**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

**FORM10-K**

**Mark One**

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

**Forthe Fiscal Year ended December 31, 2006**

**or**

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

**Forthe transition period from                            to                             .**

**CommissionFile Number: 000-52046**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                    |   | **36-4151663**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **10201  North Loop East**                                      |   |                                  |
| **Houston,  Texas**                                             |   | **77029**                             |
| (Address of  principal executive offices)                       |   | (Zip Code)                            |

 

**(713) 609-2100**

(Registrant’s telephonenumber, including area code)

Securities registeredpursuant to Section 12(b) of the Act:

| **Title of Class**                        |   | **Name of  Each Exchange on Which Registered** |
|-------------------------------------------|--------|------------------------------------------------|
| Common stock,  par value $0.001 per share |   | The Nasdaq Stock  Market                       |

 

Securities registeredpursuant to Section 12(g) of the Act: None

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.   YES  o   NO  x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.   YES  o   NO  x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days   YES  x   NO  o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulations S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.x

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct

| Large Accelerated Filer   o |   | Accelerated  Filer   o |   | Non-Accelerated Filer   x |
|--------------------------------------------|--------|---------------------------------------|--------|------------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act)    YES  o   NO  x

The aggregate marketvalue of the voting stock (common stock) held by non-affiliates of theregistrant as of the end of the second quarter ended June 30, 2006 was$193,568,714.

At March 1, 2007, therewere 20,867,172 outstanding shares of the registrant’s common stock, $.001 parvalue per share.

**DOCUMENTSINCORPORATED BY REFERENCE**

PartIII of this report incorporates by reference specific portions of theRegistrant’s Notice and Proxy Statement relating to the Annual Meeting ofStockholders to be held on May 1, 2007.

 

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**HOUSTON WIRE & CABLE COMPANY**

**Form 10-K For the Fiscal Year Ended December 31, 2006 INDEX**
|             |   |                                                                                                                |   | Page   |
|-------------|--------|---------------------------------------------------------------------------------------------------------------------|--------|--------|
| PART I.     |   |                                                                                                                |   |   |
| Item 1.     |   | Business                                                                                                            |   | 1      |
| Item  1A.   |   | Risk  Factors                                                                                                       |   | 12     |
| Item 1B.    |   | Unresolved Staff  Comments                                                                                          |   | 14     |
| Item  2.    |   | Properties                                                                                                          |   | 14     |
| Item  3.    |   | Legal  Proceedings                                                                                                  |   | 15     |
| Item 4.     |   | Submission of  Matters to a Vote of Security Holders                                                                |   | 15     |
|        |   |                                                                                                                |   |   |
| PART II.    |   |                                                                                                                |   |   |
| Item 5.     |   | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |   | 16     |
| Item 6.     |   | Selected Financial  Data                                                                                            |   | 17     |
| Item 7.     |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |   | 19     |
| Item 7A.    |   | Quantitative  and Qualitative Disclosures About Market Risk                                                         |   | 28     |
| Item 8.     |   | Consolidated  Financial Statements and Supplementary Data                                                           |   | 29     |
| Item 9.     |   | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                               |   | 45     |
| Item 9A(T). |   | Controls and  Procedures                                                                                            |   | 45     |
| Item 9B.    |   | Other Information                                                                                                   |   | 45     |
|        |   |                                                                                                                |   |   |
| PART III.   |   |                                                                                                                |   |   |
| Item 10.    |   | Directors,  Executive Officers and Corporate Governance                                                             |   | 46     |
| Item 11.    |   | Executive  Compensation                                                                                             |   | 46     |
| Item 12.    |   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |   | 46     |
| Item 13.    |   | Certain Relationships  and Related Transactions, and Director Independence                                          |   | 46     |
| Item 14.    |   | Principal  Accountant Fees and Services                                                                             |   | 46     |
|        |   |                                                                                                                |   |   |
| Part IV.    |   |                                                                                                                |   |   |
| Item 15.    |   | Exhibits and  Financial Statement Schedules                                                                         |   | 47     |

 

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**PART I**

**ITEM 1.     BUSINESS**

**Overview**

We are one of the largest distributors of specialtywire and cable and related services to the U.S. electrical distribution market.In 2006, we had over 2,700 customers in over 8,000 individual locations, includingvirtually all of the top 200 electrical distributors in the U.S. We have strongrelationships with leading wire and cable manufacturers and provide them withefficient access to the fragmented electrical distribution market. During 2006,we distributed approximately 22,000 SKUs (stock-keeping units) from elevenstrategically located distribution centers in ten states. We are focused onproviding our electrical distributor customers with a single-source solutionfor specialty wire and cable and related services by offering a large selectionof in-stock items, exceptional customer service and high levels of productexpertise.

We offer products in most categories of specialty wireand cable, including: continuous and interlocked armor cable; control and powercable; electronic wire and cable; flexible and portable cords; instrumentationand thermocouple cable; lead and high temperature cable; medium voltage cable;and premise and category wire and cable. We also offer private brandedproducts, including our LifeGuardTM low-smoke, zero-halogen cable. Our specialtywire and cable is primarily used in maintenance, repair and operations (“MRO”)related projects and is increasingly purchased for larger-scale projects in theutility, industrial and infrastructure markets. Our specialty wire and cable isused within a diverse range of industries, including the communications,energy, engineering and construction, general manufacturing, infrastructure,petrochemical, transportation, utility and wastewater treatment industries.

Our value-added services include:

·    Standard same day shipment from our extensive inventory and distributionnetwork

·    Application engineering support through our knowledgeable sales andtechnical support staff

·    Custom cutting of wire and cable to exact specifications at noadditional charge

·    Inventory management programs that provide job-specific asset managementand just-in-time delivery

·    Job-site delivery and logistics support

·    24/7/365 customer service provided by our own employees

·    Customized internet-based ordering capabilities

Our wide product selection and specialized servicessupport our position in the supply chain between wire and cable manufacturersand electrical distributors and their customers. Offering the breadth and depthof specialty wire and cable that we do requires significant warehousingresources and a large number of SKUs. An electrical distributor, however,typically sells a wide variety of electrical products ranging from lighting toMRO supplies, and only a small percentage of these items represent specialtywire and cable. In addition, given their bulk and weight, specialty wire andcable require a disproportionately high percentage of warehouse space andmaterials handling capabilities compared to the sales volume they generate foran electrical distributor. Instead of dedicating larger amounts of warehouseand other resources to specialty wire and cable, our distributor customers relyon us to supply much of their specialty wire and cable. At the other end of thesupply chain, while manufacturers may have the space and capabilities tomaintain a large supply of inventory, we do not believe that any singlemanufacturer has the breadth of product that we offer. More importantly,manufacturers historically have not offered the services that our customersneed, such as complementary custom cutting and same day shipment, and do nothave multiple distribution locations across the nation. As a result, we believethat we serve an important role in the supply chain for specialty wire andcable and that it would be uneconomical for manufacturers or electricaldistributors to compete with us, given our nationwide product and servicecapabilities.

**History**

We were founded in 1975 and have a long history ofreliable customer service, broad product selection and strong productexpertise. In 1987, we completed our first initial public offering and weresubsequently purchased in 1989 by ALLTEL Corporation. In 1997, we werepurchased by investment funds affiliated with Code, Hennessy & SimmonsLLC. In June 2006, we completed our second initial public offering. During our31 year history, we have successfully expanded our business from oneoriginal location in Houston, Texas to eleven strategic locations nationwide.

In 2000, we acquired our largest direct competitor,the Futronix division of Kent Electronics Corporation. In 2003, weimplemented a new sales and marketing strategy to expand our sales force, tointroduce new private branded products and to work in concert with our distributorcustomers to generate demand from end-users in our targeted markets, includingthe utility, industrial and infrastructure markets. As part of this initiative,we are partnering with our distributor customers and strengthening ourrelationships with project and specifying engineers to generate demand for ourspecialty wire and cable. For example, in the utility markets, we seek tocapitalize on increased spending on new power generation assets andenvironmental compliance initiatives. In addition, in the engineering andconstruction market 

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we work with specifyingengineers to drive specialty wire and cable specifications in large capitalprojects and market our cable management program as a tool to manage wire andcable at those projects.

**U.S. Industry Overview**

We operate within the U.S. electrical distributionmarket, which *Electrical Wholesaling*magazine estimates had industry-wide sales of $84.4 billion in 2006 andexpects to grow 10.5% to $93.3 billion in 2007. Electrical distributionhas historically been a growing segment of the industrial distributionindustry, with a CAGR of 4.8% since 1985.

Within the electrical distribution industry, ourbusiness focuses on specialty wire and cable. According to the U.S. CensusBureau, the total value of manufacturers’ shipments of specialty wire and cabletotaled approximately $7.8****billion in2005. The specialty wire and cable we sell generally consists of continuous andinterlocked armor cable; control and power cable; electronic wire and cable;flexible and portable cords; instrumentation and thermocouple cable; lead andhigh temperature cable; medium voltage cable; and premise and category wire andcable. These products are often highly engineered and require sophisticatedknowledge to insure proper application. Examples of primary end-markets forspecialty wire and cable include the communications, energy, engineering andconstruction, general manufacturing, infrastructure, petrochemical,transportation, utility and wastewater treatment industries.

The sales channel for specialty wire and cable dependson a number of factors, including order type, product selection, service levelexpectations, inventory management and delivery requirements. The greater theneed for customization and high service levels (represented by the right sideof the following diagram), the more likely the transaction will involve aspecialty wire and cable distributor such as us.

In certain circumstances, manufacturers of specialtywire and cable sell their products directly to the end-user. These transactionstypically consist of a bulk volume of wire and cable, involve little or nocustomized services and may require long lead times between order and delivery.An example of this type of transaction would be the purchase of full reels ofcable with manufacturing lead times ranging from 8 to 16 weeks after receipt ofthe order. More frequently, an electrical distributor serves as the saleschannel directly between the manufacturer and the contractor or end-user. Thetypical sale by an electrical distributor may involve a commonly purchased itemthat is specifically designated by the end-user and shipped from stock alongwith a variety of other electrical products. It is generally most economicalfor electrical distributors to carry in their inventories only those wire andcable SKUs that are commonly ordered and do not require high levels ofspecialized knowledge or services.

For customers requiring highly specialized wire andcable, custom cut lengths, technical expertise, short lead times or additionalservices, electrical distributors will generally source products from aspecialty wire and cable distributor. We believe that the increasing complexityof specialty wire and cable specifications and the growing need forjust-in-time delivery and logistics support will drive further growth inpurchases through specialty wire and cable distributors.

Because sales of specialty wire and cable typicallyrepresent a relatively small portion of the revenue generated by our electricaldistribution customers, our customers often rely on us to make the investmentsneeded to support their specialty wire and cable sales. Given the bulk andweight of specialty wire and cable, stocking a comprehensive offering ofspecialty wire and cable to meet diverse product demand requires adisproportionately high percentage of warehouse space and materials handlingcapabilities for our customers, compared to 

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the sales volume thatthey generate from these products. Electrical distributors typically do nothave a high enough demand for specialty wire and cable to turn inventorycost-effectively. Instead of dedicating a larger amount of warehouse space toinventory and making the investments in employee training, same day shipmentcapabilities for specialty wire and cable, end-user support, and informationtechnology needed to maintain industry leading levels of service, ourelectrical distribution customers rely on us to play this important role in thesupply chain and to be a single source solution.

***Targeted Markets***

Our business is driven, in part, by the strength, growth prospects andactivity in the end-markets in which our products are used. We have targetedthree of these markets—the utility, industrial and infrastructure markets—inour recent sales and marketing initiatives.

*Utility Market.*    The utility marketincludes large investor-owned utilities, rural cooperatives and municipal powerauthorities. While we do not distribute the power lines used for thetransmission of electricity, we sell many products used in a power plant and inthe related pollution control equipment. As such we are positioned to benefitfrom expenditures for new power generation needed to satisfy a growingpopulation with increasing energy demands and to comply with federal mandatesto reduce toxic outputs from power generating facilities. We expect to benefitfrom this trend as our customers utilize our cable management services tosupport the distribution of specialty wire and cable required for theconstruction of new power plants and upgrading of existing power plants. Forexample, large coal-fired utility plants across the U.S. may be retrofittedwith flue gas desulphurization systems (commonly referred to as scrubbers) tocomply with pollution-control initiatives. This type of project requires thespecialty instrumentation, power and control products that we distribute.

*Industrial Market.*    The industrial market is one of the largest segmentsof the U.S. economy, comprised of a diverse base of manufacturing andproduction companies. According to a January 2007 Industrial InformationResources report, spending on industrial projects in the U.S. during 2007 isexpected to total $110 billion. We help our electrical distributor customersprovide specialty wire and cable to industrial companies with large, complexplant maintenance, repair and operations requirements and for new capitalprojects. We offer specialty wire and cable that is specifically designed for avariety of industrial applications, and we are benefiting from accelerated capitalspending due to economic expansion and a catch-up of deferred maintenance. Forexample, in petrochemical and other harsh-environment operations, we distributespecialty cables specifically designed to endure exposure to caustic materialsor extreme temperatures.

*Infrastructure Market.*    We believe that significant infrastructureimprovements and additions will be needed over the next several years. Forexample, the Congressional Budget Office (“CBO”) anticipates an increase inspending over the next two decades in the U.S. for drinking water systems andwastewater infrastructure and estimates that for the years 2000 to 2019, annualcosts for investment will average between $24.6 billion and$41.0 billion. We expect to benefit from this trend given that thespecialty wire and cable we distribute are used in the construction ofwastewater treatment facilities. We are assisting our customers to furtherpenetrate the engineering and construction market by working with applicationengineers to drive specialty wire and cable specifications in largeconstruction projects.

***LifeGuardTM Market Opportunity***

We believe that the market for low-smoke, zero-halogenproducts is in its infancy in the U.S. and represents a significant marketopportunity across our targeted markets. Low-smoke, zero-halogen cables havebeen used extensively in Europe and Asia for many years. We are leading thedevelopment of the market for low-smoke, zero-halogen cable in the U.S. Inaddition to other threats, when traditional cable burns, the acid gasesproduced are particularly destructive to electronic equipment, which representsa significant investment for many businesses. In contrast, low-smoke,zero-halogen compounds provide significant flame resistance, minimal smokeproduction and substantially reduced toxicity and corrosiveness when burned, ascompared to traditional wire and cable. We sell our LifeGuardTM products acrossmost of our end-users markets.

Our LifeGuardTM cable has been accepted for use by over300 end-users, including leading engineering and construction firms, and isincreasingly included in specifications for utility, data center and industrialrelated projects. LifeGuardTM can be used in harsh environments for power,control and lighting circuits in a broad range of commercial, industrial andutility applications. We are currently marketing LifeGuardTM to the utilityindustry for use in power generation and co-generation; to industrial plantsfor petrochemical, pharmaceutical and wastewater treatment related uses; togeneral industry for use in data centers, such as computer rooms, switchingcenters and central offices; and to the engineering and construction market foruse in highly populated facilities such as multi-story buildings, schools,hotels, hospitals, sports centers, airports and mass transit stations.

**Competitive Strengths**

We are a nationally recognized, full-servicedistributor of specialty wire and cable and related services. Through elevenstrategic locations across the United States, we provide same-day shipment to abroad customer base including, among others, Border States Electric Supply,Consolidated Electrical Distributors, Inc., GE Supply Company(acquired by Rexel, Inc.), Graybar Electric Company, Inc., HD Supply, Inc.(formerly Hughes Supply, Inc.), Mayer Electric Supply Company Inc.,Rexel, Inc., The Reynolds Company, Sonepar USA and WESCO Distribution,Inc. We operate in a highly fragmented market, and we believe that thefollowing competitive strengths have helped us achieve our leading position inthe market and a strong reputation among manufacturers and customers.

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***Comprehensive Value-Added Services andProduct Expertise***

Our business model focuses on providing our customerswith comprehensive value-added services and high levels of expertise across abroad range of our suppliers’ products. Our services are designed to providemaximum efficiency and flexibility for our customers and include extensiveproduct knowledge and application engineering support, inventory management,custom cut capabilities and 24/7/365 customer service. We help our customersachieve efficient and effective procurement of specialty wire and cable onterms that typically include short lead times and the ability to ship a highpercentage of the products ordered within 24 hours. Critical to oursuccess is our application engineering support, in which our knowledgeablesales people help customers match products based on intended use, cost andperformance specifications. We have developed the expertise, infrastructure andrelationships to provide extensive customer service that we believe would becostly to build and support without the scale we have achieved.

***Strength and Tenure of Specialized SalesForce***

We have invested in developing a sales force of highlyknowledgeable professionals with considerable industry expertise. As ofDecember 31, 2006, our sales force consisted of 47 field sales personneland 88 inside sales and technical support personnel. The size of our fieldsales force has increased significantly since 2003 and is aligned according totargeted industries, geography and select customer relationships. Our salespersonnel receive ongoing, comprehensive training about innovations inspecialty wire and cable as well as changes affecting our targeted markets. Weuse a consultative selling approach that leverages our extensive product expertiseand knowledge of our customers’ needs in the markets in which the products areused. Our sales effort is designed to augment the sales efforts ofmanufacturers as well as those of our distributor customers. We believe thatour sales approach results in increased demand for the products we distributeand maximizes our reputation as a highly knowledgeable source of specialty wireand cable information.

***First-Mover Advantage with LifeGuardTM Cable***

We believe we have established a first-mover advantagein the U.S. with our LifeGuardTM line of low-smoke, zero-halogen cable products.We believe our LifeGuard line of cable has the potential to become the industrystandard in the U.S. for low-smoke, zero-halogen cable needs. Since itsintroduction in 2003, our LifeGuardTM line of cable has been accepted for use byover 300 end-users, including leading engineering and construction firms, andis increasingly included in specifications for utility, data center andindustrial related projects. We have identified a substantial potential marketfor these products and believe that our early entrance into the market providesus with a significant competitive advantage.

***Operating Efficiency***

Our ability to offer a high level of customer serviceis due in part to our highly efficient and effective operations that leveragecentralized back-office administration and purchasing, a scalable informationtechnology platform, automated warehouse operations and electronic producttracking. The products we carry are bar-coded with exact product specificationsand length and tracked on a real-time basis in our system, which allows us tocost-effectively route orders to our warehouses across the country based ondelivery distance, availability and quantity of product. Our process minimizeswaste by targeting specific locations and reels for optimal custom cut orders.Efficient purchasing and management of our products have helped us increase ouraverage inventory turns from 3.18 in 2001 to 4.46 in 2006 and improved ourgross margin during the same period from 22.8% to 28.5%. In addition, byleveraging our national infrastructure and implementing back-officeinitiatives, we have decreased our operating expenses as a percentage ofrevenue from 18.0% in 2001 to 12.1% in 2006. Based on data for 2005 reflectedin the 2006 Performance Analysis Report (“PAR Report”) published by theNational Association of Electrical Distributors (“NAED”), we compare favorablyto the electrical distribution industry averages across several metrics,including average sales per employee of approximately $781,000 versus $456,000for the industry.

***Extensive Product Offering and StrongSupplier Relationships***

In 2006, we sold approximately 22,000 SKUs,representing a broad and deep selection of high-quality specialty wire andcable. Our products include national brands of continuous and interlocked armorcable; control and power cable; electronic wire and cable; flexible andportable cords; instrumentation and thermocouple cable; lead and hightemperature cable; medium voltage cable; and premise and category wire andcable. We also offer several products under our private brands, including ourLifeGuardTM line of low-smoke, zero-halogen cable. Our strategy is to maintain awide breadth and depth of inventory, allowing us to ship a high percentage ofthe products ordered within 24 hours. We believe that our vast productoffering and value-added services are significant factors in attracting andretaining many of our customers. In addition, we have strong, often decades-long,relationships with large wire and cable manufacturers such as Belden CDT,General Cable Corp., Nexans, Service Wire Company and Southwire Company.Because of our national scale, market leadership position and specializedservices, we believe we provide an important function in the supply chain andare critical to our suppliers’ sales efforts. We also believe that ourstrategic decision to concentrate our purchases with our top suppliers allowsus to solidify our relationships with these vendors while optimizing our vendorrebates.

***Strong and Diversified Customer Base***

During 2006, we served over 2,700 customers, includingvirtually all of the top 200 electrical distributors in the U.S. We haveexperienced exceptional customer retention, and we believe that we are theprimary supplier of specialty wire and cable to a majority of our customers.Each of our top ten customers in 2006 has purchased products from us every yearover the last decade. Our direct customers are electrical distributors, and ourproducts are used within a diverse range of industries including, thecommunications, energy, engineering and construction, general manufacturing,infrastructure, petrochemical, transportation, utility and wastewater treatmentindustries. We believe that the strength of our broad customer relationshipsprovides us with a significant competitive advantage.

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***Experienced Management Team***

Our highly experienced team of executive officers andkey management has an average tenure with us of over 14 years. Thiscontinuity strengthens our relationships with our customers and suppliers andenables us to provide our customers with a high level of product and industryexpertise. Our management team is led by our President and Chief ExecutiveOfficer, Charles Sorrentino, who joined us in 1998. Working withMr. Sorrentino is a team of industry veterans who have been instrumentalto our strong growth and success to date and will enable us to leverage ourcompetitive strengths and pursue further strategic growth opportunities.

**Growth Strategies**

Since implementing our new sales and marketingstrategy in 2003, our revenue has increased from $149.1 million in 2003 to$323.5 million in 2006, and our operating income has increased from$4.7 million to $53.1 million. We intend to continue to leverage ourcompetitive strengths and pursue select strategic initiatives to drive growthin revenue and profit.

***Generate Demand from Targeted Markets***

During 2003, we realigned our sales efforts to work inconcert with our distributor customers to generate demand directly fromend-users in our targeted markets, including the utility, industrial andinfrastructure markets. We believe that our sales and marketing programs andproduct application expertise can help our distributor customers drive demand fromtheir customers. In select target markets, we are assisting our customers informing relationships with project and specifying engineers to create demandfor our specialty wire and cable. For example, in the utility market, we arepositioned to capitalize on the increased spending on new power generationassets and environmental compliance initiatives. Additionally, we are marketingour cable management program to the engineering and construction market as atool to manage supplies at large capital projects. We also believe that many ofthese new relationships have been awarded to us based on the range of valueadded services that we are able to provide. We believe that our ability to helpgenerate demand and manage the logistics of delivering our specialty wire andcable increases the value we bring to our customers and suppliers alike. Webelieve that the relationships we have developed with specifying engineersenhance our role in the sales and marketing process and established a platformto accelerate sales of our private branded products through our distributionchannels.

