Restricted Stock Unit Certificate (incorporated herein by reference to  Exhibit 99.2 to the Current Report on Form 8-K of Superior Essex  dated October 27, 2005)                                                                                                     |
| 10.34*           |       | Form of Director  Option Certificate (incorporated herein by reference to Exhibit 99.3 to  the Current Report on Form 8-K of Superior Essex dated October 27,  2005)                                                                                                                    |
| 10.35*           |       | Form of Stock  Option Certificate (incorporated herein by reference to Exhibit 10.1 to  the Current Report on Form 8-K of Superior Essex dated November 9,  2005)                                                                                                                       |
| 10.36*           |       | Form of Restricted  Stock Award Certificate (incorporated herein by reference to  Exhibit 10.2 to the Current Report on Form 8-K of Superior Essex  dated November 9, 2005)                                                                                                             |
| 10.37*           |       | Form of Performance  Contingent Share Award Certificate (incorporated herein by reference to  Exhibit 10.2 to the Current Report on Form 8-K of Superior Essex  dated March 29, 2006)                                                                                                        |
| 10.38            |       | Consulting Agreement  dated as of January 18, 2006 between the Company and DG Network  (incorporated herein by reference to Exhibit 10.1 to the Current Report  on Form 8-K of Superior Essex dated January 13, 2006)                                                                   |
| 10.39*           |       | Agreement dated as of  January 18, 2006 between the Company and Denys Gounot (incorporated  herein by reference to Exhibit 10.2 to the Current Report on  Form 8-K of Superior Essex dated January 13, 2006)                                                                            |
| 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.                                                                                                                           |

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*                    Managementcontract or compensatory plan or arrangement.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                         | Superior Essex Inc. |
|-------------------------|---------------------|
|                         |                |   |
|                    | By:                 | /s/ DAVID S. ALDRIDGE |
|                    |                | David S. Aldridge |
|                    | * *            | *Executive Vice President, Chief Financial Officer  and Treasurer* |
| Date: November  8, 2006 |                | (duly authorized officer and principal financial and  accounting officer) |

 

 

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