***Expand Our Sales Force***

As part of our ongoing strategy to penetrate newmarkets, we expect to continue to expand our sales force and further focus oursales and marketing efforts on supporting our distributor customers in ourtargeted markets. We typically hire experienced personnel for our sales force,and since 2003 we have significantly increased the number of our field salespersonnel. Based on industry data from the NAED’s PAR Report, our salespersonnel outperformed industry averages in 2005 with average sales per salesemployee of $1.8 million versus $889,000 for the industry. We believe we are inthe early stages of penetrating additional sales channel opportunities intargeted markets and will continue to add specialized sales personnel togenerate demand for our products.

***Increase Sales of Private Branded Products***

Beginning in 2003, we spearheaded the development andmarketing of select private branded products, including LifeGuardTM, alow-smoke, zero-halogen line of cable; Houwire®, a low-cost sound and securitywire; and DataGuard®, a high-end electronic cable product line. Low-smoke,zero-halogen cables have been used extensively in Europe and Asia for manyyears. While we are still in the early stages of selling these product lines,we believe the possible markets for these products are significant. Since itsintroduction in 2003, our LifeGuardTM line of cable has been accepted for use byover 300 end-users, including leading engineering and construction firms, andis increasingly included in specifications for utility, data center andindustrial related projects.

***Focus on Efficient Operations and CostControl***

We seek ways to reduce costs, increase efficiency andultimately enhance our ability to serve our customers. For example, wecontinuously measure our performance and implement best practices across ourorganization to improve our operations. We tie a portion of our managercompensation to profitable growth. In addition, we have invested in highlyflexible and scalable information systems, which have been instrumental to theefficient integration of our sales, distribution and logistics capabilities.Improvements in our inventory management have created capacity in our warehousesthat can be used to support our continued growth. We believe that our dedicatedfocus on efficient operations and scalable technology will help us driveproductivity improvements and cost savings in the future.

***Selectively Pursue Acquisition Opportunities***

Our senior management team has experience inidentifying and integrating acquisition targets. In 2000, we acquired ourlargest direct competitor, Futronix, from Kent Electronics. Following theacquisition we successfully integrated operations, including the elimination ofseven Futronix warehouses. While we are not dependent on acquisitions toachieve our growth plan, we will selectively pursue acquisitions that leverageour established infrastructure and allow us to strategically address selecttarget markets, grow our product and service offering, expand geographicallyand leverage our efficient distribution and operations platform.

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**Products**

Through our relationships with many of the large wireand cable manufacturers, we have access to a full spectrum of specialty wireand cable, allowing us to consistently meet the needs of our customers. Ourfocus is on specialty wire and cable that is engineered for specific usage andsupplies critical power and data to end-users across diverse markets. We customcut our wire and cable to exact specifications so that they can be installed assoon as they arrive at the destination. Our product strategy is to carry anextensive array of specialty wire and cable to meet the diverse, dynamic andtime-sensitive needs of our customers. In addition, our infrastructure isdesigned to respond to short lead times with high levels of productavailability and same day shipment.

***Product Categories.***    We distribute a widearray of wire and cable types for a host of applications, including:

·              *Continuous Armor.* Continuous armor cable is available in lowvoltage and medium voltage constructions and is used in harsh environmentswhere maximum conductor protection is required. The corrugated seamlessaluminum armor prevents the entrance of water, gas and corrosive elements intothe electrical core of the cable. Continuous armor cable is used in a widevariety of applications including industrial power distribution, pulp andpaper, utility and petrochemical operations. This product can be used indoorsand outdoors, aerially, in conduits, ducts, cable trays and direct burialapplications.

·              *Control & Power.* Control and power cable is 600 volt single ormultiple conductor cable used in a broad range of commercial, industrial andutility applications. Applications include lighting, control and power circuitsin wet and dry locations in conduits, ducts and raceways. Control and powercable is chemical, gasoline and oil resistant, and may be directly buried orinstalled in cable trays.

·              *Electronic.* Electronic cable is primarily used in audio,control, instrumentation and computer applications. It is highly engineeredcable that provides specific electrical performance characteristics for a broadrange of data, communications and industrial applications.

·              *Flexible & PortableCord***.** Flexible and portable cord is a highlyflexible and durable single or multiple conductor cable used in heavy-dutyindustrial applications. These cables are commonly used for energizing mobilemining equipment, diesel electric locomotives, lifting magnets, cranes andloaders, as well as for portable power distribution for tools, equipment, smallmotors and machinery.

·              *Instrumentation &Thermocouple.* Instrumentationand thermocouple cable is 300 volt or 600 volt, twisted pair or triad cableused to transmit signals for instrument, process and control, or heat sensinginstruments. It may be used in wet and dry locations, indoors or outdoors,aerially, in conduits, ducts, cable trays or 600 volt direct burialapplications.

·              *Interlocked Armor.* Interlocked armor cable is available in lowvoltage and medium voltage constructions and is used in harsh environmentswhere maximum conductor protection is required. The protective sheath is madefrom a thick corrugated metal tape that locks together as it is wrapped aroundthe cable core. It is used in a wide variety of applications includingindustrial power distribution, pulp and paper, utility and petrochemicaloperations. This product can be used indoors and outdoors, aerially, inconduits, ducts, cable trays and direct burial applications.

·              *Lead & HighTemperature.* Lead and hightemperature cable is 600 volt single conductor cable used to create or completeelectrical circuits. Many of these cables are capable of withstanding flametemperatures in excess of 2,000°C or higher. This product is commonly used forpower, control, and instrumentation circuits in iron, steel, glass, aluminumand refining applications, and in industrial heating and cooking equipment.

·              *Medium Voltage.* Medium Voltage cable is a single ormulti-conductor cable that is rated for 2,001 volts to 35,000 volts. This powercable can be used in open air, conduit, duct, cable tray (when CT rated), wetand dry locations or be directly buried in earth. It is commonly used inchemical plants, refineries, steel mills, industrial plants, commercialbuildings, utility substations and generating stations.

·              *Premise & CategoryWiring.* Premise wiring isused for general purpose remote control signaling and voice and dataapplications. Category cables are used for high speed data transmission ofvoice, data and telephony information.

***Our Private Branded Products.***    We also sell our ownprivate branded products, LifeGuardTM, DataGuard® and Houwire®, across many ofthe product categories identified above.

·              *LifeGuard***TM.** LifeGuardTM cable is a low-smoke, zero-halogencable constructed with highly engineered polymers.    LifeGuard’sTM properties exceed those of standard cableconstruction, and it has excellent electrical and mechanical characteristics.The jacket on LifeGuardTM cable is highly flame-retardant, produces very smallamounts of smoke when burned and contains no halogens. LifeGuardTM is used inharsh environments for power, control and lighting circuits in a broad range ofcommercial, industrial and utility applications. LifeGuardTM cable is ideal forapplications where a high degree of safety and equipment protection isrequired. We are currently marketing LifeGuardTM to the utility industry for usein power generation; to industrial plants for petrochemical, pharmaceutical andwastewater treatment related uses; to general industry for use in data centers,such as computer rooms, switching centers and central offices; and to theengineering and construction market for use in highly populated facilities,such as multi-story buildings, schools, hotels, hospitals, sports centers,airports and mass transit stations.

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·              *DataGuard*®**.**We introduced our DataGuard® product line in 2006 to address the data andcommunications wire and cable market. These expansive and performance drivenmarkets require cables with exacting electrical characteristics. Our DataGuard®products are premium quality, highly engineered cables specifically designed tomeet these demanding requirements and are used in a broad range of audio,control, instrumentation and computer applications.

·              *Houwire***®.** Our Houwire® product line has been customtailored for the sound, security and fire alarm market. Houwire® products arelow-voltage cables that have been value engineered for multiple applications inboth industrial plants and commercial facilities. These competitively priceditems have helped to position us for additional penetration into the broad andexpanding sound and security market.

**Services**

In addition to the broad selection of specialty wireand cable that we distribute, we offer a wide array of value-added services toour customers to assist them with their wire and cable requirements. Theseservices allow customers to use our industry expertise to efficiently managetheir wire and cable requirements with improved service and minimal waste andexpense.

We believe our inventory depth and breadth, distributioncapabilities and value-added services are critical to our customers’ wire andcable procurement needs and significantly reduce their cost by:

·              eliminating long lead times typically requiredby manufacturers;

·              reducing on-site labor costs;

·              fulfilling small orders without subjectingcustomers to purchase order minimums and price premiums;

·              reducing waste through our cut-to-lengthservice offering;

·              moderating inventory carrying costs byoffering next-day delivery for SKUs which take up substantial warehouse space;

·              providing access to restricted and exclusivebrands;

·              offering technical resource capabilitiesthrough our product specialists’ 24-hours-a-day, seven-days-a-week,365-days-a-year service; and

·              managing large, intermittent product ordersthrough our cable management program.

Our value-added services include the following:

·              *Application EngineeringSupport.* Our sales personnelhave significant technical knowledge of the specialty wire and cable we distributeand their applications and specifications. Our sales staff assists customerswith selecting the appropriate wire and cable products based on the intendeduse, cost and performance specifications.

·              *Standard Same Day Shipmentfrom Our Extensive Inventory.*Through our nine distribution facilities and two third-party logisticsproviders, it is our standard practice to ship product the day it is ordered,and we generally have it delivered by ground the next business day.

·              *24-Hours, 7-Days-a-Week,365-Days-a-Year Service Anywhere in the United States.* Our sales offices and distribution facilitiesprovide customers with around-the-clock customer support and can delivercustomized orders on short notice from any of our locations.

·              *Custom Color Striping.* We provide custom striping services,including color-coding products for circuit design applications.

·              *Cut-to-Length Capabilitiesat No Additional Charge.* Weestimate that approximately 90% of our stock orders are cut-to-length, whicheliminates excess labor costs and remnants for our customers.

·              *Wire & CableTraining Programs.* We areactively engaged in wire and cable training both for our distributor customersand for their end-user customers. Typical training activities include wireschools at both supplier facilities and our own, plant and site tours at ourfacilities and our suppliers’ facilities and on-site product training withcable engineers.

·              *Full Extranet Capabilities.* We give our customers internet-based,password protected access to select areas of our real-time ERP system, whichallows them to check product availability, obtain pricing, and confirm orderstatus—including detailed shipping information identifying the carrier used andshipment tracking number.

·              *Cable Selection System.* Our cable selection system is an internet-accessibleorder release site that allows customers to self-manage their cablerequirements such that they arrive just-in-time at the job site and allowscustomers to initiate release of wire and cable via 

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our website. With our cable selection system, thecustomer can request the exact circuit lengths to which cable is cut, projectinventory status is available for review at any time, and the project engineeror field manager can submit changes to their orders from the field.

·              *Cable Management Program.* Our cable management program is an inventorysystem that pre-allocates specialty wire and cable for a customer’s specificproject and includes a custom program designed to manage all of the wire andcable requirements for a customer’s project. The major benefits of our cablemanagement program include guaranteed availability of materials, plus safetystock; immediate shipment of material upon field release; firm pricing and adedicated project manager. As part of the program, wire and   cable stock is reserved in our warehouse andidentified with a unique part number to ensure it is available for sale whenrequested by the customer. In addition, customers can review a project’sinventory 24 hours a day via a secure internet site and can obtain detailson items such as individual circuit cut history, shipment and order trackinginformation. Our cable management program allows customers to better managetheir large projects and helps to eliminate job site theft, expenses associatedwith delayed shipments of materials and surplus materials.

**Customers**

During 2006, we served over 2,700****customers,including virtually all of the top 200 U.S. electrical distributors,representing over 8,000 customer locations nationwide. All of our top tencustomers have been customers for more than a decade.

Our top 10 customers in 2006 were:
|        | Border States Electric Supply               | HD Supply, Inc. (formerly Hughes Supply, Inc.) |
|--------|---------------------------------------------|------------------------------------------------|
|   | Consolidated Electrical Distributors, Inc.  | Mayer Electric Supply Company, Inc.            |
|   | Dealers Electric Supply                     | Rexel, Inc.                                    |
|   | GE Supply Company (acquired by Rexel, Inc.) | Sonepar USA                                    |
|   | Graybar Electric Company, Inc.              | WESCO Distribution, Inc.                       |

 

Our customers’ primary end-markets include thecommunications, energy, engineering and construction, general manufacturing,infrastructure, petrochemical, transportation, utility and wastewater treatmentindustries. While downturns or cyclicality in the markets our distributorcustomers serve could affect our business, we believe that the market andgeographic diversity of our end-users helps to mitigate risks associated withregional or sector-specific cycles. In 2006, our largest customer, WESCODistribution, represented approximately 13% of our sales. Rexel, Inc. acquiredGE Supply Company in August 2006, and the companies together representedapproximately 12% of our sales in 2006.

**Suppliers**

We obtain products from most of the leading wire andcable suppliers. We believe we have strong relationships with our topsuppliers. Although we believe that alternative sources are available for themajority of our wire and cable products, we have strategically concentrated ourpurchases with three leading suppliers in order to maximize product quality,delivery dependability, purchasing efficiencies, and supplier incentives. As aresult, in 2006 approximately 57%****of our annualpurchases came from three suppliers. We do not believe we are dependent on anyone supplier for any of our wire and cable products.

Our top five suppliers in 2006 were Belden CDT,General Cable Corp., Nexans, Service Wire Co., Inc., and Southwire Company.Products we purchased from Belden CDT, General Cable Corp., and Nexans eachgenerated more than 10% of our sales in 2006.

We believe that our national distribution presence andvalue-added services make us an essential partner in the supply chain for oursuppliers. In addition, we believe our role in the supply chain, through ournational distribution channel and value-added services, provides our supplierscost savings by:

· eliminating the need to maintain their own asset intensive distributionsystem across the U.S.;

· placing large orders, which allow suppliers to have efficient andcost-effective production planning;

· reducing their marketing and sales functions and expenses; and

· allowing them to rely on our technical specialists to provide technicalsupport to our customers and end-users.

**Sales and Marketing**

***Sales Strategy***

The primary objectives of our sales process are(i) to continue to generate market awareness, (ii) to identifyprofitable specialty wire and cable markets and (iii) to penetratetargeted markets through cost benefit analyses and customized serviceofferings. Our sales force is trained to identify the needs of our customersand develop a single-source wire and cable solution that meets their needswhile creating a competitive advantage for us.

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***Sales Organization***

In order to meet our growth initiatives and manage thecorresponding increased contact with customers, we invested heavily in salesresources (including significantly increasing the size of our field sales forcefrom 2003 to 2006). We have also transformed our compensation programs to drivea more proactive sales process. For example, we have realigned the incentivesfor our field sales force by tying more than 50% of commissions to sales to newcustomers. Our inside sales force compensation structure focuses on monthlyadjusted gross profit dollars and margin percentage targets.

We have expanded our sales channels to support ourelectrical distributor customers as “channel partners” to penetrate ourtargeted markets, including the utility, industrial and infrastructure markets.In cooperation with these distributors, we are implementing a pull-throughsales strategy to increase demand for our products and services among selectedend-users.

As of December 31, 2006, our sales and marketingstaff consisted of approximately 157 employees. We market our specialty wireand cable through an inside sales force located throughout our regional officesand a field sales force located in key geographic markets throughout the U.S.By operating under a decentralized process, regional managers are able to adaptquickly to market-specific occurrences, allowing us to compete effectively withlocal competitors. We believe the breadth and depth of our sales force iscritical to serving our fragmented and diverse customer and end-user base.

Our field sales force focuses on developing demand forour products. In addition to adding field sales resources, since 2003 we havereorganized our sales organization to service our customer base moreeffectively and to penetrate new and larger end-markets. Our sales forceoptimization plan has involved:

· driving the specification of our private branded products such asLifeGuardTM;

· developing targeted account lists within regional sales territories;

· adding sales managers in larger regions to assist regional managers;

· adding support personnel for the development of our targeted markets;

· partnering with leading electrical distributor marketing groups totarget Fortune 100 companies;

· revising the sales commission plan to motivate and compensate personnelfor profitable incremental growth;

· adding national account managers to service our largest customers; and

· implementing a customer relationship management platform to help targetand develop new accounts.

Our inside sales force’s primary objective is tomaintain, service and develop existing accounts. Our inside sales personnelassist customers and end-users with selecting the appropriate wire and cableproducts based on intended use, cost and performance specifications. With ournational presence, the inside sales force also has the ability to designate thedistribution facility that will process a customer’s order, which helps toreduce freight charges and transportation time. In addition to assistingcustomers with proper product selection, our inside sales personnel facilitatethe designation of our products in project specifications, increasing theutilization of our products. Part of our inside sales force consists of ourNational Service Center, (“NSC”), an outbound call center located in Houston,Texas, that is focused on developing smaller or less active accounts. The NSCcultivates our customers using a cost effective and consistently applied salesand marketing process. We believe the NSC represents a valuable, hands-on andprofitable training ground for the development of our current and future salesforce.

Through the NSC, we offer continuous in-depth trainingfor our entry-level sales personnel. In addition to our NSC training, we offerour sales force extensive training and education, including training on ISO9001:2000 standard sales-related procedures, a hands-on multi-departmentorientation, an in-house wire school facilitated by in-house experts andfactory engineers, and attendance at the “Belden College of Wire Knowledge” atBelden CDT’s manufacturing facility. All sales professionals are educated onour regimented sales process with complete protocols, requirements andcontrols.

***Marketing***

As a result of the initiatives we adopted in 2003, wehave augmented our marketing activities and functions by:

·       creating an executive marketing positionresponsible for continual strategic analysis of our marketing channels,customers, products,  and brandawareness;

·       implementing a sales and marketingorganizational infrastructure driven by corporate market managers and segmentedby targeted  markets;

·       introducing a marketing services manager tohandle customer-specific marketing programs;

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·       adopting pricing matrices and controls;

·       developing marketing plans to target newmarkets and customers; and

·       developing new private branded products, suchas LifeGuardTM, DataGuard® and Houwire®.

Our marketing materials include a master catalog,targeted mini-catalogs, product brochures, direct mail and an online presencethat includes an e-catalog, company overview and LifeGuardTM cable informationalvideos. The extranet access we provide allows customers to obtain custompricing, inventory availability and information on shipping and order-tracking.We also regularly participate in trade shows.

We employ database mining techniques to identify newbusiness development opportunities and customers. We utilize our own data aswell as third-party provided data. Our database contains over21,500 contacts from over 8,000 accounts at electrical distributorsnationwide. In addition, we have approximately 18,500 contacts of engineeringand procurement professionals. We believe we possess one of the largestdatabases of contact information for electrical distributors of specialty wireand cable in the U.S.

We are members of various national marketing groupsthat represent hundreds of electrical distributors across the U.S. As asupplier member of these groups, we are recognized as a preferred supplier tothese customers. We believe that our relationships with these groups arestrong. We also maintain direct relationships with all of our customers who aredistributor members of these groups.

**Operations & Facilities**

***Purchasing***

To maximize purchasing efficiencies, we utilize acentralized purchasing function located at our corporate headquarters inHouston, Texas, which manages each distribution facility’s unique productprofile and inventory levels. The purchasing department is led by the VicePresident of Marketing and Merchandising, who oversees a Director ofPurchasing, senior buyers who are responsible for purchasing specific productgroups, length allocation specialists, who are responsible for efficient reelselection, and a logistics and product analyst, who is responsible forinventory optimization initiatives. Additionally, the corporate market managersand sales personnel provide feedback on product lines to the Vice President ofMarketing and Merchandising and the Director of Purchasing. Our ability toconsolidate demand and purchase large quantities of wire and cable providessubstantial manufacturing scale for our suppliers and results in competitiveprices including attractive rebate programs.

Our centralized purchasing function is supported byour ERP system, which notifies the senior buyers of required inventorypurchases through the use of a real-time inventory forecasting system. Underthis system all inventory items have a classification based on sales frequency,which is customized for every SKU. Based on a particular item’s classification,demand analysis is developed from usage history, minimum acceptable safetystock and projected manufacturing lead times.

***Logistics***

Our logistics process is highly automated through anERP system that enables the seamless integration of operating functions. In1999, we implemented a radio frequency bar-coded inventory system. Thisbar-coding system has facilitated our length allocation process, which auditsall customers’ orders prior to their release into the distribution facilitiesand subsequently directs warehouse personnel to particular reels forcut-to-length orders. This process reduces wire and cable remnants, ensuresaccuracy and maintains our real-time inventory system for sales personnel.

We process customers’ orders the same day they arereceived. Our strategically located distribution centers generally allow forground delivery nationwide within 24 hours of shipment. Orders aredelivered through a variety of distribution methods, includingless-than-truck-load, truck-load, air or parcel service providers, direct fromsupplier and cross-dock shipments. Freight costs are typically borne by ourcustomers. Due to our shipment volume, we have preferred pricing relationshipswith our contract carriers.

***Information Systems and Technology***

We utilize scalable information systems and technologyto provide support for all of our operations. We utilize a proprietarystate-of-the-industry ERP system. Over the years, the system has been upgradedand customized for our operations and allows for the seamless integration offinancial, operational and administrative functions. Each of our locations isconnected to our computer networks through dedicated data lines. These systemsare protected by the support of recognized security systems, and we maintain adisaster recovery system that provides for the back-up of our data.

Our automated bar-coded inventory system allows us totrack and manage our inventory on a real-time basis. With more than 43,000reels across eleven distribution facilities, our information technology systemsallow complete traceability of our products through the entire supply chainfrom our suppliers to delivery to our customers. We also developed aproprietary cable management system that allows our customers to review onlinethe wire and cable products designated for specific projects, release ordersfor shipment and review previous shipments.

In 2004, we augmented our ERP system with theimplementation of a CRM platform for customer relationship and sales forcemanagement, which allows for advanced customer management in a secureenvironment.

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We have an experienced and dedicated informationtechnology department, including on-site programmers and other networkprofessionals.

***Employees***

As of December 31, 2006, we had 293 employees, ofwhich approximately 80% are sales or warehouse personnel.

Our employees are not represented by a labor union orcovered by a collective bargaining agreement. We believe that our employeerelations are good.

**Competition**

Like the general U.S. electrical distribution market,the specialty wire and cable market is highly competitive and fragmented, withover 200 specialty wire and cable distributors serving this market. The productofferings and levels of service provided by the other specialty wire and cabledistributors with which we compete vary widely. We primarily compete with otherspecialty wire and cable distributors on a regional and local basis. Most ofour direct competitors are smaller companies that focus on a specificgeographical area or feature a select product offering, such as surplus wire.In addition to the direct competition with other specialty wire and cabledistributors, we also face, on a much more limited basis, competition with thehundreds of electrical distributors and manufacturers that sell productsdirectly or through multiple distribution channels to end-users or otherresellers. In the markets that we serve, competition is primarily based onproduct line breadth, quality, product availability, service capabilities andprice.

**Website Access**

Our internet address is www.houwire.com.Information contained on our website is not part of, and should not beconstrued as being incorporated by reference into, this Annual Report on Form10-K. We make available, free of charge under the “Investor Relations” headingon our website, our annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to those reports filed or furnishedpursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, asamended (the “Exchange Act”), as well as proxy and information statements, assoon as reasonably practicable after such documents are electronically filed orfurnished, as applicable, with the Securities and Exchange Commission (the “SEC”).You also may read and copy any material we file with the SEC at the SEC’sPublic Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtaininformation on the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. The SEC maintains an Internet site at www.sec.gov thatcontains reports, proxy and information statements and other informationregarding issuers like us who file electronically with the SEC.

**Government Regulations**

We are subject to regulation by various federal, stateand local agencies. These agencies include the Environmental Protection Agency,Department of Transportation, Interstate Commerce Commission, OccupationalSafety and Health Administration, Department of Labor and Equal EmploymentOpportunity Commission. We believe we are in compliance in all material respectswith existing applicable statutes and regulations affecting environmentalissues and our employment, workplace health and workplace safety practices.

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**ITEM 1A.  RISK FACTORS**

*Investing in our common stock involves a high degree of risk. Youshould carefully consider the following factors, as well as other informationcontained in this Form 10-K, before deciding to invest in shares of our commonstock. The trading price of our common stock could decline due to any of theserisks, and you may lose all or part of your investment in our common stock.*

**RisksRelating to Our Business and Industry**

***Downturns in capital spending andcyclicality in certain of the markets we serve could have a material adverseeffect on our financial condition and results of operations.***

The majority of our products are used in theconstruction, maintenance and operation of facilities, plants and projects inthe communications, energy, engineering and construction, generalmanufacturing, infrastructure, petrochemical, transportation, utility andwastewater treatment industries. The demand for our products and servicesdepends to a large degree on the capital spending levels of end-users in thesemarkets. Many of these end-users defer capital expenditures or cancel projectsduring economic downturns. In addition, certain of the markets we serve arecyclical, which affects capital spending by end-users in these industries. Forexample, in late 2005, our sales benefited from the cleanup and rebuildingefforts following Hurricanes Katrina and Rita, but we expect this increaseddemand to wane as construction activity returns to more typical levels. Adownturn in the general economy, or in one or more of the end-markets for ourspecialty wire and cable, could have a material adverse effect on our financialcondition and results of operations.

***We have risks associated with inventory.***

Our business requires us to maintain substantiallevels of inventory. We must identify the right mix and quantity of products tokeep in our inventory to meet customer orders. Failure to do so could adverselyaffect our sales and earnings. However, if our inventory levels are too high,we are at risk that unexpected changes in circumstances, such as a shift inmarket demand, drop in prices or default or loss of a customer, could have amaterial adverse impact on the net realizable value of our inventory.

***Our operating results may be affected byfluctuations in commodity prices.***

Copper and petrochemical products are components ofthe wire and cable we sell. Fluctuations in the costs of these and othercommodities have historically affected our operating results. We estimate thatapproximately one-fifth of the growth in sales from 2005 to 2006 and between$4.5 million and $6.5 million of net income in 2006 was attributable to highercommodity prices for certain components of our products, principally copper andpolymers. To the extent higher commodity prices result in increases in thecosts we pay for our products, we attempt to reflect the increase in the priceswe charge our customers. While we historically have been able to pass most ofthese cost increases on to our customers, to the extent we are unable to do soin the future, it could have a material adverse effect on our operatingresults. In addition, as commodity costs increase, our customers may delay ordecrease their purchases of our wire and cable, which could adversely affectthe demand for our products. Copper prices, which peaked in May 2006 at $4.04per pound, have declined to $2.74 per pound as of March 1, 2007. To the extentcommodity prices decline, the net realizable value of our existing inventorycould be reduced, and our gross profits could be adversely affected.

***If we are unable to maintain ourrelationships with our electrical distributor customers, it could have amaterial adverse effect on our financial results.***

We rely primarily on electrical distributors topurchase our wire and cable. The number, size, business strategy and operationsof these electrical distributors vary widely from market to market. The successof our sales and distribution channels depends heavily on our successfulcooperation with these electrical distributors in each of our various markets.

In 2006, our ten largest customers accounted forapproximately 47% of our sales, and our largest customer accounted forapproximately 13% of our sales. If we were to lose one or more of our largeelectrical distributor customers, or if one or more of our large electricaldistributor customers were to significantly reduce the amount of specialty wireand cable they purchase from us, and we were unable to replace the lost saleson similar terms, we could experience a significant loss of revenue andprofits. In addition, if one or more of our key electrical distributorcustomers failed or were unable to pay, we could experience a write-off orwrite-down of the related receivables, which could adversely affect ourearnings. We participate in a number of national marketing groups and engage injoint promotional sales activities with the electrical distributor members ofthose groups. Any permanent exclusion of us from, or refusal to allow us toparticipate in, such national marketing groups could have a material adverseeffect on our sales and our results of operations.

***An inability to obtain the products that wedistribute could result in lost revenues and reduced profits and damage ourrelationships******with customers.***

We currently source products from more than 160suppliers. However, we have adopted a strategy to concentrate our purchaseswith a small number of suppliers in order to maximize product quality, deliverydependability, purchasing efficiencies and supplier incentives. As a result, in2006 over 57% of our annual purchases came from three suppliers. If any ofthese suppliers changed its sales strategy to reduce its reliance ondistributors, or decided to terminate its business relationship with us, oursales and earnings would be adversely affected unless and until we were able toestablish relationships with suppliers of comparable products. In addition, ifwe are not able to obtain the products we distribute from either our currentsuppliers or other competitive sources, we could experience a loss of revenue,reduction in profits and damage to our relationships with our customers. Supplyshortages may occur as a result of unanticipated demand or production cutbacks,

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shortages of rawmaterials, labor disputes or weather conditions affecting products orshipments, transportation disruptions or other reasons beyond our control. Whenshortages occur, specialty wire and cable suppliers often allocate productsamong distributors, and our allocations might not be adequate to meet ourcustomers’ needs.

***Loss of key personnel or our inability toattract and retain new qualified personnel could hurt our ability to operateand grow successfully.***

Our success is highly dependent upon the services ofCharles Sorrentino, our President and Chief Executive Officer, Nicol Graham,our Chief Financial Officer, and James Pokluda, our Vice President of Marketingand Merchandising. Our success will continue to depend to a significant extenton our executive officers and key management and sales personnel. We do not havekey man life insurance covering any of our executive officers. We may not beable to retain our executive officers and key personnel or attract additionalqualified management and sales personnel. The loss of any of our executiveofficers or our other key management and sales personnel or our inability torecruit and retain qualified personnel could hurt our ability to operate andmake it difficult to execute our growth strategies.

***A change in vendor rebate programs couldadversely affect our gross margins and results of operations.***

The terms on which we purchase products from many ofour suppliers entitle us to receive a rebate based on the volume of ourpurchases. These rebates effectively reduce our costs for products. If marketconditions change, suppliers may adversely change the terms of some or all ofthese programs. These changes may lower our gross margins on products we selland may have an adverse effect on our operating income.

***Our private branded products might notcontinue to gain market acceptance.***

An important element of our growth strategy is thecontinued development and market acceptance of our LifeGuardTM line oflow-smoke, zero-halogen cable and other products sold under our private brands.Our success with our private branded products, however, depends on our abilityto market these products in the appropriate channels and, ultimately, on theacceptance of these products in the markets we serve. We have only been sellingLifeGuardTM cable since 2003, and our efforts to develop and market new privatebranded products might not be successful. Further demand for our products coulddiminish as a result of a competitor’s introduction of higher quality, betterperforming or lower cost products in the marketplace. In addition, thelow-smoke, zero-halogen properties of our LifeGuardTM line of cable productsdepend on a highly-engineered petrochemical material. If there is not anadequate supply of this material, we may be unable to have our LifeGuardTMproducts manufactured, or our LifeGuardTM products may be available only at ahigher cost or after a long delay. If we cannot sustain the growth in demandfor our LifeGuardTM products, if we cannot have those products manufactured onacceptable terms or if we do not develop additional private branded products,we will be unable to realize fully our growth strategy.

***If we encounter difficulties with ourmanagement information systems, we would experience problems managing ourbusiness.***

We believe our management information systems are acompetitive advantage in maintaining our leadership position in the specialtywire and cable distribution industry. We rely upon our management informationsystems to manage and replenish inventory, fill and ship orders on a timelybasis and coordinate our sales and marketing activities. If we experienceproblems with our management information systems, we could experience productshortages, diminished inventory control or an increase in accounts receivable.Any failure by us to maintain our management information systems couldadversely impact our ability to attract and serve customers and would cause usto incur higher operating costs and experience reduced profitability.

***An increase in competition could decreasesales or earnings.***

We operate in a highly competitive industry. Wecompete directly with national, regional and local providers of specialty wireand cable. Competition is primarily focused in the local service area and isgenerally based on product line breadth, product availability, servicecapabilities and price. Some of our existing competitors have, and new marketentrants may have, greater financial and marketing resources than we do. To theextent existing or future competitors seek to gain or retain market share byreducing prices, we may be required to lower our prices, thereby adverselyaffecting our financial results. Existing or future competitors also may seekto compete with us for acquisitions, which could have the effect of increasingthe price and reducing the number of suitable acquisitions. Other companies,including our current electrical distributor customers, could seek to competedirectly with our private branded products, which could adversely affect oursales of those products and ultimately our financial results. Our existingelectrical distributor customers, as well as suppliers, could seek to competewith us by offering services similar to ours, which could adversely affect ourmarket share and our financial results. In addition, competitive pressuresresulting from the industry trend toward consolidation could adversely affectour growth and profit margins.

***We may be subject to product liabilityclaims that could be costly and time consuming.***

We sell specialty wire and cable that has beenmanufactured by third parties. As a result, from time to time we have beennamed as defendants in lawsuits alleging that these products caused physicalinjury or injury to property. We rely on product warranties and indemnitiesfrom the product manufacturers, as well as insurance that we maintain, toprotect us from these claims. However, manufacturers’ warranties andindemnities are typically limited in duration and scope and may not cover allclaims that might be asserted. Moreover, our insurance coverage may not beavailable or may not be adequate to cover every claim asserted or the entireamount of every claim.

***As a newly public company ouradministrative costs are increasing and management’s time and attention isbeing diverted, particularly to comply with regulatory requirements implementedby the Securities and Exchange Commission and The Nasdaq Stock  Market.***

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***As a newly public company, we incurredsignificant legal, accounting, director and officer liability insurance costs,and other costs during 2006 that we did not incur as a private company. We willcontinue to incur additional costs in 2007, as we become subject to more of theprovisions of the Sarbanes-Oxley Act of 2002 and other rules and regulationsthat the Securities and Exchange Commission, or the SEC, and The Nasdaq StockMarket, or Nasdaq, have adopted. In particular, beginning with our annualreport for 2007, we will be required under Section 404 of the Sarbanes-OxleyAct to furnish a report by our management on the design and operatingeffectiveness of our internal controls over financial reporting. Given thatthis will be the first time that we will be required to furnish such a report,we expect to incur material costs and to spend significant management time tocomply with Section 404. In addition, we are incurring all of the internal and externalcosts of preparing and distributing periodic public reports required under thesecurities laws and to comply with applicable rules and regulations. We havenot yet experienced a full fiscal year of these additional costs but we expectthem to be in the range of $1.25 million to $1.75 million per year.In addition to increasing costs, our compliance efforts have made someactivities more time-consuming and diverted management time and attention awayfrom our core business. We will need to expand our operational and financialsystems and controls as part of our compliance efforts.***

***If we fail to maintain an effective system ofinternal controls, we may not be able to accurately report our financialresults or prevent fraud.  As a result,current and potential stockholders could lose confidence in our financialreporting, which would harm the trading price of our stock.***

Effective internal controls are necessary for us toprovide reliable financial reports and prevent fraud.  Any failure to implement required new orimproved controls, or difficulties encountered in their implementation, couldharm our operating results or cause us to fail to meet our reportingobligations.  Inadequate internalcontrols could also cause investors to lose confidence in our reportedfinancial information, which could have a negative effect on the trading priceof our stock.

***We may not be able to successfully identifyacquisition candidates, effectively integrate newly acquired businesses intoour operations or achieve expected profitability from our acquisitions.***

To supplement our growth, we intend to selectivelypursue acquisition opportunities. If we are not successful in findingattractive acquisition candidates that we can acquire on satisfactory terms, orif we cannot complete those acquisitions that we identify, we will not be ableto realize the benefit of this growth strategy.

Acquisitions involve numerous possible risks,including unforeseen difficulties in integrating operations, technologies,services, accounting and personnel; the diversion of financial and managementresources from existing operations; unforeseen difficulties related to enteringgeographic regions or target markets where we do not have prior experience; thepotential loss of key employees; and the inability to generate sufficientprofits to offset acquisition or investment-related expenses. If we financeacquisitions by issuing equity securities or securities convertible into equitysecurities, our existing stockholders could be diluted, which, in turn, couldadversely affect the market price of our stock. If we finance an acquisitionwith debt, it could result in higher leverage and interest costs. As a result,if we fail to evaluate and execute acquisitions properly, we might not achievethe anticipated benefits of these acquisitions, and we may incur costs inexcess of what we anticipate.

**ITEM 1B.  UNRESOLVED STAFFCOMMENTS**

None.

**ITEM 2.     PROPERTIES**

***Facilities***

Thefollowing table sets forth information about our executive offices and ourwarehouse facilities as of December 31, 2006.
| **Location**     | ** ** | ** ** | ** ** | **Total  Square Feet** | ** ** | **Warehouse  Square Feet** | ** ** | **Leased Expiration Date** | ** ** |
|------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------------|------------|
| Houston, TX      |       | 166,720    |       | 136,720                     |       | Owned                           |       |
| Chicago, IL      |       | 67,448     |       | 62,378                      |       | August 8, 2013                  |       |
| Philadelphia, PA |       | 60,000     |       | 54,500                      |       | December 31, 2011               |       |
| Los Angeles, CA  |       | 52,901     |       | 47,036                      |       | November 14, 2009               |       |
| Atlanta, GA      |       | 50,733     |       | 47,483                      |       | September 30, 2009              |       |
| Tampa, FL        |       | 49,776     |       | 45,374                      |       | March 31, 2013                  |       |
| Charlotte, NC    |       | 44,159     |       | 38,892                      |       | June 30, 2015                   |       |
| Baton Rouge, LA  |       | 22,200     |       | 19,700                      |       | September 30, 2009              |       |
| Seattle, WA      |       | 15,240     |       | 13,740                      |       | March 31, 2007                  |       |
| Total            |       | 529,177    |       | 465,823                     |       |                            |       |

 

We own our Houston, Texas facility, which serves as aregional distribution center as well as our corporate headquarters. Constructedin 1995 on 11.5 acres, the facility houses all centralized and back officefunctions such as finance, marketing, purchasing, human resources 

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and informationtechnology. Our Houston headquarters is pledged as collateral to our lenders.We believe that our properties are in good operating condition and adequatelyserve our current business operations.

As a test of potential new markets and to augment ourdistribution network, we contract with two third party logistics firms. Thelocation of and services provided by these third party logistics firms are asfollows:

·       *Denver, Colorado*—Inventory and ship pre-packaged andcut-to-order lengths of specialty wire and cable for a monthly service fee foran unlimited number of transactions; and

·       *San Francisco, California*—Inventory and ship pre-packaged andcut-to-order lengths of specialty wire and cable on a per-transaction feebasis.

**ITEM 3.     LEGAL PROCEEDINGS**

From time to time, we are involved in lawsuits thatare brought against us in the normal course of business. We are not currently aparty to any legal proceedings that we expect, either individually or in theaggregate, to have a material adverse effect on our business or financialcondition. We, along with many other defendants, have been named in a number oflawsuits in the state courts of Minnesota, North Dakota and South Dakotaalleging that certain wire and cable which may have contained asbestos causedinjury to the plaintiffs who were exposed to this wire and cable. Theselawsuits are individual personal injury suits that seek unspecified amounts ofmoney damages as the sole remedy. It is not clear whether the alleged injuriesoccurred as a result of the wire and cable in question or whether we, in fact,distributed the wire and cable alleged to have caused any injuries. Inaddition, we did not manufacture any of the wire and cable at issue, and wewould rely on any warranties from the manufacturers of such cable if it weredetermined that any of the wire or cable that we distributed contained asbestoswhich caused injury to any of these plaintiffs. In connection with ALLTEL’ssale of our company in 1997, ALLTEL provided indemnities with respect to costsand damages associated with these claims that we believe we could enforce ifour insurance coverage proves inadequate. In addition, we maintain generalliability insurance that has applied to these claims. To date, all costsassociated with these claims have been covered by the applicable insurancepolicies and all defense of these claims has been handled by the applicableinsurance companies.

**ITEM 4.     SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS**

No matters were submitted to a vote of our securityholders during the fourth quarter of the year ended December 31, 2006.

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**PART II**

**ITEM 5.**                    MARKET FORREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER  PURCHASES OF  EQUITY SECURITIES

Our common stock has been traded on The Nasdaq GlobalMarket under the symbol “HWCC” since June 15, 2006.  Prior to that time, there was no publicmarket for our stock.  The followingtable lists quarterly information on the price range of our common stock basedon the high and low reported sale prices for our common stock as reported byThe Nasdaq Global Market for the periods indicated below.
| ** **                           | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------------|------------|----------|------------|---------|------------|
| **Year ended December 31, 2006:**    |       |     |       |    |       |
| Second quarter  (from June 15, 2006) |       | $        | 17.97      |    | $          | 15.00 |   |
| Third quarter                        |       | $        | 23.89      |    | $          | 15.88 |   |
| Fourth quarter                       |       | $        | 25.50      |    | $          | 17.54 |   |

 

Therewere 28 holders of record of our common stock as of December 31, 2006.

**Purchasesof Equity Securities by the Issuer and Affiliated Purchasers**

No purchases of our equity securities were made by usor affiliated purchasers during the fourth quarter of the year ended December31, 2006.

**Dividend Policy**

We paid a special dividend aggregating$20.0 million on our common stock on December 30, 2005. We have notpaid any other dividends since that time, and our board of directors currentlyintends to retain any future earnings for reinvestment in our business. In anyevent, any determination to pay dividends will be at the discretion of ourboard of directors and will be dependent upon our results of operations andcash flows, our financial position and capital requirements, general businessconditions, legal, tax, regulatory and any contractual restrictions on thepayment of dividends, including the restrictions contained in the agreementsgoverning our outstanding indebtedness and any other factors our board ofdirectors deems relevant.

As a holding company, our only source of funds to paydividends is distributions from our operating subsidiary. Under our creditfacility, our operating subsidiary may only pay us dividends for specifiedpurposes, which do not include enabling us to pay dividends on our commonstock.

**SecuritiesAuthorized for Issuance under Equity Compensation Plans**

The information called for by this item and by Item 12regarding securities available for issuance is presented under Item 12.

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**ITEM 6.**                    SELECTEDFINANCIAL DATA

You should read the following selected financialinformation together with our consolidated financial statements and the relatednotes and the “Management’s Discussion and Analysis of Financial Condition andResults of Operations” appearing elsewhere in this Form 10-K. We have derivedthe consolidated statement of income data for each of the years endedDecember 31, 2006, 2005 and 2004, and the consolidated balance sheetinformation at December 31, 2006 and December 31, 2005 from ouraudited financial statements, which are included in this Form 10-K. We havederived the consolidated statement of income data for each of the years endedDecember 31, 2003 and December 31, 2002, and the consolidated balancesheet data at December 31, 2004, 2003 and 2002 from our audited financialstatements, which are not included in this Form 10-K.
| ** **                                      | ** ** | **Year Ended December 31,**                             | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                                               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands, except share data)** | ** ** |
| ** **                                      |       |                                                                   |       |   |   |   |   |   |   |   |   |
| **CONSOLIDATED  STATEMENT OF INCOME DATA:**     |       |                                                                   |       |   |   |   |   |   |   |   |   |
| Sales                                           |       | $                                                                      | 323,467    |   | $ | 213,957 |   | $ | 172,723 |   | $ | 149,084 |   | $ | 158,230 |   |
| Cost of sales                                   |       | 231,128                                                                |       | 158,240 |   | 131,419 |   | 113,959 |   | 120,839 |   |
|                                            |       |                                                                   |       |   |   |   |   |   |   |   |   |
| Gross profit                                    |       | 92,339                                                                 |       | 55,717 |   | 41,304 |   | 35,125 |   | 37,391 |   |
| Operating  expenses:                            |       |                                                                   |       |   |   |   |   |   |   |   |   |
| Salaries and commissions                        |       | 22,706                                                                 |       | 18,707 |   | 16,665 |   | 14,588 |   | 15,190 |   |
| Other operating expenses                        |       | 15,975                                                                 |       | 14,016 |   | 12,392 |   | 13,857 |   | 12,846 |   |
| Management feeto stockholder(1)                 |       | 208                                                                    |       | 500 |   | 501 |   | 502 |   | 504 |   |
| Litigation settlements                          |       | —                                                                 |       | (672 | ) | (650 | ) | — |   | 49 |   |
| Depreciation and amortization                   |       | 376                                                                    |       | 398 |   | 876 |   | 1,481 |   | 1,688 |   |
| Total operating  expenses                       |       | 39,265                                                                 |       | 32,949 |   | 29,784 |   | 30,428 |   | 30,277 |   |
|                                            |       |                                                                   |       |   |   |   |   |   |   |   |   |
| Operating income                                |       | 53,074                                                                 |       | 22,768 |   | 11,520 |   | 4,697 |   | 7,114 |   |
| Interest expense                                |       | 3,075                                                                  |       | 2,955 |   | 3,544 |   | 4,186 |   | 4,360 |   |
|                                            |       |                                                                   |       |   |   |   |   |   |   |   |   |
| Income before  income taxes                     |       | 49,999                                                                 |       | 19,813 |   | 7,976 |   | 511 |   | 2,754 |   |
| Income tax  provision                           |       | 19,325                                                                 |       | 7,299 |   | 3,167 |   | 295 |   | 290 |   |
|                                            |       |                                                                   |       |   |   |   |   |   |   |   |   |
| Net income                                      |       | $                                                                      | 30,674     |   | $ | 12,514 |   | $ | 4,809 |   | $ | 216 |   | $ | 2,464 |   |
|                                            |       |                                                                   |       |   |   |   |   |   |   |   |   |
|                                            |       |                                                                   |       |   |   |   |   |   |   |   |   |
| Earnings per  share:                            |       |                                                                   |       |   |   |   |   |   |   |   |   |
| Basic                                           |       | $                                                                      | 1.63       |   | $ | 0.75 |   | $ | 0.29 |   | $ | 0.01 |   | $ | 0.15 |   |
|                                            |       |                                                                   |       |   |   |   |   |   |   |   |   |
| Diluted                                         |       | $                                                                      | 1.62       |   | $ | 0.75 |   | $ | 0.29 |   | $ | 0.01 |   | $ | 0.15 |   |
| Weighted average  common shares outstanding(2): |       |                                                                   |       |   |   |   |   |   |   |   |   |
| Basic                                           |       | 18,875,192                                                             |       | 16,606,672 |   | 16,350,465 |   | 16,334,079 |   | 16,333,875 |   |
| Diluted                                         |       | 18,984,826                                                             |       | 16,757,303 |   | 16,520,601 |   | 16,504,215 |   | 16,504,011 |   |

----

(1)             Themanagement fee arrangement was terminated as of the completion of our initialpublic offering in June 2006.

(2)             Allof the share information has been restated for the 1.875 stock split discussedin Note 1 of the consolidated financial statements.

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| ** **                            | ** ** | **As of December 31,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|
| ** **                            | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)**  | ** ** |
| **CONSOLIDATED  BALANCE SHEET DATA:** |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents            |       | $                                     | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Accounts  receivable, net             |       | $                                     | 52,128     |   | $ | 41,309 |   | $ | 27,072 |   | $ | 21,644 |   | $ | 20,923 |   |
| Inventories, net                      |       | $                                     | 56,329     |   | $ | 31,306 |   | $ | 29,836 |   | $ | 26,905 |   | $ | 34,726 |   |
| Total assets                          |       | $                                     | 116,864    |   | $ | 81,241 |   | $ | 65,724 |   | $ | 58,455 |   | $ | 66,927 |   |
| Book overdraft (1)                    |       | $                                     | 1,265      |   | $ | 2,119 |   | $ | 1,341 |   | $ | 174 |   | $ | 389 |   |
| Total debt (2)                        |       | $                                     | 12,059     |   | $ | 61,406 |   | $ | 43,752 |   | $ | 46,548 |   | $ | 55,668 |   |
| Stockholder’s equity (2)         |       | $                                     | 81,674     |   | $ | 742 |   | $ | 8,228 |   | $ | 3,364 |   | $ | 3,148 |   |

----

(1)             Ourbook overdraft is funded by our revolving credit facility as soon as therelated checks clear our disbursement account.

(2)             OnDecember 30, 2005, we paid a special dividend of $20.0 million to our common stockholdersand funded the payment by borrowing under our existing credit facility.

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**7.  **MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

*You should read the following discussion in conjunction with ourconsolidated financial statements and related notes appearing elsewhere in thisForm 10-K. In addition to historical information, this discussion containsforward-looking statements that involve risks, uncertainties and assumptionsthat could cause actual results to differ materially from our expectations.Factors that could cause such differences include those described in “RiskFactors” and elsewhere in this Form 10-K. Certain tabular information will notfoot due to rounding.*

**Overview**

Since our founding over30 years ago, we have grown to be one of the largest distributors ofspecialty wire and cable and related services to the U.S. electricaldistribution market. Today, we serve over 2,700 customers, including virtuallyall of the top 200 electrical distributors in the U.S. Our specialty wire andcable is primarily used in maintenance, repair and operations (“MRO”) relatedprojects and is increasingly purchased for larger scale projects in thecommunications, energy, engineering and construction, general manufacturing,infrastructure, petrochemical, transportation, utility and wastewater treatmentindustries.

In 2000, we acquired ourlargest competitor, the Futronix division of Kent Electronics Corporation.Since that time, we have pursued a number of initiatives designed to improveour operating efficiencies and increase our share of the fragmented market forspecialty wire and cable. We integrated the Futronix business into our own andrationalized inventory, facilities and low-margin customer relationships. Wehave made substantial investments in warehouse facilities and informationsystems in order to enhance our ability to provide customers with comprehensivevalue-added services, including application engineering support, inventorymanagement, custom cut capabilities and 24/7/365 customer service, orderfulfillment and shipping. During the years 2001 through 2003, the U.S.electrical distribution market was adversely affected by the general slowdownof the U.S. economy. In response to these economic conditions, we increased ourfocus on achieving operating efficiencies by leveraging our investments in ourcentralized back-office administration and purchasing, investing in a scalableinformation technology platform and implementing automated warehouse operationsand electronic product tracking. This focus has assisted us in increasing ouroperating income margin from 4.8% in 2001 to 16.4% in 2006.

Since 2003, the U.S.electrical distribution market has experienced increased demand, as largeindustrial and commercial companies have increased capital spending to “catch-up”on deferred maintenance and upgrade and expand infrastructure. According to *Electrical Wholesaling* magazine, the U.S. electricaldistribution market is estimated to have grown from approximately$60.6 billion of industry-wide sales in 2003 to $84.4 billion in2006, and is expected to grow 10.5% to $93.3 billion in 2007. At the sametime as the electrical distribution market began to recover, we implemented anew sales and marketing strategy that focuses on working in concert with ourdistributor customers to generate demand from end-users in our targeted marketsand to strengthen relationships with project and specifying engineers tostimulate demand for our specialty wire and cable. In addition, we havesignificantly increased the size of our sales force since 2003, and as ofDecember 31, 2006 we had 157 sales employees. In 2003, we introduced ourLifeGuardTM line of low-smoke, zero-halogen cable products which, due to theirhighly engineered specifications and safety benefits, generate higher marginsfor us than traditional cable products. As a result of our new sales andmarketing initiatives, as well as general market growth, our revenue hasincreased at a CAGR of 29.5% over the past three years, from$149.1 million in 2003 to $323.5 million in 2006.

Our revenue is driven in partby the level of capital spending within the end-markets we serve. Because manyof these end-markets defer capital expenditures during periods of economicdownturns, our business has experienced cyclicality from time to time. Webelieve that our revenue will continue to be impacted by fluctuations incapital spending and by our ability to drive demand through our sales andmarketing initiatives and the continued development and marketing of ourprivate branded products, such as LifeGuardTM.

Our direct costs will continueto be influenced significantly by the prices we pay our suppliers to procurethe products we distribute to our customers. Changes in these costs may result,for example, from increases or decreases in raw material costs, changes in ourrelationships with suppliers or changes in vendor rebates. Our operatingexpenses will continue to be affected by our investment in sales, marketing andcustomer support personnel and commissions paid to our sales force for revenuegenerated. Some of our operating expenses are related to our fixedinfrastructure, including rent, utilities, administrative salaries,maintenance, insurance and supplies. To meet our customers’ needs for anextensive product offering and short delivery times, we will need to continueto maintain adequate inventory levels. Our ability to obtain this inventorywill depend, in part, on our relationships with suppliers.

**Changes in Connection with Becoming a Public Company**

In June 2006 wecompleted our initial public offering, in which we sold 4,250,000 shares ofcommon stock for approximately $49.9 million in net proceeds, which we used toreduce indebtedness under our credit facility. In connection with the offering,we terminated a management agreement between us and an affiliate of CodeHennessy & Simmons, under which we previously paid an annual $500,000management fee.

As a public company, we haveincurred significant additional operating expenses such as increased auditfees, professional fees, directors’ and officers’ insurance costs, compensationfor our board of directors, and expenses related to hiring additional personneland expanding our administrative functions. Many of these expenses were notincurred or were incurred at a lower level by us as a private company and arenot included in our prior results of operations. We began to incur certain ofthese expenses during 2006, and we expect that these expenses will continue toincrease. We expect these additional expenses to be in the range of$1.25 million to $1.75 million per year.

On December 30, 2005, wepaid a special dividend of $20.0 million to our common stockholders andfunded the payment by borrowing under our existing credit facilities. Due tothe interest payable on these borrowings, our net earnings, and earnings pershare, in 2006 were lower than they would have been had we not paid the specialdividend.

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**Critical Accounting Policies and Estimates**

Critical accounting policiesare those that both are important to the accurate portrayal of a company’sfinancial condition and results, and require subjective or complex judgments,often as a result of the need to make estimates about the effect of mattersthat are inherently uncertain.

In order to prepare financialstatements that conform to accounting principles generally accepted in theUnited States, commonly referred to as GAAP, we make estimates and assumptionsthat affect the amounts reported in our financial statements and accompanyingnotes. Certain estimates are particularly sensitive due to their significanceto the financial statements and the possibility that future events may besignificantly different from our expectations.

We have identified thefollowing accounting policies as those that require us to make the mostsubjective or complex judgments in order to fairly present our consolidatedfinancial position and results of operations. Actual results in these areascould differ materially from management’s estimates under different assumptionsand conditions.

*Allowance for Doubtful Accounts*

We maintain an allowance fordoubtful accounts receivable for estimated losses resulting from the inabilityof our customers to make required payments. We perform periodic creditevaluations of our customers and typically do not require collateral.Consistent with industry practices, we require payment from most customerswithin 30 days of invoice date. We have an estimation procedure, based onhistorical data and recent changes in the aging of these receivables, that weuse to record reserves throughout the year. In the last five years, write-offsagainst our allowance for doubtful accounts have averaged approximately$157,000 per year. A 20% change in our estimate at December 31, 2006 wouldhave resulted in a change in income before income taxes of $98,000 for the yearended December 31, 2006.

*Reserve for Returns and Allowances*

We estimate the gross profitimpact of returns and allowances for previously recorded sales. This reserve iscalculated on historical and statistical returns and allowances data andadjusted as trends in the variables change. A 20% change in our estimate atDecember 31, 2006 would have resulted in a change in income before incometaxes of $136,000 for the year ended December 31, 2006.

*Inventory Obsolescence*

We continually monitor ourinventory levels at each of our distribution locations. Our reserve forinventory obsolescence is based on the age of the inventory, movements of ourinventory over the prior twelve months and the experience of our purchasing andsales departments in estimating demand for the product in the succeeding year.Our inventories are generally not susceptible to technological obsolescence. A20% change in our estimate at December 31, 2006 would have resulted in achange in income before income taxes of $393,000 for the year ended December 31,2006.

*Vendor Rebates*

Many of our arrangements withour vendors entitle us to receive a rebate of a specified amount when weachieve any of a number of measures, generally related to the volume ofpurchases from the vendor. We account for these rebates as a reduction of theprices of the vendor’s products, which reduces inventory until we sell theproduct, at which time these rebates reduce cost of sales. Throughout the year,we estimate the amount of rebates earned based on our purchases to date and ourestimate of purchases to be made for the remainder of the year relative to thepurchase levels that mark our progress toward earning the rebates. Wecontinually revise these estimates to reflect actual purchase levels. A 20%change in our estimate of total rebates earned during 2006 would have resultedin a change in income before income taxes of $1.2 million for the yearended December 31, 2006.

*Goodwill*

Goodwill represents theexcess of the amount we paid to acquire businesses over the estimated fairvalue of tangible assets and identifiable intangible assets acquired, lessliabilities assumed. At December 31, 2006, our goodwill balance was $3.0million, representing 2.6% of our total assets.

In 2002, we adopted theprovisions of Statement of Financial Accounting Standards No. 142, *Goodwill and Other Intangible Assets* (“SFAS 142”).Under SFAS 142, we test goodwill for impairment annually, or morefrequently if indications of possible impairment exist, by applying a fairvalue-based test. In October 2006, we performed our annual goodwillimpairment tests for goodwill and, as a result of this test, we believe thegoodwill on our balance sheet is not impaired. If circumstances change orevents occur to indicate that our fair market value has fallen below bookvalue, we will compare the estimated fair value of the goodwill to its carryingvalue. If the carrying value of goodwill exceeds the estimated fair value ofgoodwill, we will recognize the difference as an impairment loss in operatingincome.

**New Accounting Pronouncements**

In July 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes*(“FIN 48”), an interpretation of FASB Statement No. 109, *Accounting for Income Taxes*. FIN 48 requires that aposition taken or expected to be taken in a tax return be recognized in thefinancial statements when it is more likely than not (i.e., a likelihood ofmore than fifty percent) that the position would be sustained upon examinationby tax authorities. A recognized tax position is then measured at the largestamount of benefit that is greater than fifty percent likely of being realizedupon ultimate settlement. Our effective date is January 1, 

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2007.Upon adoption, the cumulative effect of applying the recognition andmeasurement provisions of FIN 48, if any, shall be reflected as anadjustment to the opening balance of retained earnings. The adoption ofFIN 48 is not anticipated to have a material impact on our ConsolidatedFinancial Statements.

In March 2006, the EmergingIssues Task Force (“EITF”) reached a consensus on EITF IssueNo. 06-3, *How Taxes Collected from Customers andRemitted to Governmental Authorities Should be Presented in the IncomeStatement (that is, Gross versus Net Presentation)*, which allowscompanies to adopt a policy of presenting taxes in the income statement oneither a gross or net basis. Taxes within the scope of this EITF would includetaxes that are imposed on a revenue transaction between a seller and acustomer, for example, sales taxes, use taxes, value-added taxes, and sometypes of excise taxes. EITF 06-3 is effective for interim and annualreporting periods beginning after December 15, 2006. EITF 06-3 willnot impact our method for recording and reporting these type taxes in itsconsolidated financial statements, as our current policy is to report all suchtaxes on a net basis.

**Sales**

We generate most of our salesby providing specialty wire and cable to our customers. We also collect salesthrough freight charges. We recognize revenue upon shipment of our products tocustomers from our distribution centers or directly from our suppliers. Salesincentives earned by customers are accrued in the same month as the shipment isinvoiced.

**Cost of Sales**

Cost of sales consists primarilyof the average cost of the specialty wire and cable that we sell. We also incurshipping and handling costs in the normal course of business. Cost of salesalso reflects cash discounts for prompt payment to vendors and vendor rebatesgenerally related to annual purchase targets.

**Operating Expenses**

Operating expenses include all expenses incurred to receive, sell andship product and administer the operations of our company.

*Salaries and Commissions.*   Salary expense includes the basecompensation, and any overtime earned by hourly personnel, for all sales,administrative and warehouse employees. Commission expense is earned by insidesales personnel based on gross profit dollars generated, by field salespersonnel from generating sales and meeting various personal objectives, bysales, national and project managers for driving the sales process, by regionalmanagers based on the profitability of their branches and by corporate managersbased primarily on our profitability and also on other operating metrics.

*Other Operating Expenses.*   Other operating expenses include allother expenses, except for salaries and commissions, management fees anddepreciation and amortization. This includes all payroll taxes, healthinsurance, traveling expenses, public company expenses, advertising, managementinformation system expenses, facility rent and maintenance and all distributionexpenses such as packaging, reels, and repair and maintenance of equipment andfacilities.

*Management Fee.*   The management fee consists of expensesthat we paid to CHS Management II, L.P. for certain management and advisoryservices. This management fee arrangement was cancelled upon the completion ofthe June 2006 public offering.

*Litigation Settlements.*   Litigation settlements reflect thefunds received from the settlement of a lawsuit against two vendors in 2004 andfrom a court award in 2005 related to a claim for breach of contract thatoccurred under the previous ownership.

*Depreciation and Amortization.*   We incur depreciation and amortizationexpenses for costs related to the capitalization of property and equipment on astraight-line basis over the estimated useful lives of the assets, which rangefrom three to 30 years. We amortize leasehold improvements over theshorter of the lease term or the life of the related asset.

**Interest Expense**

Interest expense consistsprimarily of interest we pay on our debt. The decrease in interest expense in2005 resulted from payments made in 2004 and 2005 on our junior subordinatedpromissory notes, which bore interest at a rate of 14.0% per annum. Interestexpense increased in the first quarter of 2006 due to the additional debtincurred to finance the payment of the special dividend in December 2005.Interest expense decreased in the last two quarters of 2006 due to our use of theIPO proceeds to reduce outstanding debt.

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**Results of Operations**

The following discussioncompares our results of operations for the years ended December 31, 2006,2005 and 2004.

The following table shows, for the periods indicated, informationderived from our consolidated statements of income, expressed as a percentageof sales for the period presented.
| ** **                    | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Sales                         |       | 100.0                                      | %          | 100.0 | % | 100.0 | % |
| Cost of sales                 |       | 71.5                                       | %          | 74.0 | % | 76.1 | % |
| Gross profit.                 |       | 28.5                                       | %          | 26.0 | % | 23.9 | % |
| Operating  expenses:          |       |                                       |       |   |   |   |   |
| Salaries and commissions      |       | 7.0                                        | %          | 8.7 | % | 9.6 | % |
| Other operating expenses      |       | 4.9                                        | %          | 6.6 | % | 7.2 | % |
| Management fee to stockholder |       | 0.1                                        | %          | 0.2 | % | 0.3 | % |
| Litigation settlements        |       | 0.0                                        | %          | (0.3 | %) | (0.4 | %) |
| Depreciation and amortization |       | 0.1                                        | %          | 0.2 | % | 0.5 | % |
| Total operating expenses      |       | 12.1                                       | %          | 15.4 | % | 17.2 | % |
| Operating income              |       | 16.4                                       | %          | 10.6 | % | 6.7 | % |
| Interest expense              |       | 1.0                                        | %          | 1.4 | % | 2.1 | % |
| Income before  income taxes   |       | 15.5                                       | %          | 9.3 | % | 4.6 | % |
| Income tax  provision         |       | 6.0                                        | %          | 3.4 | % | 1.8 | % |
| Net income                    |       | 9.5                                        | %          | 5.8 | % | 2.8 | % |

 

***Comparison of Years EndedDecember 31, 2006 and 2005***

**Sales**

Our sales for 2006 increased51.2% to $323.5 million from $214.0 million in fiscal year 2005. We estimatethat approximately 8% to 12% of the growth in sales is attributable to highercommodity prices for certain components of our products, principally copper andpolymers. The remaining 39% to 43% of the increase in sales represents growth,net of inflation, from the five major end-user market growth initiatives,encompassing Emission Controls, Engineering & Construction,Industrials, LifeGuardTM (and other private branded products), Utility PowerGeneration and our core distributor business. Additionally, during the year, weincreased the size of our sales force by approximately 10%, which alsopositively impacted sales growth.

**Cost of Sales**

Cost of sales was $231.1million in 2006, an increase of $72.9 million, or 46.1%, compared to cost ofsales of $158.2 million in 2005. The increase was primarily due to the increasein demand for our products. The increase also resulted in part from an increasein freight costs of $1.0 million in 2006 over 2005. Additionally, there was aninventory obsolescence charge of $0.3 million in 2006 compared to a credit of$0.2 million in 2005. Partially offsetting these increases were vendor rebatesand discounts for prompt payments totaling $4.5 million more in 2006 than in2005. Vendor rebates and discounts for prompt payment increased primarily dueto increased sales volume. Vendor rebates also increased due to more favorable termsin the agreements in 2006 versus 2005.

**Gross Profit**

Gross profit for 2006increased 65.7% to $92.3 million in 2006 from $55.7 million in 2005. Theincrease in gross profit was primarily due to increased sales. Gross profit asa percentage of net sales, commonly referred to as gross margin, increased to28.5% in 2006 from 26.0% in 2005. The increase in the Company’s gross marginwas principally a result of better price realization because of improvedproduct availability and service capabilities as a result of our decision toincrease inventory levels. Increased sales of private branded products, whichtypically sell at a higher gross margin than our other products, and increasedvendor rebates also helped increase gross margin.

**Operating Expenses**

Operating expenses were $39.3million in 2006, an increase of $6.3 million, or 19.2%, compared to operatingexpenses of $32.9 million in 2005. As a percentage of sales, overall operatingexpenses decreased to 12.1% in 2006 from 15.4% in 2005, reflecting our abilityto leverage fixed costs over the higher sales volume. The increase in operatingexpenses was attributable to the specific factors discussed below.

*Salaries and Commissions.*   Salaries and commissions increased $4.0million, or 21.4%, to $22.7 million in 2006 from $18.7 million in 2005. Thisincrease resulted from higher head count, annual pay increases and increasedcommission expense due to higher sales levels, gross profit dollars andprofitability. Salaries and commissions as a percentage of net sales decreasedto 7.0% in 2006 from 8.7% in 2005 due to changes in, or maximum payouts under,commission programs.

22

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*Other Operating Expenses.*   Other operating expenses increased $2.0million, or 14.0%, to $16.0 million in 2006 from $14.0 million in 2005. Theincrease in other operating expenses was due to the higher level of businessactivity and public company expenses which were not incurred in 2005.

*Management Fee.*   Management fee expenses decreased to$0.2 million in 2006 from $0.5 million in 2005. This reduction was due to thecancellation of the management services agreement in connection with the IPO inJune 2006.

*Depreciation and Amortization.*   Depreciation and amortization expensewas consistent at $0.4 million in 2006 and 2005.

**Interest Expense**

Interest expense increased$0.1 million, or 4.1%, from $3.0 million in 2005 to $3.1 million in 2006. Theslight increase in interest expense was the result of the increase in debt tofund the dividend payout in December 2005, offset by the pay down of debtfrom the proceeds of our initial public offering in June 2006.

**Income Tax Expense**

Income taxes increased $12.0million or 164.8%, primarily due to the 152.4% increase in income before taxes.Our effective income tax rate increased from 36.8% in 2005 to 38.7% in 2006,primarily due to an increase in state income taxes.

**Net Income**

We achieved net income of$30.7 million in 2006 compared to net income of $12.5 million in2005, an increase of 145.1%. We estimate that net income benefited by$4.5 million to $6.5 million in 2006 due to the effect of inflationon certain components of our products, principally copper and polymers.

***Comparison of Years EndedDecember 31, 2005 and 2004***

**Sales**

Our sales were$214.0 million in 2005, an increase of $41.2 million, or 23.9%,compared to sales of $172.7 million in 2004. The increase was the resultof greater demand for our products, spurred by a higher level of capitalspending in a number of end-markets, including investments by utilities in newpower generation projects and facility upgrades, increased MRO spending andincreased sales of our LifeGuardTM product. Sales of control and power cable,our largest product family, increased by $17.0 million, or 30%, from $56.4 millionin 2004 to $73.4 million in 2005. Sales also benefited from the additionof 13 sales personnel in 2005 and from the efforts of our field sales force totrack new construction and MRO projects to get our products included inspecifications. Sales increased by more than 20% in every region we servedexcept the Northeast, where general economic activity remained slower than inthe rest of the country. We estimate that we benefited by approximately $5.0 to$6.0 million in sales as a result of the Gulf Coast hurricanes in thesecond half of 2005.

**Cost of Sales**

Cost of sales was$158.2 million in 2005, an increase of $26.8 million, or 20.4%,compared to cost of sales of $131.4 million in 2004. The increase wasprimarily due to the increase in demand for our products mentioned above. Theincrease also resulted in part from an increase in freight costs of$0.9 million in 2005 over 2004. Partially offsetting these increases werevendor rebates and discounts for prompt payment totaling $1.7 million morein 2005 than in 2004 and an inventory obsolescence credit of $0.2 millionin 2005, as compared to a charge of $0.7 million in 2004, reflecting oursuccess in selling some older, reserved inventory.

**Gross Profit**

Gross profit increased$14.4 million, or 34.9%, to $55.7 million in 2005 from$41.3 million in 2004, due primarily to increased sales. Gross marginincreased to 26.0% in 2005 compared to 23.9% for 2004. This increase was duemainly to a more favorable product mix, including a greater proportion ofhigher margin items and increased vendor rebates. Improved inventory profilesallowed us to increase the percentage of sales volume shipped from inventoryheld in our distribution centers from 68.1% in 2004 to 69.5% in 2005. Shipmentsfrom inventory held in our distribution centers generally represent smallerorders and command a higher level of gross margin. Also contributing to thisincrease was the inventory obsolescence credit described above.

**Operating Expenses**

Operating expenses were$32.9 million in 2005, an increase of $3.1 million, or 10.4%,compared to operating expenses of $29.8 million in 2004. This increase wasattributable to the specific factors discussed below.

*Salaries and Commissions.*   Salaries and commissions increased$2.0 million, or 12.3%, to $18.7 million in 2005 from$16.7 million in 2004. This increase consists of a $0.7 millionincrease in salaries due to pay increases and additional personnel and a$1.3 million increase in commission expense, reflecting the higher levelof sales. Salaries and commissions as a percentage of net sales decreased to8.7% in 2005 from 9.6% in 2004, as sales increased at a faster rate thanpersonnel additions and commission payments.

23

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*Other Operating Expenses.*   Other operating expenses increased$1.6 million, or 13.1%, to $14.0 million in 2005 from$12.4 million in 2004. The increase in other operating expenses is due toexpenditures for advertising to support the growth in the sales volume, administrativecosts, including payroll taxes and medical and dental costs, and warehousingcosts, including supplies and equipment. While other operating expensesincreased in 2005 from 2004, other operating expenses as a percentage of netsales decreased to 6.6% in 2005 from 7.2% in 2004 due to our ability toleverage infrastructure costs.

*Management Fee.*   Management fee expenses were consistentat $0.5 million in 2005 and 2004.

*Litigation Settlement.*   We realized a litigation settlementbenefit of $0.7 million in 2005, an increase of $22,000 or 3.4% comparedto the benefit received in 2004. The 2005 litigation settlement resulted from acourt award involving the seller indemnification provisions of the 1997purchase agreement by which an investor group led by Code Hennessy &Simmons acquired us.

*Depreciation and Amortization.*   Depreciation and amortization expensewas $0.4 million in 2005, a decrease of $0.5 million, or 54.6%,compared to $0.9 million in 2004. This decrease was primarily due to thecharge in 2004 of $0.3 million for the unamortized balance of anon-compete agreement (relating to the 2000 Futronix acquisition) that wasfully amortized in 2004.

**Interest Expense**

Interest expense decreased$0.6 million, or 16.6%, to $3.0 million in 2005 from$3.5 million in 2004. An increase in our average debt outstanding was morethan offset by the effect of a decrease in our effective interest rate to 7.2%in 2005 from 7.9% in 2004. The decrease in the effective interest rate wasprimarily due to a reduction in the outstanding amount of the juniorsubordinated promissory notes, which had a 14.0% interest rate.

**Income Tax Expense**

Our effective income tax ratedecreased from 39.7% in 2004 to 36.8% in 2005, primarily due to an increase indeferred tax assets as a result of an increase in the federal rate from 34% to35% and the non-taxable nature of the litigation settlement.

**Net Income**

We generated net income of$12.5 million in 2005 compared to net income of $4.8 million in 2004,an increase of 160.2%.

**Quarterly Results**

The following table presents our unaudited quarterly results ofoperations for each of our last eight quarters ended December 31, 2006.You should read the following table in conjunction with the consolidatedfinancial statements and related notes contained elsewhere in this Form 10-K.We have prepared the unaudited information on the same basis as our auditedconsolidated financial statements. Results of operations for any quarter arenot necessarily indicative of results for any future quarters or for a fullyear.
| ** **                                      | ** ** | **Quarter Ended**                                             | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **March 31,  2005**                                           | ** ** | **June 30,  2005** | ** ** | **September 30,  2005** | ** ** | **December 31,  2005** | ** ** | **March 31,  2006** | ** ** | **June 30,  2006** | ** ** | **September 30,  2006** | ** ** | **December 31,  2006** | ** ** |
| ** **                                      | ** ** | **(In thousands, except per share data)** | ** ** |
| **CONSOLIDATED STATEMENT OF INCOME:** |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                                           |       | $                                                                  | 43,106     |   | $ | 46,652 |   | $ | 58,321 |   | $ | 65,878 |   | $ | 66,428 |   | $ | 84,184 |   | $ | 89,963 |   | $ | 82,892 |   |
| Gross profit                                    |       | $                                                                  | 11,157     |   | $ | 12,053 |   | $ | 15,136 |   | $ | 17,371 |   | $ | 17,991 |   | $ | 24,527 |   | $ | 26,203 |   | $ | 23,618 |   |
| Operating income                                |       | $                                                                  | 3,897      |   | $ | 4,271 |   | $ | 6,889 |   | $ | 7,711 |   | $ | 8,953 |   | $ | 14,563 |   | $ | 15,857 |   | $ | 13,701 |   |
| Net income                                      |       | $                                                                  | 2,011      |   | $ | 2,240 |   | $ | 3,904 |   | $ | 4,359 |   | $ | 4,802 |   | $ | 8,254 |   | $ | 9,468 |   | $ | 8,150 |   |
| Earnings per share:                             |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                           |       | $                                                                  | 0.12       |   | $ | 0.13 |   | $ | 0.24 |   | $ | 0.26 |   | $ | 0.29 |   | $ | 0.48 |   | $ | 0.45 |   | $ | 0.39 |   |
| Diluted                                         |       | $                                                                  | 0.12       |   | $ | 0.13 |   | $ | 0.23 |   | $ | 0.26 |   | $ | 0.29 |   | $ | 0.48 |   | $ | 0.45 |   | $ | 0.39 |   |

 

Historically, our sales havebeen stronger in the second and third quarters than in the first and fourthquarters, primarily as a result of seasonality in the industry. In the lastseveral years, these quarterly fluctuations were moderated by growth in oursales and, in late 2005, from demand driven by increased construction activityfollowing Hurricanes Katrina and Rita. As the effect of sales tied toHurricanes Katrina and Rita diminishes, we expect historical seasonalitycharacteristics in our sales to become more apparent.

**Impact of Inflation and Commodity Prices**

Our results of operations areaffected by changes in the inflation rate and commodity prices. Moreover,because copper and petrochemical products are components of the wire and cablewe sell, fluctuations in the costs of these and other commodities havehistorically affected our operating results. We estimate that approximatelyone-fifth of the growth in our sales from 2005 to 2006 and between$4.5 million and $6.5 million of net income in 2006 is attributableto higher commodity prices for certain components of our products, principallycopper and polymers. Copper prices, which peaked in May 2006 at $4.04 perpound, have declined to $2.74 per pound as of March 1, 2007. If we areunable to pass on to our customers cost increases due to inflation or risingcommodity prices, it could adversely affect our operating results. To theextent commodity prices decline, the net realizable value of our existinginventory could be reduced, and our gross profits could be adversely affected.

 

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**Liquidity and CapitalResources**

Our primary capital needsare for working capital obligations and other general corporate purposes,including acquisitions and capital expenditures. Our primary sources of workingcapital are cash from operations supplemented by bank borrowings. We havefunded our capital expenditures through cash from operations.

We had a book overdraftof $1.3 million at December 31, 2006 compared to a book overdraft of $2.1million at December 31, 2005. The book overdraft is funded by our revolvingcredit facility as soon as the related checks clear our disbursement account.Our net working capital was $86.9 million at December 31, 2006 compared tonet working capital of $51.4 million at December 31, 2005. The increase inworking capital was primarily due to the increase in inventory and accountsreceivable. Inventory increased to support our customers and end markets, andaccounts receivable increased due to the improved sales volume. In addition, inJune 2006 we used $49.9 million in net proceeds from our IPO to repayoutstanding debt, including the current portion of long-term obligations ($3.5million at December 31, 2005), leaving no current debt obligations at yearend 2006.

Liquidity is defined asthe ability to generate adequate amounts of cash to meet the current need forcash. We assess our liquidity in terms of our ability to generate cash to fundour operating activities. Significant factors which could affect liquidityinclude the following:

·       theadequacy of available bank lines of credit;

·       theability to attract long-term capital with satisfactory terms;

·       cashflows generated from operating activities;

·       acquisitions;and

·       capitalexpenditures.

***Comparison of Years Ended December 31, 2006 and 2005***

Our net cash provided byoperating activities was less than $0.1 million in 2006 compared to net cashused in operating activities of $3.8 million in 2005. The positive componentsto net cash provided by operating activities were net income of $30.7 millionand increases in accounts payable of $2.7 million and accrued liabilities of$2.5 million. The increases in accounts payable and accrued liabilities wereprimarily due to the increase in sales in 2006 over 2005 levels. Thesecomponents to cash provided by operating activities were offset by the increasein inventory of $25.3 million and the increase in accounts receivable of $11.0million. Inventory increased to support the increased sales activity and cablemanagement projects. Our cable management program involves purchasing and storingdedicated inventory, so customers have immediate availability for the durationof their projects. The increase to accounts receivable was due to increasedsales.

Net cash used ininvesting activities for 2006 was $0.6 million compared to $0.3 million in2005. The capital expenditures increased primarily due to purchases ofwarehouse equipment to service our growth and to upgrade or maintain ourforklifts.

Net cash provided byfinancing activities for 2006 was $0.6 million compared to $4.1 million in 2005.The cash proceeds from financing activities in 2006 reflected the proceeds fromour IPO, net of offering costs, of $49.9 million, and the subsequent pay off ofour term loan of $14.5 million, with the remaining balance going to payments onour revolving loan. The net cash provided by financing activities in 2005 wasdue to the net borrowings on the revolving and term bank loans of $33.9million. These borrowings were primarily incurred to pay off the juniorsubordinated promissory notes of $9.6 million, which carried a much higherinterest rate than our bank loans, and the payment of a special $20.0 milliondividend.

***Comparison of Years Ended December 31, 2005 and 2004***

Our net cash used byoperating activities was $3.8 million for 2005 compared to net cashprovided of $12.0 million for 2004. The cash used in operations in 2005was primarily due to the decrease in the book overdraft of $5.9 million,an increase in accounts receivable of $14.3 million and an increase ininventory of $1.3 million. This was offset in 2005 by net income of$12.5 million and increases in accounts payable and income taxes payableof $3.2 million and $0.6 million, respectively. These changes wereprimarily due to the increase in sales in 2005 over 2004 levels. Depreciationand amortization decreased by $0.5 million, including a decrease of$0.3 million due to the absence in 2005 of a charge for a non-competeagreement that was fully amortized in 2004.

Net cash used ininvesting activities for 2005 was $0.3 million compared to $0.2 millionfor 2004. The investing activities were for capital expenditures, which haveremained relatively constant over the past three years.

Net cash provided byfinancing activities for 2005 was $4.1 million compared to net cash usedof $11.8 million for 2004. The difference was primarily due to theborrowing of additional funds in 2005 to finance a $20.0 million specialdividend payment, while in 2004, we repaid $14.0 million of our juniorsubordinated promissory notes.

***Indebtedness***

Our principal source ofliquidity at December 31, 2006 was working capital of $86.9 millioncompared to $51.4 million at December 31, 2005. We also had availableborrowing capacity in the amount of $32.9 million at December 31,2006 and $1.5 million at December 31, 2005 under our loan andsecurity agreement with Bank of America and another syndication lender.

We believe that we haveadequate availability of capital to fund our present operations, meet ourcommitments on our existing debt, and fund anticipated growth over the nexttwelve months, including expansion in existing and targeted market areas. Wecontinually seek potential acquisitions and from time to time hold discussionswith acquisition candidates. If suitable acquisition opportunities or working 

25

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capitalneeds arise that would require additional financing, we believe that ourfinancial position and earnings history provide a solid base for obtainingadditional financing resources at competitive rates and terms. Additionally, wemay issue additional shares of common or preferred stock to raise funds.

*Loan and Security Agreement*

We have a loan and security agreement with Bank ofAmerica and another lender, which provides for a $45.0 million revolving loan.The loan bears interest at Bank of America’s base interest rate and matures onMay 21, 2010. The lenders have a security interest in all of our assets,including accounts receivable and inventory.

Portions of the outstanding loans may be converted toLIBOR loans in minimum amounts ranging between $100,000 to $1 million andintegral multiples of $100,000. Upon such conversion, interest is payable atLIBOR plus 0.75%. We have entered into a series of one-month LIBOR loans,which, upon maturity, are either rolled back into the revolving loan or renewedunder a new LIBOR contract.

Covenants in the loan agreement require us to maintaincertain minimum financial ratios, restrict our ability to pay dividends andmake capital expenditures and require us to use 75% of our excess cash flow toreduce indebtedness. Additionally, we are obligated to pay an unused facilityfee on the unused portion of the loan commitment. As of December 31, 2006,we were in compliance with all financial covenants. We paid approximately$83,000 in unused facility fees for the year ended December 31, 2006.

*Junior SubordinatedPromissory Notes*

In 1997, we issued approximately $9.0 million ofjunior subordinated promissory notes, which bore interest at a rate of 14.0%per annum. On May 22 of each year, accrued interest was rolled into theprincipal amount of the notes. The principal amount of the notes, together withall unpaid accrued interest, was due and payable on May 22, 2007. OnMay 13, 2004 and December 30, 2004, we made equal payments of$7.0 million to reduce the borrowings under the notes. On June 1,2005, we paid an additional $6.0 million to reduce the borrowings, and wepaid the remaining balance of all principal and interest due of$4.3 million on November 10, 2005.

*Contractual Obligations*

The following table describes our cash commitments to settle contractualobligations as of December 31, 2006.
| ** **                               | ** ** | **Total**               | ** ** | **Less than   1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
|------------------------------------------|------------|-------------------------|------------|---------------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **(In thousands)** | ** ** |
| Term loans and  loans payable            |       | $                       | 12,059     |                                  | $          | —             |       | $                  | —     |                             | $          | 12,059 |   | $ | — |   |
| Operating lease  obligations             |       | 11,120                  |       | 2,172                                 |       | 4,093              |       | 3,001              |       | 1,854                            |       |
| Non-cancellable  purchase obligations(1) |       | 37,675                  |       | 37,675                                |       | —             |       | —             |       | —                           |       |
| Total                                    |       | $                       | 60,854     |                                  | $          | 39,847             |       | $                  | 4,093      |                             | $          | 15,060 |   | $ | 1,854 |   |

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(1)             These obligations reflect purchase ordersoutstanding with manufacturers as of December 31, 2006. We believe thatsome of these obligations may be cancellable upon negotiation with our vendors,but we are treating these as non-cancellable for this disclosure due to theabsence of an express cancellation right.

**Capital Expenditures**

We made capital expendituresof $0.6 million, $0.3 million and $0.2 million in the yearsended December 31, 2006, 2005 and 2004, respectively.

**Off-Balance Sheet Arrangements**

We have no off-balance sheetarrangements, other than operating leases.

**Financial Derivatives**

We have no financialderivatives.

**Market Risk Management**

We are exposed to marketrisks arising from changes in market prices, including movements in interestrates and commodity prices.

**Interest Rate Risk**

Our variable interest ratedebt is sensitive to changes in the general level of interest rates. AtDecember 31, 2006, the weighted average interest rate on our $12.1 millionof variable interest debt was approximately 6.49%.

While our variable rate debtobligations expose us to the risk of rising interest rates, management does notbelieve that the potential exposure is material to our overall financialperformance or results of operations. Based on December 31, 2006 borrowinglevels, a 1.0% increase or decrease in current market interest rates would havea $0.1 million effect on our statements of operations.

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**ForeignCurrency Exchange Rate Risk**

Our product is purchased andinvoiced in U.S. dollars. Accordingly, we do not believe we are exposed toforeign exchange rate risk.

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**FactorsAffecting Future Results**

This Annual Report on Form 10-K contains statements that may beconsidered forward-looking.  Thesestatements can be identified by the fact that they do not relate strictly tohistorical or current facts. They use words such as “aim,” “anticipate,” “believe,”“could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should,” “willbe,” “will continue,” “will likely result,” “would” and other words and termsof similar meaning in conjunction with a discussion of future operating orfinancial performance. You should read statements that contain these wordscarefully, because they discuss our future expectations, contain projections ofour future results of operations or of our financial position or state other “forward-looking”information.  Actual results could differmaterially from the results indicated by these statements, because therealization of those results is subject to many risks and uncertainties.  Some of these risks and uncertainties are discussedin greater detail under Item 1A, “Risk Factors.”

All forward-looking statements are based on current managementexpectations. Except as required under federal securities laws and the rulesand regulations of the SEC, we do not have any intention, and do not undertake,to update any forward-looking statements to reflect events or circumstancesarising after the date of this Form 10-K.

**ITEM 7A.  QUANTITATIVE ANDQUALITATIVE DISCLOSURE ABOUT MARKET RISK**

Quantitative and QualitativeDisclosures about Market Risk are reported in Item 7, “Management’s Discussionand Analysis of Financial Condition and Results of Operations — Market RiskManagement, — Interest Rate Risk and — Foreign Currency Exchange Rate Risk.”

 

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**ITEM 8.     CONSOLIDATED FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

**HoustonWire & Cable Company**

**Index toconsolidated financial statements**

**P**
| ** **                                                                                                                                  | **Page** |
|---------------------------------------------------------------------------------------------------------------------------------------------|----------|
| Report of Independent  Registered Public Accounting Firm.                                                                                   | 30       |
| Consolidated Balance  Sheets as of December 31, 2006 and December 31, 2005                                                             | 31       |
| Consolidated  Statements of Income for the years ended December 31, 2006, December 31, 2005  and  December 31, 2004.                   | 32       |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31, 2006,  December 31, 2005 and  December 31, 2004 | 33       |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2006, December 31,  2005 and  December 31, 2004.               | 34       |
| Notes to  Consolidated Financial Statements                                                                                                 | 35       |

 

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**Report ofIndependent Registered Public Accounting Firm**

TheBoard of Directors and StockholdersHouston Wire & CableCompany

Wehave audited the accompanying consolidated balance sheets of HoustonWire & Cable Company as of December 31, 2006 and 2005, and therelated consolidated statements of income, stockholders’ equity, and cash flowsfor each of the three years in the period ended December 31, 2006. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. We were not engaged toperform an audit of the Company’s internal control over financial reporting.Our audits included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of HoustonWire & Cable Company at December 31, 2006 and 2005, and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2006, in conformity with U.S.generally accepted accounting principles.

Asdiscussed in Notes 1 and 8 to the consolidated financial statements, in 2006the Company changed its method of accounting for stock based compensation.

/s/ Ernst & Young LLP

Houston,TexasMarch 9, 2007

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**Houston Wire & Cable Company**

**ConsolidatedBalance Sheets**
| ** **                                                      | ** ** | **December 31,**                                     | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                                  | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **(In thousands, except share data)** | ** ** |
|                                                            |       |                                                      |       |
| **Assets**                                                      | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| Current assets:                                                 |       |                                                      |       |   |   |
| Accounts  receivable, net                                       |       | $                                                         | 52,128     |   | $ | 41,309 |   |
| Inventories, net                                                |       | 56,329                                                    |       | 31,306 |   |
| Deferred income  taxes                                          |       | 1,165                                                     |       | 826 |   |
| Prepaid expenses                                                |       | 450                                                       |       | 490 |   |
| Total current assets                                            |       | 110,072                                                   |       | 73,931 |   |
|                                                            |       |                                                      |       |   |   |
| Property and equipment,  net                                    |       | 2,973                                                     |       | 2,733 |   |
|                                                            |       |                                                      |       |   |   |
| Goodwill                                                        |       | 2,996                                                     |       | 2,996 |   |
| Deferred income taxes                                           |       | 688                                                       |       | 1,146 |   |
| Other assets                                                    |       | 135                                                       |       | 435 |   |
| Total assets                                                    |       | $                                                         | 116,864    |   | $ | 81,241 |   |
|                                                            |       |                                                      |       |   |   |
|                                                            |       |                                                      |       |   |   |
| **Liabilities  and stockholders’ equity**                  | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| Current liabilities:                                            |       |                                                      |       |   |   |
| Book overdraft                                                  |       | $                                                         | 1,265      |   | $ | 2,119 |   |
| Trade accounts  payable                                         |       | 10,988                                                    |       | 8,268 |   |
| Accrued and  other current liabilities                          |       | 10,358                                                    |       | 7,882 |   |
| Income taxes  payable                                           |       | 520                                                       |       | 824 |   |
| Current portion  of long-term obligations                       |       | ——                                              |       | 3,468 |   |
| Total current  liabilities                                      |       | 23,131                                                    |       | 22,561 |   |
|                                                            |       |                                                      |       |   |   |
| Long-term obligations                                           |       | 12,059                                                    |       | 57,938 |   |
|                                                            |       |                                                      |       |   |   |
| Stockholders’ equity:                                      |       |                                                      |       |   |   |
| Common stock,  $0.001 par value; 100,000,000 shares authorized: |       |                                                      |       |   |   |
| 20,867,172  shares issued and outstanding at December 31, 2006  |       |                                                      |       |   |   |
| and 16,606,672  at December 31, 2005                            |       | 21                                                        |       | 17 |   |
| Additional  paid-in capital                                     |       | 50,979                                                    |       | 1,284 |   |
| Unearned stock  compensation                                    |       | ——                                              |       | (559 | ) |
| Retained  earnings                                              |       | 30,674                                                    |       | —— |   |
| Total stockholders’  equity                                |       | 81,674                                                    |       | 742 |   |
|                                                            |       |                                                      |       |   |   |
| Total liabilities and stockholders’ equity                 |       | $                                                         | 116,864    |   | $ | 81,241 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

31

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**Houston Wire & Cable Company**

**ConsolidatedStatements of Income**
| ** **                                   | ** ** | **Year Ended December 31,**                | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                   |       | **(In thousands, except share data)** |       |
| ** **                                   |       | ** **                                                |       |
| Sales                                        |       | $                                                         | 323,467    |   | $ | 213,957 |   | $ | 172,723 |   |
| Cost of sales                                |       | 231,128                                                   |       | 158,240 |   | 131,419 |   |
| Gross profit                                 |       | 92,339                                                    |       | 55,717 |   | 41,304 |   |
|                                         |       |                                                      |       |   |   |   |   |
| Operating expenses:                          |       |                                                      |       |   |   |   |   |
| Salaries and  commissions                    |       | 22,706                                                    |       | 18,707 |   | 16,665 |   |
| Other operating  expenses                    |       | 15,975                                                    |       | 14,016 |   | 12,392 |   |
| Management fee  to stockholder               |       | 208                                                       |       | 500 |   | 501 |   |
| Litigation  settlements                      |       | ——                                              |       | (672 |   | (650 | ) |
| Depreciation and  amortization               |       | 376                                                       |       | 398 |   | 876 |   |
| Total operating  expenses                    |       | 39,265                                                    |       | 32,949 |   | 29,784 |   |
|                                         |       |                                                      |       |   |   |   |   |
| Operating income                             |       | 53,074                                                    |       | 22,768 |   | 11,520 |   |
| Interest expense                             |       | 3,075                                                     |       | 2,955 |   | 3,544 |   |
| Income before income  taxes                  |       | 49,999                                                    |       | 19,813 |   | 7,976 |   |
| Income tax provision                         |       | 19,325                                                    |       | 7,299 |   | 3,167 |   |
| Net income                                   |       | $                                                         | 30,674     |   | $ | 12,514 |   | $ | 4,809 |   |
|                                         |       |                                                      |       |   |   |   |   |
|                                         |       |                                                      |       |   |   |   |   |
| Earnings per share:                          |       |                                                      |       |   |   |   |   |
| Basic                                        |       | $                                                         | 1.63       |   | $ | 0.75 |   | $ | 0.29 |   |
| Diluted                                      |       | $                                                         | 1.62       |   | $ | 0.75 |   | $ | 0.29 |   |
|                                         |       |                                                      |       |   |   |   |   |
| Weighted average common  shares outstanding: |       |                                                      |       |   |   |   |   |
| Basic                                        |       | 18,875,192                                                |       | 16,606,672 |   | 16,350,465 |   |
| Diluted                                      |       | 18,984,826                                                |       | 16,757,303 |   | 16,520,601 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

32

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**Houston Wire & Cable Company**

**ConsolidatedStatements of Stockholders’ Equity**
| ** **                                       | ** ** | ** **                                                | ** ** | **Additional** | ** ** | **Unearned**    | ** ** | **Retained**     | ** ** | **Total**              | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------|------------|----------------|------------|-----------------|------------|------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **Common Stock**                                     | ** ** | **Paid-In**    | ** ** | ** Stock** | ** ** | **Earnings**     | ** ** | **Stockholders’** | ** ** |
| ** **                                       | ** ** | **Shares**                                                | ** ** | **Amount**     | ** ** | **Capital**     | ** ** | **Compensation** | ** ** | **(Deficit)**          | ** ** | **Equity** | ** ** |
| ** **                                       | ** ** | ** **                                                | ** ** |
| ** **                                       | ** ** | **(In thousands, except share data)** | ** ** |
|                                             |       |                                                      |       |           |       |            |       |             |       |                   |       |   |   |
| Balance at December 31,  2003                    |       | 16,334,078                                                |       | $              | 16         |            | $          | 5,021            |       | $                      | —     |   | $ | (1,673 | ) | $ | 3,364 |   |
| Exercise of  stock options                       |       | 272,594                                                   |       | 1              |       | 54              |       | —           |       | —                 |       | 55 |   |
| Net income                                       |       | —                                                    |       | —         |       | —          |       | —           |       | 4,809                  |       | 4,809 |   |
|                                             |       |                                                      |       |           |       |            |       |             |       |                   |       |   |   |
| Balance at  December 31, 2004          |       | 16,606,672                                                |       | 17             |       | 5,075           |       | —           |       | 3,136                  |       | 8,228 |   |
| Net income                                       |       | —                                                    |       | —         |       | —          |       | —           |       | 12,514                 |       | 12,514 |   |
| Issuance of  stockoptions                        |       | —                                                    |       | —         |       | 559             |       | (559             | )          | —                 |       | — |   |
| Dividend paid                                    |       | —                                                    |       | —         |       | (4,350          | )          | —           |       | (15,650                | )          | (20,000 | ) |
|                                             |       |                                                      |       |           |       |            |       |             |       |                   |       |   |   |
| Balance at  December 31, 2005          |       | 16,606,672                                                |       | 17             |       | 1,284           |       | (559             | )          | —                 |       | 742 |   |
| Net income                                       |       | —                                                    |       | —         |       | —          |       | —           |       | 30,674                 |       | 30,674 |   |
| Issuance of  stock                               |       | 4,250,000                                                 |       | 4              |       | 49,896          |       | —           |       | —                 |       | 49,900 |   |
| Exercise of  stockoptions                        |       | 10,500                                                    |       | —         |       | 6               |       | —           |       | —                 |       | 6 |   |
| Excess tax  benefit forstock options (unaudited) |       | —                                                    |       | —         |       | 20              |       | —           |       | —                 |       | 20 |   |
| Reclassification  foradoption of SFAS123(R)      |       | —                                                    |       | —         |       | (559            | )          | 559              |       | —                 |       | — |   |
| Amortization of unearned  stock compensation     |       | —                                                    |       | —         |       | 332             |       | —           |       | —                 |       | 332 |   |
|                                             |       |                                                      |       |           |       |            |       |             |       |                   |       |   |   |
| Balance at December 31, 2006           |       | 20,867,172                                                |       | $              | 21         |            | $          | 50,979           |       | $                      | —     |   | $ | 30,674 |   | $ | 81,674 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

33

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**Houston Wire & Cable Company**

**ConsolidatedStatements of Cash Flows**

** **
| ** **                                                                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                   | ** ** | **(In thousands)**                    | ** ** |
| **Operating activities**                                                                     | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                   |       | $                                          | 30,674     |   | $ | 12,514 |   | $ | 4,809 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and  amortization                                                               |       | 376                                        |       | 398 |   | 876 |   |
| Amortization of  capitalized loan costs                                                      |       | 326                                        |       | 124 |   | 125 |   |
| Amortization of  unearned stock compensation                                                 |       | 332                                        |       | — |   | — |   |
| Deferred  interest                                                                           |       | —                                     |       | — |   | 2,344 |   |
| Provision for  doubtful accounts                                                             |       | —                                     |       | 13 |   | 304 |   |
| Provision for  returns and allowances                                                        |       | 211                                        |       | — |   | 469 |   |
| Provision for  inventory obsolescence                                                        |       | 289                                        |       | (196 | ) | 696 |   |
| (Gain) loss on  disposals of property and equipment                                          |       | 1                                          |       | (11 | ) | 2 |   |
| Deferred income  taxes                                                                       |       | 119                                        |       | 298 |   | 387 |   |
| Changes in  operating assets and liabilities:                                                |       |                                       |       |   |   |   |   |
| Accounts  receivable                                                                         |       | (11,030                                    | )          | (14,250 | ) | (6,201 | ) |
| Inventories                                                                                  |       | (25,312                                    | )          | (1,274 | ) | (3,627 | ) |
| Prepaid expenses                                                                             |       | 40                                         |       | (74 | ) | (63 | ) |
| Other assets                                                                                 |       | (26                                        | )          | 10 |   | (30 | ) |
| Book overdraft                                                                               |       | (854                                       | )          | (5,944 | ) | 7,889 |   |
| Trade accounts  payable                                                                      |       | 2,720                                      |       | 3,153 |   | 1,671 |   |
| Accrued and  other current liabilities                                                       |       | 2,476                                      |       | 833 |   | 2,282 |   |
| Income taxes  payable                                                                        |       | (304                                       | )          | 585 |   | 81 |   |
| Net cash provided by  (used in) operating activities                                         |       | 38                                         |       | (3,821 | ) | 12,014 |   |
|                                                                                         |       |                                       |       |   |   |   |   |
| **Investing activities**                                                                     | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Expenditures for  property, plant, and equipment                                             |       | (623                                       | )          | (329 | ) | (208 | ) |
| Proceeds from  disposals of property and equipment                                           |       | 6                                          |       | 12 |   | 1 |   |
| Net cash used in  investing activities                                                       |       | (617                                       | )          | (317 | ) | (207 | ) |
| **Financing activities**                                                                     | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Borrowings on  revolver                                                                      |       | 332,488                                    |       | 225,022 |   | 177,428 |   |
| Payments on  revolver                                                                        |       | (367,335                                   | )          | (205,587 | ) | (175,290 | ) |
| Borrowings on  long-term obligations                                                         |       | —                                     |       | 14,500 |   | — |   |
| Payments on  long-term obligations                                                           |       | (14,500                                    | )          | — |   | — |   |
| Payments on  junior subordinated debt                                                        |       | —                                     |       | (9,559 | ) | (14,000 | ) |
| Payments for  financing costs                                                                |       | —                                     |       | (238 | ) | — |   |
| Proceeds from  exercise of stock options                                                     |       | 6                                          |       | — |   | 55 |   |
| Dividends paid                                                                               |       | —                                     |       | (20,000 | ) | — |   |
| Proceeds from  sale of stock                                                                 |       | 51,382                                     |       | — |   | — |   |
| Payment of  offering costs                                                                   |       | (1,482                                     | )          | — |   | — |   |
| Excess tax  benefit for options                                                              |       | 20                                         |       | — |   | — |   |
| Net cash provided by  (used in) financing activities                                         |       | 579                                        |       | 4,138 |   | (11,807 | ) |
|                                                                                         |       |                                       |       |   |   |   |   |
| Net change in cash                                                                           |       | —                                     |       | — |   | — |   |
| Cash at beginning of  year                                                                   |       | —                                     |       | — |   | — |   |
|                                                                                         |       |                                       |       |   |   |   |   |
| Cash at end of year                                                                          |       | $                                          | —     |   | $ | — |   | $ | — |   |
|                                                                                         |       |                                       |       |   |   |   |   |
| **Supplemental disclosures**                                                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid during  the year for interest                                                      |       | $                                          | 2,982      |   | $ | 1,910 |   | $ | 1,044 |   |
|                                                                                         |       |                                       |       |   |   |   |   |
| Cash paid (received)  during the year for income taxes                                       |       | $                                          | 19,459     |   | $ | 6,356 |   | $ | 2,637 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

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**HoustonWire & Cable Company**

**Notes to Consolidated FinancialStatements**

**December 31, 2006**

*(in thousands, except per share data)*

**1.             Organization and Summary ofSignificant Accounting Policies**

***Descriptionof Business***

Houston Wire & Cable Company (“HWC” or the “Company”),through its wholly owned subsidiaries, HWC Wire & Cable Company, Advantage Wire & Cable andCable Management Services Inc., distributes specialty electrical wire andcable to the U.S. electrical distribution market through eleven locations inten states throughout the United States. The Company has no other businessactivity.

***Basis of Presentation and Principles of Consolidation***

The consolidated financial statements include theaccounts of the Company and its subsidiaries and have been prepared followingaccounting principles generally accepted in the United States (“GAAP”) and therequirements of the Securities and Exchange Commission (“SEC”). The financialstatements include all normal and recurring adjustments that are necessary fora fair presentation of the Company’s financial position and operating results.All significant inter-company balances and transactions have been eliminated.

On March 23, 2006, HWC Holding Corporationamended its certificate of incorporation to change its name to HoustonWire & Cable Company and to increase its authorized capital stock from10,000 shares of common stock to 100,000 shares of common stock and5,000 shares of preferred stock. All references to authorized shares inthe accompanying consolidated financial statements have been retroactivelyrestated for such increase in authorized shares. Also on March 23, 2006the Company’s operating subsidiary, Houston Wire & Cable Company,changed its name to HWC Wire & Cable Company.

On May 16, 2006, the Company effected a 1.875-for-1stock split for its outstanding common stock in the form of a stock dividend.All stockholder equity balances and disclosures in the accompanyingconsolidated financial statements have been retroactively restated for suchstock split.

***Use of Estimates***

The preparation of the financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. The mostsignificant estimates are those relating to the allowance for doubtfulaccounts, the inventory obsolescence reserve, the reserve for returns andallowances, and vendor rebates. These estimates are continually reviewed and adjustedas necessary, but actual results could differ from those estimates.

***Earnings per Share***

In accordance with Statement of Financial AccountingStandards (“SFAS”) 128, *Earnings per Share*,basic earnings per share is calculated by dividing net income by the weightedaverage number of common shares outstanding. Diluted earnings per share includethe dilutive effects of stock option awards.

The following reconciles the numerator and denominatorused in the calculation of earnings per share:
| ** **                                                   | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Numerator:                                                   |       |                                       |       |   |   |   |   |
| Net income for basic earnings per share                      |       | $                                          | 30,674     |   | $ | 12,514 |   | $ | 4,809 |   |
| Effect of dilutive securities                                |       | —                                     |       | — |   | — |   |
| Numerator for  diluted earnings per share                    |       | $                                          | 30,674     |   | $ | 12,514 |   | $ | 4,809 |   |
|                                                         |       |                                       |       |   |   |   |   |
| Denominator:                                                 |       |                                       |       |   |   |   |   |
| Weighted average common shares for basic earnings  per share |       | 18,875                                     |       | 16,607 |   | 16,350 |   |
| Effect of dilutive securities                                |       | 110                                        |       | 150 |   | 171 |   |
|                                                         |       |                                       |       |   |   |   |   |
| Denominator for diluted  earnings per share                  |       | 18,985                                     |       | 16,757 |   | 16,521 |   |

 

Options to purchase 29, 0 and 0 shares of common stockwere not included in the diluted net income per share calculation for 2006,2005 and 2004, respectively, as their inclusion would have been anti-dilutive.

***Accounts Receivable***

Accounts receivable consists primarily of receivablesfrom customers, less an allowance for doubtful accounts of $490 and $447, and areserve for returns and allowances of $680 and $469 at December 31, 2006and 2005, respectively. Consistent with industry practices, we

35

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normally require paymentfrom our customers within 30 days. The Company has no contractualrepurchase arrangements with its customers. Credit losses have been withinmanagement’s expectations.

The following table summarizes the changes in ourallowance for doubtful accounts for the past three years (in thousands):
| ** **                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance at  beginning of year |       | $        | 447        |     | $          | 475      |       | $ | 294 |   |
| Bad debt expense              |       | —   |       | 13       |       | 304      |       |
| Write-offs, net of recoveries |       | 43       |       | (41      | )          | (123     | )          |
| Balance at end of year        |       | $        | 490        |     | $          | 447      |       | $ | 475 |   |

 

***Inventories***

Inventories are carried at the lower of cost, usingthe average cost method, or market and consist primarily of goods purchased forresale, less a reserve for obsolescence and unusable items. The reserve forinventory is based upon a number of factors, including the experience of the purchasingand sales departments, age of the inventory, new product offerings, and otherfactors. Management believes that the reserve for inventory may periodicallyrequire adjustment as the factors identified above change. The inventoryreserve was $1,965 and $1,908 at December 31, 2006 and 2005, respectively.

***Vendor Rebates***

We account for vendor rebates in accordance with theEmerging Issues Task Force Issue 02-16, *Accountingby a Customer (Including a Reseller) for Certain Consideration Received from aVendor*. Many of our arrangements with our vendors provide for us toreceive a rebate of a specified amount of consideration, payable to us when weachieve any of a number of measures, generally related to the volume level ofpurchases from our vendors. We account for such rebates as a reduction of theprices of the vendor’s products and therefore as a reduction of inventory untilwe sell the product, at which time such rebates reduce cost of sales in theaccompanying consolidated statements of income. Throughout the year, weestimate the amount of the rebate earned based on our estimate of purchases todate relative to the purchase levels that mark our progress toward earning therebates. We continually revise these estimates to reflect actual rebates earnedbased on actual purchase levels.

***Property and Equipment***

The Company provides for depreciation on astraight-line method over the following estimated useful lives:

| Buildings                |   | 30 years     |
|--------------------------|--------|--------------|
| Machinery and  equipment |   | 3 to 5 years |

 

Leasehold improvements are depreciated over theirestimated life or the term of the lease, whichever is shorter. Depreciationexpense was approximately $376,****$398, and $564for the years ended December 31, 2006, 2005 and 2004, respectively.

***Goodwill***

The Company accounts for goodwill under the provisionsof SFAS No. 142, *Goodwill and OtherIntangible Assets* (“SFAS 142”). Under SFAS 142, goodwillis not amortized but is reviewed annually for impairment, or more frequently ifindications of possible impairment exist, by applying a fair value-based test.The Company completes the required annual assessment as of October 1 ofeach year. The Company has performed the requisite impairment tests forgoodwill and has determined that goodwill was not impaired.

***Other Assets***

Other assets include deferred financing costs ofapproximately $1,751. The capitalized loan costs are amortized on astraight-line basis over the contractual life of the related debt agreement,which approximates the effective interest method, and such amortization expenseis included in interest expense in the accompanying consolidated statements ofincome. Accumulated amortization at December 31, 2006 and 2005, wasapproximately $1,639 and $1,313, respectively.

Estimated future amortizationexpense for capitalized loan costs through the maturity of the agreement are$42, $29, $29, and $12 for the years 2007 through 2010 respectively.

***Self Insurance***

The Company retains certain self-insurance risks forboth health benefits and property and casualty insurance programs. The Companylimits its exposure to these self insurance risks by maintaining excess andaggregate liability coverage. Self insurance reserves are established based onclaims filed and estimates of claims incurred but not reported. The estimatesare based on information provided to the Company by its claims administrators.

***Segment Reporting***

SFAS No. 131, *Disclosures about Segmentsof an Enterprise and Related Information*, establishes standards forthe way that public companies report information about operating segments inannual financial statements and for related disclosures about products and

36

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services, geographicareas and major customers. The Company operates in a single operating andreporting segment, sales of specialty wire and cable.

***Revenue Recognition, Returns & Allowances***

The Company recognizes revenue in accordance with SECStaff Accounting Bulletin (“SAB”) 104, *Revenue Recognition inFinancial Statements*, and the appropriate amendments. SAB 104requires that four basic criteria must be met before we can recognize revenue:

1.                                       Persuasiveevidence of an arrangement exists;

2.                                       Deliveryhas occurred or services have been rendered;

3.                                       Theseller’s price to the buyer is fixed or determinable; and

4.                                       Collectibilityis reasonably assured.

The Company records revenue when customers takedelivery of products. Customers may pick up products at any warehouse location,or products may be delivered via third party carriers. Products shipped viathird party carriers are considered delivered based on the shipping terms,which are generally FOB shipping point. Normal payment terms are net 30 days.Customers are permitted to return product only on a case-by-case basis. Productexchanges are handled as a credit, with any replacement items being re-invoicedto the customer. Customer returns are recorded as an adjustment to net sales.In the past, customer returns have not been material. The Company has noinstallation obligations.

The Company may offer volume rebates, which areaccrued monthly as an adjustment to net sales.

***Shipping and Handling***

The Company incurs shipping and handling costs in thenormal course of business. Freight amounts invoiced to customers are includedas sales and freight charges are included as a component of cost of sales.

***Credit Risk***

The Company’s customers are located primarilythroughout the United States. One customer accounted for approximately 13%,11%, and 10% of the Company’s sales in 2006, 2005 and 2004, respectively. TheCompany performs periodic credit evaluations of its customers and generallydoes not require collateral.

***Advertising Costs***

Advertising costs are expensed when incurred.Advertising expenses were $385, $610, and $319 for the years endedDecember 31, 2006, 2005, and 2004, respectively.

***Financial Instruments***

The carrying values of the accounts receivable, tradeaccounts payable and accrued and other current liabilities approximate fairvalue, due to the short maturity of these instruments. The carrying amount oflong term debt approximates fair value as it bears interest at variable rates.

***Stock-Based Compensation***

In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS 123(R), *Share-Based Payment* (“SFAS 123(R)”). This new standardrequires companies to recognize compensation cost for stock options and otherstock-based awards based on their fair value as measured on the grant date. Thenew standard prohibits companies from accounting for stock-based compensationunder the provisions of APB 25.

Effective January 1, 2006 the Company adoptedSFAS 123(R) using the prospective transition method and, therefore,the impact on the Company’s net income subsequent to January 1, 2006includes the remaining amortization of the intrinsic value of existingstock-based awards discussed above, plus the fair value of any futuregrants.  See Note 8 for additionalinformation.

Prior to January 1, 2006, the Company accountedfor its employee stock options under the intrinsic value method described byAPB 25. Accordingly, the Company did not record compensation expense foroptions issued with an exercise price equal to the stock’s fair market price onthe grant date. Additionally, the stock compensation expense recorded in 2005for the stock options granted below the Company’s estimate of its stock’s fairmarket value was less than $1, as those options were granted onDecember 30, 2005. As a result of this grant, the Company recorded $559 ofunearned compensation that will be amortized over the vesting period of fiveyears.

37

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***IncomeTaxes***

Deferred income taxes are determined by the liabilitymethod in accordance with SFAS No. 109, *Accountingfor Income Taxes*. Under this method, deferred tax assets andliabilities are determined based on differences between the carrying amounts ofassets and liabilities for financial reporting purposes and the amounts usedfor income tax purposes and are measured using the enacted tax rates and lawsthat will be in effect when the differences are expected to reverse.

***New Accounting Pronouncements***

In July 2006, the Financial Accounting StandardsBoard (“FASB”) issued FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes* (“FIN 48”), an interpretation ofFASB Statement No. 109, *Accounting for IncomeTaxes*. FIN 48 requires that a position taken or expected to be takenin a tax return be recognized in the financial statements when it is morelikely than not (i.e., a likelihood of more than fifty percent) that theposition would be sustained upon examination by tax authorities. A recognizedtax position is then measured at the largest amount of benefit that is greaterthan fifty percent likely of being realized upon ultimate settlement. Theeffective date for the Company is January 1, 2007. Upon adoption, thecumulative effect of applying the recognition and measurement provisions of FIN48, if any, shall be reflected as an adjustment to the opening balance ofretained earnings. The adoption of FIN 48 is not anticipated to have a materialimpact on our Consolidated Financial Statements.

In March 2006, the EITF reached a consensus on EITFIssue No. 06-3, How Taxes Collected from Customers and Remitted toGovernmental Authorities Should be Presented in the Income Statement (that is,Gross versus Net Presentation), which allows companies to adopt a policy of presentingtaxes in the income statement on either a gross or net basis. Taxes within thescope of this EITF would include taxes that are imposed on a revenuetransaction between a seller and a customer, for example, sales taxes, usetaxes, value-added taxes, and some types of excise taxes. EITF 06-3 iseffective for interim and annual reporting periods beginning afterDecember 15, 2006. EITF 06-3 will not impact the Company’s method forrecording and reporting these type taxes in its consolidated financial statements,as the Company’s current policy is to report all such taxes on a net basis.

***Reclassifications***

Certain reclassifications have been made in the 2005and 2004 financial statements to conform to the current year presentation.

**2.**             InitialPublic Offering

On June 14, 2006, a Registration Statement relating tothe Company’s initial public offering of common stock was declared effective bythe Securities and Exchange Commission. As a result, the Company issued4,250 shares of common stock which were subsequently sold to the publicfor $13.00 per share. Certain selling stockholders sold an additional5,525 shares which also were resold to the public for $13.00 pershare. The Company received net proceeds of $49,900 after deducting the underwritingdiscount and offering expenses. The net proceeds were used to repay a portionof the outstanding debt.

**3.             Detail of Selected Balance SheetAccounts**

***Property and Equipment***

Property and equipment are stated at cost and consistof the following at:
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Land                           |       | $                     | 617        |   | $ | 617 |   |
| Buildings                      |       | 2,057                 |       | 2,057 |   |
| Machinery and  equipment       |       | 5,162                 |       | 4,613 |   |
|                           |       | 7,836                 |       | 7,287 |   |
| Less accumulated  depreciation |       | 4,863                 |       | 4,554 |   |
|                           |       | $                     | 2,973      |   | $ | 2,733 |   |

 

***                Accruedand Other Current Liabilities***

Accrued and other current liabilities consist of thefollowing at:
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Customer rebates                   |       | $                     | 4,094      |   | $ | 2,292 |   |
| Payroll,  commissions, and bonuses |       | 2,325                 |       | 2,096 |   |
| Accrued  inventory purchases       |       | 357                   |       | 900 |   |
| Other                              |       | 3,582                 |       | 2,594 |   |
|                               |       | $                     | 10,358     |   | $ | 7,882 |   |

 

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**4.             Long-Term Obligations**

HWC has a loan and security agreement (“Agreement”)with Bank of America and one other syndication bank (“Lender”). The Agreementis guaranteed by HWC through the pledge of its interest in the capital stock ofHWC Wire & Cable Company. Additionally, the Company has provided tothe Lender a security interest in all of its assets, including accountsreceivable, inventory, and all assets owned by the Company and HWCWire & Cable Company. The Agreement, which matures May 21, 2010,consists of a $45,000 revolving loan (“Revolver”) with interest at the Lender’sbase interest rate.

Portions of the outstanding loan under the Agreementmay be converted to LIBOR loans in minimum amounts of $1,000 and integralmultiples of $100. Upon such conversion, interest is payable at LIBOR plus0.75%. The Company has entered into a series of one-month LIBOR loans, whichupon maturity are either rolled back into the Revolver or renewed under a newLIBOR contract.

The Agreement includes, among other things, covenantsthat require the Company to maintain certain minimum financial ratios.Additionally, the Agreement allows the Company to pay dividends not to exceed$20,000, limits capital expenditures and requires that 75% of the Excess CashFlow (as defined) commencing with the fiscal year ending December 31,2006, be used to reduce indebtedness. The Company is in compliance with thefinancial covenants governing its indebtedness.

In 1997, the Company issued approximately $9,000 ofJunior Subordinated Promissory Notes (the “Notes”), which bore interest at arate of 14% per annum to certain stockholders and officers of the Company. OnMay 22 of each year, accrued interest was rolled into the principal amountof the Notes. The principal amount of the Notes, together with all unpaidinterest accrued was due and payable on May 22, 2007.

On May 13, 2004, and on December 30, 2004,the Company made equal payments of $7,000 to reduce the borrowings under theNotes. Substantially all of the December 30, 2004 $7,000 payment had not clearedthe Company’s operating bank account at December 31, 2004, which resultedin an increase in the Company’s book overdraft of approximately $6,722. Sincethe book overdraft was funded by the Company’s Revolver in January 2005,this book overdraft has been included in long-term obligations in theaccompanying consolidated balance sheet at December 31, 2004.

On June 1, 2005 the Company made an additionalpayment of $6,000 and on November 10, 2005 paid the remaining balance ofall principal and interest due in the amount of approximately $4,319.

The Company’s borrowings and related weighted averageinterest rates consisted of the following:
| ** **            | ** ** | **Weighted Average**     | ** ** | ** **            | ** ** | ** ** | ** ** |
|-----------------------|------------|-------------------------------|------------|-----------------------|------------|------------|------------|
| ** **            | ** ** | **Interest Rate**        | ** ** | ** **            | ** ** | ** ** | ** ** |
| ** **            | ** ** | **at December 31,** | ** ** | **December 31,** | ** ** |
| ** **            | ** ** | **2006**                      | ** ** | **2006**              | ** ** | **2005**   | ** ** |
| Revolver loan         |       | 6.49                          | %          | $                     | 12,059     |       | $          | 46,906 |   |
| Term A loan           |       | —                        | %          | —                |       | 4,500      |       |
| Term B loan           |       | —                        | %          | —                |       | 10,000     |       |
|                  |       |                          |       | 12,059                |       | 61,406     |       |
| Less current  portion |       |                          |       | —                |       | 3,468      |       |
| Long term obligations |       |                          |       | $                     | 12,059     |       | $          | 57,938 |   |

 

During 2006, the Company had an average availableborrowing capacity of approximately $25,275. This average was computed from themonthly borrowing base certificates prepared for the Lender. AtDecember 31, 2006 the Company had available borrowing capacity ofapproximately $32,941 under the terms of the Agreement. Under the Agreement,the Company is obligated to pay an unused facility fee of 0.2% computed on adaily basis. During the years ended December 31, 2006, 2005 and 2004, theCompany paid approximately $83, $69, and $91, respectively, for the unusedfacility.

Principal repayment obligations for succeeding fiscalyears are as follows:
| 2007  |   | $      | — |   |
|-------|--------|--------|--------|--------|
| 2008  |   | — |   |
| 2009  |   | — |   |
| 2010  |   | 12,059 |   |
| Total |   | $      | 12,059 |   |

 

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**5.             Income Taxes**

The provision (benefit) for income taxes consists of:
| ** **     | ** ** | **Year Ended December 31,** | ** ** |
|----------------|------------|--------------------------------------------|------------|
| ** **     | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:       |       |                                       |       |   |   |   |   |
| Federal        |       | $                                          | 16,592     |   | $ | 6,070 |   | $ | 2,420 |   |
| State          |       | 2,614                                      |       | 931 |   | 360 |   |
| Total          |       | 19,206                                     |       | 7,001 |   | 2,780 |   |
|           |       |                                       |       |   |   |   |   |
| Deferred:      |       |                                       |       |   |   |   |   |
| Federal        |       | 108                                        |       | 294 |   | 392 |   |
| State          |       | 11                                         |       | 4 |   | (5 | ) |
|           |       |                                       |       |   |   |   |   |
| Total deferred |       | 119                                        |       | 298 |   | 387 |   |
|           |       |                                       |       |   |   |   |   |
| Total          |       | $                                          | 19,325     |   | $ | 7,299 |   | $ | 3,167 |   |

 

A reconciliation of the U.S. Federal statutory taxrate to the effective tax rate on income before taxes is as follows:
| ** **                           | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Federal  statutory rate              |       | 35.0                                       | %          | 35.0 | % | 34.0 | % |
| State taxes, net  of federal benefit |       | 3.4                                        | %          | 3.6 | % | 3.9 | % |
| Non-deductible  items                |       | 0.2                                        | %          | 0.5 | % | 1.8 | % |
|                                 |       |                                       |       |   |   |   |   |
| Litigation  settlement               |       | —                           |       | (1.2 | )% | — |   |
| Other                                |       | 0.1                                        | %          | (1.1 | )% | — |   |
|                                 |       |                                       |       |   |   |   |   |
| Total effective tax  rate            |       | 38.7                                       | %          | 36.8 | % | 39.7 | % |

 

Significant components of the Company’s deferred taxassets were as follows:
| ** **                        | ** ** | **Year Ended**   | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **December 31,** | ** ** |
| ** **                        | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Deferred tax  assets:             |       |                  |       |   |   |
| Property and equipment            |       | $                     | 548        |   | $ | 584 |   |
| Goodwill                          |       | 140                   |       | 242 |   |
| Uniform capitalization adjustment |       | 360                   |       | 390 |   |
| Inventory reserve                 |       | 545                   |       | 523 |   |
| Capital loss carryover            |       | 48                    |       | 48 |   |
| Allowance for doubtful accounts   |       | 189                   |       | 172 |   |
| Other                             |       | 71                    |       | 61 |   |
| Total deferred  tax assets        |       | 1,901                 |       | 2,020 |   |
| Less valuation  allowance         |       | 48                    |       | 48 |   |
| Net deferred tax assets           |       | $                     | 1,853      |   | $ | 1,972 |   |

 

The Company has a U.S. capital loss carryover ofapproximately $130 at December 31, 2006, that, if not utilized, will expire beginning 2007. The Company hasprovided a valuation allowance against this U.S capital loss carryover since itdoes not believe that it is more likely than not that this deferred tax assetwill be realized prior to its expiration.

**6.             Related-Party Transactions**

HWC had a management servicesagreement with an affiliate of the majority stockholder of the Company thatprovided for the payment of monthly management fees of approximately $42 andthe reimbursement of certain expenses. Management fees and expenses of $208,****$500, and $501, were incurred and paid under this agreementfor the years ended December 31, 2006, 2005 and 2004, respectively.Contemporaneous with the IPO, the management services agreement was cancelled.

As discussed in Note 4above, the Company issued Junior Subordinated Promissory Notes in 1997. TheseNotes were held by the majority stockholder and certain other stockholders andofficers of the Company.

**7.             Employee Benefit Plans**

A combination profit-sharingplan and salary deferral plan (the “Plan”) is provided for the benefit of HWC’semployees. Employees who are eligible to participate in the Plan can contributea percentage of their base compensation, up to the maximum percentage allowable

40

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notto exceed the limits of Internal Revenue Code Sections 401(k), 404, and 415,subject to the IRS-imposed dollar limit. Employee contributions are invested incertain equity and fixed-income securities, based on employee elections.Effective January 1, 2005, the Board of Directors approved a Company matchof an employee’s contributions up to a maximum of 50% of the first 4% of eachemployee’s compensation. Effective January 1, 2006, the Company’s matchincreased to 50% of the employee’s first 5% of contributions. The Company’smatch for the years ended December 31, 2006, 2005 and 2004 was $351, $238,and $4 respectively. Effective January 1, 2007, the Company adopted theSafe Harbor provisions of the Internal Revenue Code, whereby contributions upto the first 3% of an employee’s compensation are matched 100% by the Companyand the next 2% are matched 50% by the Company.

**8.             Stock Option Plan and Dividends**

On March 23, 2006, the Company adopted the 2006Stock Plan to provide incentives for certain key employees and directorsthrough awards and the exercise of options. The 2006 Stock Plan provides foroptions to be granted at the fair market value of the Company’s common stock atthe date of grant and may be either nonqualified stock options or incentivestock options as defined by Section 422 of the Code. Under the 2006 StockPlan a maximum of 1,800 shares may be issued to designated participants.The maximum number of shares available to any one participant in any onecalendar year is 500.

On December 29, 2005, the Directors of theCompany declared a dividend on the Company’s shares of common stock in theamount of approximately $1.21 per share for an aggregate dividend of$20 million. This dividend was paid to the holders of record of its commonstock on December 30, 2005.

In 2000, the Company adopted a stock option plan (the “2000Plan”) to provide incentives for certain key employees and directors throughawards and the exercise of options. The 2000 Plan provides for options to begranted at the fair market value of the Company’s common stock at the date ofthe grant and may be either nonqualified stock options or incentive stockoptions as defined by Section 422 of the Internal Revenue Code of 1986(the “Code”), as amended.

The 2000 Plan was amended on December 30, 2005,increasing the maximum number of shares available to be issued to designated participantsfrom 186 shares to 469 shares. The maximum number of shares available to anyone participant is 47 shares in any one calendar year. In connection with theadoption of the 2006 Stock Plan, the Board of Directors resolved that nofurther options would be granted under the 2000 Plan.

In 1998, the Company adopted a stock option plan (the “1998Plan”) to provide incentives for certain key employees and directors throughawards and the exercise of options. The 1998 Plan provides for options to begranted at the fair market value of the Company’s common stock on the date ofgrant and may be either nonqualified stock options or incentive stock optionsas defined by Section 422 of the Code, as amended. On October 29,2000, the 1998 Plan was amended to increase the number of shares available tobe issued from 200 shares to 847 shares. The maximum number of shares availableto any one participant was increased from 180 shares to 281 shares in any onecalendar year.

***Adoption of SFAS 123(R)***

The Company has granted options to purchase its commonstock to employees and directors of the Company under various stock optionplans at no less than the fair market value of the underlying stock on the dateof grant. These options are granted for a term not exceeding ten years and maybe forfeited in the event the employee or director terminates, other than byretirement, his or her employment or relationship with the Company. Optionsgranted to employees generally vest over three to five years, and optionsgranted to directors generally vest one year after the date of grant. Alloption plans contain anti-dilutive provisions that permit an adjustment of thenumber of shares of the Company’s common stock represented by each option forany change in capitalization.

The Company adopted the fair value recognitionprovisions of SFAS 123(R) on January 1, 2006, using theprospective transition method. The fair value of the options granted afterJanuary 1, 2006 is estimated using a Black-Scholes option-pricing modeland amortized to expense over the options’ vesting period. Prior to adoption ofSFAS 123(R), the Company accounted for stock based payments under the  recognition and measurement provisions ofAPB 25, and related Interpretations, as permitted by SFAS 123. Underthe prospective transition method, compensation cost recognized beginning in2006 includes: (a) compensation cost for all stock based payments grantedprior to, but not yet vested as of January 1, 2006, based on the remainingamortization of the intrinsic value of such stock based awards, and(b) compensation cost for all stock based payments granted subsequent toJanuary 1, 2006, based on the grant-date fair value estimated inaccordance with the provisions of SFAS 123(R). As permitted by SFAS 123(R),results for prior periods have not been restated.

The fair value of each option awarded is estimated onthe date of grant using a Black-Scholes option-pricing model. Expectedvolatilities are based on historical volatility on the Company’s stock and thehistorical volatility of the stock of similar companies, and other factors. TheCompany uses historical data to estimate option exercises and employeeterminations within the valuation model. The expected life of options grantedrepresents the period of time that options granted are expected to beoutstanding. The risk-free rate for periods within the life of the option isbased on the U.S. Treasury yield curve in effect at the time of grant. Foroptions issued in 2006, the following assumptions were used:
| ** **                      | ** ** | **Year Ended**             | ** ** |
|---------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **December 31, 2006** | ** ** |
| Risk-free  interest rate        |       | 4.6-5.1                         | %          |
| Expected  dividend yield        |       | 0.0                             | %          |
| Weighted average  expected life |       | 5.5 years                       |       |
| Expected volatility             |       | 45                              | %          |

 

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Prior to the adoption of SFAS 123(R), the Companypresented all tax benefits of deductions resulting from the exercise of stockoptions as operating cash flows in the Statement of Cash Flows.SFAS 123(R) requires the cash flows resulting from the tax benefitsresulting from tax deductions in excess of the compensation cost recognized forthose options (excess tax benefits) to be classified as financing cash flows.In 2006, $20 of such tax benefits were reflected in financing cash flows.

The total intrinsic value of options exercised duringthe year ended December 31, 2006 was $131.

The following summarizes stock option activity andrelated information:
| ** **                                                     | ** ** | **2006**    | ** ** | ** **              | ** ** |
|----------------------------------------------------------------|------------|-------------|------------|-------------------------|------------|
| ** **                                                     | ** ** | ** **  | ** ** | **Weighted**            | ** ** | **Aggregate** | ** ** |
| ** **                                                     | ** ** | ** **  | ** ** | **Average**             | ** ** | **Intrinsic** | ** ** |
| ** **                                                     | ** ** | **Options** | ** ** | **Exercise Price** | ** ** | **Value** | ** ** |
| Outstanding—Beginning  of year                            |       | 256         |       | $                       | 1.30       |   |   |   |
| Granted                                                        |       | 195         |       | 20.04                   |       |   |   |
| Exercised                                                      |       | (10         | )          | (0.53                   | )          |   |   |
| Forfeitures                                                    |       | (4          | )          | (1.87                   | )          |   |   |
| Expired                                                        |       | —      |       | —                  |       |   |   |
| Outstanding—End of year                                   |       | 437         |       | $                       | 9.67       |   | $ | 5,018 |   |
| Exercisable—End of year                                   |       | 139         |       | $                       | 0.81       |   | $ | 2,784 |   |
| Weighted average fair value of options granted during the year |       | $           | 9.63       |                    |       |   |   |   |
|                                                                |            |             |            |                         |            |  |  |  |  |  |

 

A summary of the Company’s nonvested options atDecember 31, 2006, and changes during the twelve months then ended, ispresented below:
| ** **                           | ** ** | ** **  | ** ** | **Weighted Average** | ** ** |
|--------------------------------------|------------|-------------|------------|---------------------------|------------|
| ** **                           | ** ** | ** **  | ** ** | **Grant Date**       | ** ** |
| ** **                           | ** ** | **Options** | ** ** | **Fair Value**       | ** ** |
| ** **                           | ** ** | ** **  | ** ** | ** **                | ** ** |
| Nonvested at  January 1, 2006   |       | 158         |       | $                         | 3.87       |   |
| Granted                              |       | 195         |       | 9.63                      |       |
| Vested                               |       | (51         | )          | 2.38                      |       |
| Forfeited                            |       | (4          | )          | 4.15                      |       |
| Nonvested at  December 31, 2006 |       | 298         |       | $                         | 7.89       |   |

 

Vesting dates range from January 1, 2007to December 20, 2011, and expiration dates range from June 26,2010 to December 19, 2016 at exercise prices and average contractuallives as follows:
| ** **               | ** ** | ** **      | ** ** | **Weighted**    | ** ** | ** **                   | ** ** | **Weighted**    | ** ** |
|--------------------------|------------|-----------------|------------|-----------------|------------|------------------------------|------------|-----------------|------------|
| ** **               | ** ** | ** **      | ** ** | **Average**     | ** ** | ** **                   | ** ** | **Average**     | ** ** |
| ** **               | ** ** | **Outstanding** | ** ** | **Remaining**   | ** ** | ** **                   | ** ** | **Remaining**   | ** ** |
| ** **               | ** ** | **as of**  | ** ** | **Contractual** | ** ** | **Exercisable**              | ** ** | **Contractual** | ** ** |
| **Exercise Prices** | ** ** | **12/31/06**    | ** ** | **Life**        | ** ** | **as of 12/31/06** | ** ** | **Life**        | ** ** |
| $0.53                    |       | 152             |       | 5.10            |       | 121                          |       | 4.77            |       |
| $2.67                    |       | 90              |       | 9.00            |       | 18                           |       | 9.00            |       |
| $13.00                   |       | 15              |       | 9.47            |       | —                       |       | —          |       |
| $16.98                   |       | 30              |       | 9.55            |       | —                       |       | —          |       |
| $17.98                   |       | 15              |       | 9.61            |       | —                       |       | —          |       |
| $21.73                   |       | 135             |       | 9.97            |       | —                       |       | —          |       |
|                     |       | 437             |       | 8.01            |       | 139                          |       | 5.32            |       |

 

Total stock-based compensation cost was $332 for theyear ended December 31, 2006. Total income tax benefit recognized forstock-based compensation arrangements was $126 for the year endedDecember 31, 2006. No stock-based compensation costs were incurred duringthe years ended December 31, 2005 and 2004.

As a result of adopting SFAS 123(R) onJanuary 1, 2006, the Company recognized $220 of additional stock-basedcompensation expense related to stock options during the year endedDecember 31, 2006. The Company’s income before income taxes and net incomefor the year ended December 31, 2006, were therefore $220 and $136,respectively, lower than if the Company had continued to account forstock-based compensation under APB 25. Basic and diluted earnings pershare were $0.01 lower for the year ended December 31, 2006, than if theCompany had continued to account for the stock-based compensation underAPB 25.

As of December 31, 2006, there was $2,094 oftotal unrecognized compensation cost related to nonvested share-basedcompensation arrangements. The cost is expected to be recognized over aweighted average period of approximately fifty-one months. There were1,605 shares available for future grants under the various option plans atDecember 31, 2006. The Company generally issues new shares when optionsare exercised.

The total fair value of options vested during theyears ended December 31, 2006, 2005 and 2004 was $121, $3 and $3respectively.

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**9.             Commitments and Contingencies**

The Company has entered into operating leases,primarily for warehouse and office facilities. These operating leasesfrequently include renewal options at the fair rental value at that time. Forleases with step rent provisions, whereby the rental payments increaseincrementally over the life of the lease, we recognize the total minimum leasepayments on a straight line basis over the minimum lease term. Rent expense wasapproximately $1,737 in 2006, $1,611 in 2005 and $1,632 in 2004. Future minimumlease payments under non-cancelable operating leases with initial terms of oneyear or more consisted of the following at December 31, 2006:
| 2007                          |   | $     | 2,172  |   |
|-------------------------------|--------|-------|--------|--------|
| 2008                          |   | 2,131 |   |
| 2009                          |   | 1,962 |   |
| 2010                          |   | 1,480 |   |
| 2011                          |   | 1,521 |   |
| Thereafter                    |   | 1,854 |   |
| Total minimum lease  payments |   | $     | 11,120 |   |

 

The Company had aggregate purchase commitments forinventory of approximately $37,675****atDecember 31, 2006.

During 2004, HWC settled a lawsuit with a vendor, inregards to a prior inventory purchase, which resulted in the receipt of $650,which is included in litigation settlements in the accompanying 2004 consolidatedstatement of income.

In September 2000, HWC lost a court case broughtby a vendor for alleged breach of contract. The jury found in favor of thevendor and awarded the vendor the sum of $1,300 plus accrued interest, whichtotaled approximately $1,600. The breach of contract occurred prior to theacquisition of the Company from its previous owner (“ALLTEL”). In 2001, HWCfiled suit against ALLTEL under the terms of the purchase agreement, in whichHWC is to be indemnified by ALLTEL, for any liability either disclosed orundisclosed in the agreement of sale. In October 2004, the court renderedits verdict on the suit. HWC was awarded approximately $672 for ALLTEL’s breachunder one portion of the suit which amount was received in January 2005and included in litigation settlements in the accompanying 2005 statement ofincome, while the court found in favor of ALLTEL on the second portion of thesuit. HWC appealed the decision on the second portion of the suit, but thisdecision was affirmed by the Illinois Appellate Court in March 2006.

HWC, along with many other defendants, have been namedin a number of lawsuits in the state courts of Minnesota, North Dakota andSouth Dakota alleging that certain wire and cable which may have containedasbestos caused injury to the plaintiffs who were exposed to this wire andcable. These lawsuits are individual personal injury suits that seekunspecified amounts of money damages as the sole remedy. It is not clearwhether the alleged injuries occurred as a result of the wire and cable inquestion or whether HWC, in fact, distributed the wire and cable alleged tohave caused any injuries. In addition, HWC did not manufacture any of the wireand cable at issue, and HWC would rely on any warranties from the manufacturersof such cable if it were determined that any of the wire or cable that HWCdistributed contained asbestos which caused injury to any of these plaintiffs.In connection with ALLTEL’s sale of the company in 1997, ALLTEL providedindemnities with respect to costs and damages associated with these claims thatHWC believes it could enforce if its insurance coverage proves inadequate. Inaddition, HWC maintains general liability insurance that has applied to theseclaims. To date, all costs associated with these claims have been covered bythe applicable insurance policies and all defense of these claims has beenhandled by the applicable insurance companies.

In addition to the foregoing cases, there are no legalproceedings pending against or involving the Company that, in management’sopinion, based on the current known facts and circumstances, are expected tohave a material adverse effect on the Company’s consolidated financialposition, cash flows, or results from operations.

Pursuant to a registration rights agreement betweenthe Company and a certain stockholder, such stockholder has the right torequest registration of certain shares and require the Company to bear theapplicable offering expenses of such registration.

**10.          Subsequent Event**

On March 9, 2007, the Company granted500,000 options to purchase shares of its common stock to the Company’schief executive officer with an exercise price of the fair market value of theCompany’s stock at the close of trading on March 9, 2007. These optionshave a contractual life of ten years and vest 50% after four years from thedate of grant and 50% after five years of the date grant, provided that in theevent of death or permanent disability, such options would vest proportionallybased on the days served from the date of grant.

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**11.          Select Quarterly Financial Data(unaudited)**

The following table presents our unaudited quarterlyresults of operations for each of our last eight quarters endedDecember 31, 2006. We have prepared the unaudited information on the samebasis as our audited consolidated financial statements. Results of operationsfor any quarter are not necessarily indicative of results for any futurequarters or for a full year.
| ** **                             | ** ** | **Quarter Ended**                                             | ** ** |
|----------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                             | ** ** | **March 31,**                                                 | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                             | ** ** | **2005**                                                           | ** ** | **2005** | ** ** | **2005** | ** ** | **2005** | ** ** | **2006** | ** ** | **2006** | ** ** | **2006** | ** ** | **2006** | ** ** |
| ** **                             | ** ** | **(In thousands, except per share data)** | ** ** |
| **CONSOLIDATED  STATEMENT OF INCOME:** |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                                  |       | $                                                                  | 43,106     |   | $ | 46,652 |   | $ | 58,321 |   | $ | 65,878 |   | $ | 66,428 |   | $ | 84,184 |   | $ | 89,963 |   | $ | 82,892 |   |
| Gross profit                           |       | $                                                                  | 11,157     |   | $ | 12,053 |   | $ | 15,136 |   | $ | 17,371 |   | $ | 17,991 |   | $ | 24,527 |   | $ | 26,203 |   | $ | 23,618 |   |
| Operating income                       |       | $                                                                  | 3,897      |   | $ | 4,271 |   | $ | 6,889 |   | $ | 7,711 |   | $ | 8,953 |   | $ | 14,563 |   | $ | 15,857 |   | $ | 13,701 |   |
| Net income                             |       | $                                                                  | 2,011      |   | $ | 2,240 |   | $ | 3,904 |   | $ | 4,359 |   | $ | 4,802 |   | $ | 8,254 |   | $ | 9,468 |   | $ | 8,150 |   |
| Earnings per  share:                   |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                  |       | $                                                                  | 0.12       |   | $ | 0.13 |   | $ | 0.24 |   | $ | 0.26 |   | $ | 0.29 |   | $ | 0.48 |   | $ | 0.45 |   | $ | 0.39 |   |
| Diluted                                |       | $                                                                  | 0.12       |   | $ | 0.13 |   | $ | 0.23 |   | $ | 0.26 |   | $ | 0.29 |   | $ | 0.48 |   | $ | 0.45 |   | $ | 0.39 |   |

 

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**ITEM 9.**                    CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

**None.**

**ITEM 9A(T).**        CONTROLS AND PROCEDURES

**Evaluationof Disclosure Controls and Procedures**

In accordance with Exchange Act Rules 13a-15 and15a-15, we carried out an evaluation, under the supervision and with theparticipation of management, including our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report. Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of December 31,2006.

The annual report does not include a report ofmanagement’s assessment regarding internal control over financial reporting oran attestation report of the Company’s registered public accounting firm due toa transition period established by rules of the Securities and ExchangeCommission for newly public companies.

**ITEM 9B.**           OTHER INFORMATION

**On March 9, 2007, the Companygranted 500,000 options to purchase shares of its common stock to the Company’schief executive officer with an exercise price of $26.19, which represents theclosing price per share of the Company’s common stock as reported on the NasdaqNational Market on March 9, 2007. These options have a contractual life of tenyears and vest 50% after four years from the date of grant and 50% after fiveyears of the date grant, provided that in the event of death or permanentdisability, such options would vest proportionally based on the days servedfrom the date of grant.  The grant wasmade under the Company’s 2006 Stock Plan.**

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**PART III**

**ITEM 10.**          DIRECTORS, EXECUTIVEOFFICERS AND CORPORATE GOVERNANCE

The informationcalled for by Item 10 relating to directors and nominees for election to theBoard of Directors isincorporated herein by reference to the “Election of Directors” section of theCorporation’s definitive 2007 Notice and Proxy Statement to be filed on orabout April 2, 2007 in connection with the Annual Meeting of Stockholders to beheld on May 1, 2007.  The informationcalled for by Item 10 relating to executive officers and certain significantemployees is set forth in Part I of this Annual Report on Form 10-K.

The information called for by Item 10 relating todisclosure of delinquent Form 3, 4 or 5 filers is incorporated herein byreference to the “Stock Ownership of Certain Beneficial Owners and Management”section of the Corporation’s definitive 2007 Notice and Proxy Statement to befiled on or about April 2, 2007 in connection with the Annual Meeting ofStockholders to be held on May 1, 2007.

The information called for by Item 10 relating to thecode of ethics is incorporated herein by reference to the “Corporate Governanceand Board Committees — Code of Business Practices” section of the Corporation’sdefinitive 2007 Notice and Proxy Statement to be filed on or about April 2,2007 in connection with the Annual Meeting of Stockholders to be held on May 1,2007.

The information called for by Item 10 relating to theprocedures by which security holders may recommend nominees to the Board ofDirectors is incorporated herein by reference to the “Corporate Governance andBoard Committees — Stockholder Recommendations for Director Nominations”section of the Corporation’s definitive 2007 Notice and Proxy Statement to befiled on or about April 2, 2007 in connection with the Annual Meeting ofStockholders to be held on May 1, 2007.

The information called for by Item 10 relating to theaudit committee and the audit committee financial expert is incorporated hereinby reference to the “Corporate Governance and Board Committees — CommitteesEstablished by the Board — Audit Committee” section of the Corporation’sdefinitive 2007 Notice and Proxy Statement to be filed on or about April 2,2007 in connection with the Annual Meeting of Stockholders to be held on May 1,2007.

**ITEM 11.**          EXECUTIVE COMPENSATION

The information called for by Item 11 is incorporatedherein by reference to the “Report of the Compensation Committee,” “CompensationCommittee Interlocks and Insider Participation,” “Executive Compensation” and “DirectorCompensation” sections of the Corporation’s definitive 2007 Notice and ProxyStatement to be filed on or about April 2, 2007 in connection with the AnnualMeeting of Stockholders to be held on May 1, 2007.

**ITEM 12.**          SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information called for by Item 12 is incorporatedherein by reference to the “Stock Ownership of Certain Beneficial Owners andManagement” and “Equity Compensation Plan Information” sections of theCorporation’s definitive 2007 Notice and Proxy Statement to be filed on orabout April 2, 2007 in connection with the Annual Meeting of Stockholders to beheld on May 1, 2007.

**ITEM 13.**          CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information called for by Item 13 is incorporatedherein by reference to the “Corporate Governance and Board Committees — Are aMajority of the Directors Independent?” and “Certain Relationships and RelatedTransactions” sections of the Corporation’s definitive 2007 Notice and ProxyStatement to be filed on or about April 2, 2007 in connection with the AnnualMeeting of Stockholders to be held on May 1, 2007.

**ITEM 14.**          PRINCIPAL ACCOUNTANTFEES AND SERVICES

The information called for by Item 14 is incorporatedherein by reference to the “Principal Independent Accountant Fees and Services”section of the Corporation’s definitive 2007 Notice and Proxy Statement to befiled on or about April 2, 2007 in connection with the Annual Meeting ofStockholders to be held on May 1, 2007.

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**PART IV**

**ITEM15.**             EXHIBITSAND FINANCIAL STATEMENT SCHEDULES

(a)  Thefollowing financial statements of our Company and Report of the IndependentRegistered Public Accounting Firm are included in Part II:

·                  Report of Independent Registered PublicAccounting Firm

·                  Consolidated Balance Sheets as of December 31,2006 and 2005

·                  Consolidated Statements of Income for theyears ended December 31, 2006, 2005 and 2004

·                  Consolidated Statements of Stockholders’Equity for the years ended December 31, 2006, 2005 and 2004

·                  Consolidated Statements of Cash Flows for theyears ended December 31, 2006, 2005 and 2004

·                  Notesto Consolidated Financial Statements

(b)**FinancialStatement Schedules:

Financial statement schedules have been omittedbecause they are either not applicable or the required information has beendisclosed in the financial statements or notes thereto.

(c)  Exhibits

Exhibits are set forth on the attached exhibit index(only if applicable)

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.
|        | HOUSTON WIRE & CABLE COMPANY |
|--------|----------------------------------|
|   | (Registrant)                     |
|   |                             |   |
|   |                             |   |
|   | By:                              | /s/  NICOL G.  GRAHAM |
|   |                             |   |
|   |                             | Nicol G. Graham |
|   |                             | Chief Financial  Officer, Treasurer and Secretary |

 

Pursuant to the requirements of the Securities Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacity and on the dates indicated.
| **SIGNATURE**                         | ** **                           | **TITLE**                                        | ** ** | **DATE**       |
|---------------------------------------|--------------------------------------|--------------------------------------------------|------------|----------------|
|                                  |                                 |                                             |       |           |
|                                  |                                 |                                             |       |           |
|                                  |                                 |                                             |       |           |
| /s/  CHARLES  A. SORRENTINO |                                 | President, Chief Executive Officer and Director  |       | March 14, 2007 |
| Charles A.  Sorrentino           |                                 |                                             |       |           |
|                                  |                                 |                                             |       |           |
|                                  |                                 |                                             |       |           |
| /s/  NICOL  G. GRAHAM       |                                 | Chief Financial Officer, Treasurer and Secretary |       | March 14, 2007 |
| Nicol G.  Graham                 |                                 | (Chief Accounting Officer)                       |       |           |
|                                  |                                 |                                             |       |           |
|                                  |                                 |                                             |       |           |
| /s/  PETER  M. GOTSCH*      |                                 | Director                                         |       | March 14, 2007 |
| Peter M.  Gotsch                 |                                 |                                             |       |           |
|                                  |                                 |                                             |       |           |
|                                  |                                 |                                             |       |           |
| /s/  ROBERT  G. HOGAN*      |                                 | Director                                         |       | March 14, 2007 |
| Robert G.  Hogan                 |                                 |                                             |       |           |
|                                  |                                 |                                             |       |           |
|                                  |                                 |                                             |       |           |
| /s/  IAN  S. FARWELL*       |                                 | Director                                         |       | March 14, 2007 |
| Ian S. Farwell                        |                                 |                                             |       |           |
|                                  |                                 |                                             |       |           |
|                                  |                                 |                                             |       |           |
| /s/  WILLIAM  H. SHEFFIELD* |                                 | Director                                         |       | March 14, 2007 |
| William H.  Sheffield                 |                                 |                                             |       |           |
|                                  |                                 |                                             |       |           |
|                                  |                                 |                                             |       |           |
| /s/  SCOTT  L. THOMPSON*    |                                 | Director                                         |       | March 14, 2007 |
| Scott L.  Thompson                    |                                 |                                             |       |           |
|                                  |                                 |                                             |       |           |
|                                  |                                 |                                             |       |           |
| /s/  WILSON  B. SEXTON*     |                                 | Director                                         |       | March 14, 2007 |
| Wilson B.  Sexton                |                                 |                                             |       |           |
|                                  |                                 |                                             |       |           |
|                                  |                                 |                                             |       |           |
|                                  |                                 |                                             |       |           |
| By:                                   |                                 |                                             |       |           |
|                                  | /s/  CHARLES A. SORRENTINO |                                             |       |           |   |
|                                  | Charles A. Sorrentino,               |                                             |       |           |   |
|                                  | *Attorney-in-Fact*                   |                                             |       |           |   |

 

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**INDEX TO EXHIBITS**
| EXHIBIT    | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **NUMBER** | ** ** | **EXHIBIT**                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** |
| 3.1        |       | Amended and Restated  Certificate of Incorporation of Houston Wire & Cable Company  (incorporated herein by reference to Exhibit 3.1 to Houston Wire & Cable  Company’s Registration Statement on Form S-1 (Registration No. 333-132703))                                                                                                                                                                       |       |
| 3.2        |       | By-Laws of Houston  Wire & Cable Company (incorporated herein by reference to Exhibit  3.2 to Houston Wire & Cable Company’s Registration Statement on Form S-1  (Registration No. 333-132703))                                                                                                                                                                                                                 |       |
| 4.1        |       | Form of Specimen Common  Stock Certificate of Houston Wire & Cable Company (incorporated  herein by reference to Exhibit 4.1 to Houston Wire & Cable Company’s  Registration Statement on Form S-1 (Registration No. 333-132703))                                                                                                                                                                               |       |
| 10.1       |       | Registration Rights  Agreement, dated as of June 20, 2006, by and between Houston Wire &  Cable Company and Code, Hennessy & Simmons II, L.P.                                                                                                                                                                                                                                                         |       |
| 10.2       |       | Houston Wire &  Cable Company 2000 Stock Plan (incorporated herein by reference to Exhibit  10.2 to Houston Wire & Cable Company’s Registration Statement on Form S-1  (Registration No. 333-132703))                                                                                                                                                                                                           |       |
| 10.3       |       | Houston Wire &  Cable Company 2006 Stock Plan (incorporated herein by reference to Exhibit  10.3 to Houston Wire & Cable Company’s Registration Statement on Form S-1  (Registration No. 333-132703))                                                                                                                                                                                                           |       |
| 10.4       |       | Amended and Restated  Loan and Security Agreement, dated as of May 22, 2000, by and among  various specified lenders, Fleet Capital Corporation (now Bank of  America, Inc.) and HWC Holding Company (now Houston Wire &  Cable Company) (incorporated herein by reference to Exhibit 10.4 to Houston  Wire & Cable Company’s Registration Statement on Form S-1 (Registration  No. 333-132703)) |       |
| 10.5       |       | First Amendment to  Amended and Restated Loan Agreement, dated as of July 13, 2000  (incorporated herein by reference to Exhibit 10.5 to Houston Wire & Cable  Company’s Registration Statement on Form S-1 (Registration No. 333-132703))                                                                                                                                                                          |       |
| 10.6       |       | Second Amendment to  Amended and Restated Loan Agreement, dated as of May 30, 2001  (incorporated herein by reference to Exhibit 10.6 to Houston Wire & Cable  Company’s Registration Statement on Form S-1 (Registration No. 333-132703))                                                                                                                                                                          |       |
| 10.7       |       | Third Amendment to  Amended and Restated Loan Agreement, dated as of October 22, 2001  (incorporated herein by reference to Exhibit 10.7 to Houston Wire & Cable  Company’s Registration Statement on Form S-1 (Registration No. 333-132703))                                                                                                                                                                       |       |
| 10.8       |       | Fourth Amendment to  Amended and Restated Loan Agreement, dated as of December 31, 2002  (incorporated herein by reference to Exhibit 10.8 to Houston Wire & Cable  Company’s Registration Statement on Form S-1 (Registration No. 333-132703))                                                                                                                                                                     |       |
| 10.9       |       | Fifth Amendment to  Amended and Restated Loan Agreement, dated as of November 19, 2003  (incorporated herein by reference to Exhibit 10.9 to Houston Wire & Cable  Company’s Registration Statement on Form S-1 (Registration No. 333-132703))                                                                                                                                                                      |       |
| 10.10      |       | Sixth Amendment to  Amended and Restated Loan Agreement, dated as of May 26, 2005  (incorporated herein by reference to Exhibit 10.10 to Houston Wire &  Cable Company’s Registration Statement on Form S-1 (Registration No.  333-132703))                                                                                                                                                                         |       |
| 10.11      |       | Seventh Amendment to  Amended and Restated Loan Agreement, dated as of December 14, 2005  (incorporated herein by reference to Exhibit 10.11 to Houston Wire &  Cable Company’s Registration Statement on Form S-1 (Registration No.  333-132703))                                                                                                                                                                  |       |
| 10.12      |       | Eighth Amendment to  Amended and Restated Loan Agreement, dated as of December 30, 2005  (incorporated herein by reference to Exhibit 10.12 to Houston Wire &  Cable Company’s Registration Statement on Form S-1 (Registration No.  333-132703))                                                                                                                                                                   |       |
| 10.13      |       | Ninth Amendment to  Amended and Restated Loan Agreement, dated as of May 23, 2006 (incorporated  herein by reference to Exhibit 10.19 to Houston Wire & Cable Company’s  Registration Statement on Form S-1 (Registration No. 333-132703))                                                                                                                                                                               |       |
| 10.14      |       | Tenth Amendment to  Amended and Restated Loan Agreement, dated as of November 3, 2006  (incorporated herein by reference to Exhibit 10.1 to Houston Wire & Cable  Company’s Current Report on Form 8-K filed November 7, 2006)                                                                                                                                                                                           |       |
| 10.15      |       | Termination Agreement,  dated as of March 23, 2006, by and between HWC Wire &  Cable Company and CHS Management II, L.P. (incorporated herein by  reference to Exhibit 10.13 to Houston Wire & Cable Company’s Registration  Statement on Form S-1 (Registration No. 333-132703))                                                                                                           |       |

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| 10.16 |   | Employment Agreement,  dated as of April 26, 2006, by and between Charles A. Sorrentino  and Houston Wire & Cable Company (incorporated herein by reference  to Exhibit 10.14 to Houston Wire & Cable Company’s Registration Statement  on Form S-1 (Registration No. 333-132703))                                                                                                                                                       |   |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.17 |   | Form of Executive  Securities Agreement by and among Code, Hennessy & Simmons II,  L.P., HWC Holding Corporation (now Houston Wire & Cable Company) and  executive (incorporated herein by reference to Exhibit 10.15 to Houston Wire  & Cable Company’s Registration Statement on Form S-1 (Registration No.  333-132703))                                                                                                          |   |
| 10.18 |   | Investor Securities  Agreement, dated as of May 22, 1997, by and among Code,  Hennessy & Simmons II, L.P., HWC Holding Corporation  (now Houston Wire & Cable Company) and various specified investors  (incorporated herein by reference to Exhibit 10.16 to Houston Wire &  Cable Company’s Registration Statement on Form S-1 (Registration No.  333-132703))                                                      |   |
| 10.19 |   | Executive Securities  Agreement, dated as of December 31, 1998, and amended as of  June 28, 2000, and April 26, 2006, by and among Code,  Hennessy & Simmons II, L.P., HWC Holding Corporation (now Houston  Wire & Cable Company) and Charles A. Sorrentino (incorporated  herein by reference to Exhibit 10.17 to Houston Wire & Cable Company’s  Registration Statement on Form S-1 (Registration No. 333-132703)) |   |
| 10.20 |   | Executive Securities  Agreement, dated as of September 11, 1997, by and among Code,  Hennessy & Simmons II, L.P., HWC Holding Corporation (now Houston  Wire & Cable Company) and Nicol G. Graham (incorporated herein  by reference to Exhibit 10.18 to Houston Wire & Cable Company’s  Registration Statement on Form S-1 (Registration No. 333-132703))                                                                      |   |
| 10.21 |   | Form of Employee Stock  Option Agreement under Houston Wire & Cable Company’s 2006 Stock Plan  (incorporated herein by reference to Exhibit 10.1 to Houston Wire & Cable  Company’s Current Report on Form 8-K filed December 27, 2006)                                                                                                                                                                                                            |   |
| 10.22 |   | Form of Director Stock  Option Agreement under Houston Wire & Cable Company’s 2006 Stock Plan  (incorporated herein by reference to Exhibit 10.2 to Houston Wire & Cable  Company’s Current Report on Form 8-K filed December 27, 2006)                                                                                                                                                                                                            |   |
| 10.23 |   | Description of Senior  Management Bonus Program (incorporated herein by reference to Exhibit 10.3 to  Houston Wire & Cable Company’s Current Report on Form 8-K filed December  27, 2006)                                                                                                                                                                                                                                                                   |   |
| 10.24 |   | Form of  Director/Officer Indemnity Agreement by and between Houston Wire & Cable  Company and a director, member of a committee of the Board of Directors or  officer of Houston Wire & Cable Company                                                                                                                                                                                                                                                       |   |
| 21.1  |   | Subsidiaries of Houston  Wire & Cable Company (incorporated herein by reference to Exhibit  21.1 to Houston Wire & Cable Company’s Registration Statement on Form S-1  (Registration No. 333-132703))                                                                                                                                                                                                                                              |   |
| 23.1  |   | Consent of  Ernst & Young LLP, Independent Registered Public Accountants                                                                                                                                                                                                                                                                                                                                                                               |   |
| 31.1  |   | Certification of CEO  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 31.2  |   | Certification of CFO  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 32.1  |   | Certifications of CEO  and CFO 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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