** **

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**Washington,D.C. 20549

** **

**FORM 10-Q**

 

| **þ** | ** ** | **(QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|------------|------------|-----------------------------------------------------------------------------------------------|

**For the quarterly period ended September 30, 2006**

or

| **o** |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------|-----------------------------------------------------------------------------------------------|

**For the transition period from                            to                             **

**Commission File Number: 000-52046**

| ****                                                    |
|---------------------------------------------------------|
| **Houston Wire & Cable  Company**                   |
| (Exact name of  registrant as specified in its charter) |

 

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

 

**(713) 609-2100**

(Registrant’stelephone number, including area code)

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Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the Registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days   YES þ     NO o

Indicateby check mark whether the registrant is a large accelerated filer, an acceleratedfiler or a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act

| Large Accelerated Filer o |   | Accelerated  Filer o |   | Non-Accelerated  Filer þ |
|---------------------------|--------|----------------------|--------|-------------------------------|

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

YES o       NO þ

At November6, 2006 there were 20,867,173 outstanding shares of the registrant’s commonstock, $.001 par value per share.

 

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**HOUSTONWIRE & CABLE COMPANY**

**Form 10-QFor the Quarter and Nine Months Ended September 30, 2006****INDEX**

 
| **PART I. FINANCIAL INFORMATION**                                                                    | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                           | ** ** | ** ** |
| Item 1. Financial Statements  (Unaudited)                                                            | ** ** | ** ** |
| Consolidated Balance Sheets                                                                          |       |       |
| Consolidated Statements of Income                                                                    |       |       |
| Consolidated Statements of Cash Flows                                                                |       |       |
| Notes to Consolidated Financial Statements                                                           |       |       |
|                                                                                                 |       |       |
| Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations |       |       |
| Overview                                                                                             |       |       |
| Results of Operations                                                                                |       |       |
| Impact of Inflation and Commodity Prices                                                             |       |       |
| Liquidity and Capital Resources                                                                      |       |       |
| Contractual Obligations                                                                              |       |       |
| Cautionary Statement                                                                                 |       |       |
|                                                                                                 |       |       |
| Item 3. Quantitative and Qualitative Disclosures about  Market Risk                                  |       |       |
|                                                                                                 |       |       |
| Item 4. Controls and Procedures                                                                      |       |       |
|                                                                                                 |       |       |
| **PART II. OTHER INFORMATION**                                                                       |       |       |
| ** **                                                                                           | ** ** | ** ** |
| Item 1A. Risk Factors                                                                                |       |       |
|                                                                                                 |       |       |
| Item 6. Exhibits                                                                                     |       |       |
|                                                                                                 |       |       |
|                                                                                                 |       |       |
| **Signature Page**                                                                                   |       |       |
|                                                                                                 |       |       |
|                                                                                                 |       |       |

** **

2

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**HOUSTONWIRE & CABLE COMPANYPart I. FINANCIAL INFORMATIONItem 1.  Financial Statements**

**Consolidated Balance Sheets**(In thousands, except share data)

 
| ** **                                                                                                                                                       | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                       | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                       | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                  |       |                         |       |                        |       |
| Accounts  receivable, less allowance of $454 at September 30, 2006 and $447 at December  31, 2005                                                                |       | $                            | 58,757     |                        | $          | 41,778 |   |
| Inventories, net                                                                                                                                                 |       | 54,326                       |       | 31,306                      |       |
| Deferred income  taxes                                                                                                                                           |       | 1,275                        |       | 826                         |       |
| Prepaid expenses                                                                                                                                                 |       | 680                          |       | 490                         |       |
| Total current assets                                                                                                                                             |       | 115,038                      |       | 74,400                      |       |
|                                                                                                                                                             |       |                         |       |                        |       |
| Property and equipment,  net                                                                                                                                     |       | 2,791                        |       | 2,733                       |       |
| Goodwill                                                                                                                                                         |       | 2,996                        |       | 2,996                       |       |
| Deferred income taxes                                                                                                                                            |       | 749                          |       | 1,146                       |       |
| Other assets, net                                                                                                                                                |       | 221                          |       | 435                         |       |
| Total assets                                                                                                                                                     |       | $                            | 121,795    |                        | $          | 81,710 |   |
|                                                                                                                                                             |       |                         |       |                        |       |
| **Liabilities and stockholders’  equity**                                                                                                                   | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                             |       |                         |       |                        |       |
| Book overdraft                                                                                                                                                   |       | $                            | 3,612      |                        | $          | 2,119 |   |
| Trade accounts  payable                                                                                                                                          |       | 13,722                       |       | 8,268                       |       |
| Accrued and  other current liabilities                                                                                                                           |       | 12,256                       |       | 8,351                       |       |
| Income taxes  payable                                                                                                                                            |       | 2,007                        |       | 824                         |       |
| Short-term  obligations                                                                                                                                          |       | 4,200                        |       | 3,468                       |       |
| Total current  liabilities                                                                                                                                       |       | 35,797                       |       | 23,030                      |       |
|                                                                                                                                                             |       |                         |       |                        |       |
| Long-term obligations                                                                                                                                            |       | 12,629                       |       | 57,938                      |       |
|                                                                                                                                                             |       |                         |       |                        |       |
| Stockholders’ equity:                                                                                                                                       |       |                         |       |                        |       |
| Common stock,  $.001 par value; 100,000,000 sharesauthorized: 20,867,173 shares issued and  outstanding atSeptember 30, 2006 and 16,606,673 at December 31, 2005 |       | 21                           |       | 17                          |       |
| Additional  paid-in capital                                                                                                                                      |       | 50,842                       |       | 1,302                       |       |
| Unearned stock  compensation                                                                                                                                     |       | —                       |       | (559                        | )          |
| Retained  earnings                                                                                                                                               |       | 22,524                       |       | —                      |       |
| Treasury shares,  at cost                                                                                                                                        |       | (18                          | )          | (18                         | )          |
| Total stockholders’  equity                                                                                                                                 |       | 73,369                       |       | 742                         |       |
|                                                                                                                                                             |       |                         |       |                        |       |
| Total liabilities and stockholders’ equity                                                                                                                  |       | $                            | 121,795    |                        | $          | 81,710 |   |

 

The accompanying Notesare an integral part of these Consolidated Financial Statements

3

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**HOUSTON WIRE & CABLE COMPANYConsolidated Statements of Income**(Unaudited)

(In thousands, except share and per share data)

 
| ** **                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Sales                                       |       | $                                                    | 89,963     |                                                | $          | 58,321 |   | $ | 240,575 |   | $ | 148,079 |   |
| Cost of sales                               |       | 63,760                                               |       | 43,185                                              |       | 171,854 |   | 109,733 |   |
| Gross profit                                |       | 26,203                                               |       | 15,136                                              |       | 68,721 |   | 38,346 |   |
| ** **                                  | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating Expenses:                         |       |                                                 |       |                                                |       |   |   |   |   |
| Salaries and  commissions                   |       | 6,005                                                |       | 4,761                                               |       | 17,024 |   | 13,463 |   |
| Other operating  expenses                   |       | 4,248                                                |       | 3,250                                               |       | 11,840 |   | 9,791 |   |
| Management fee                              |       | —                                               |       | 125                                                 |       | 208 |   | 375 |   |
| Recovery from  litigation                   |       | —                                               |       | —                                              |       | — |   | (672 | ) |
| Depreciation and  amortization              |       | 93                                                   |       | 111                                                 |       | 276 |   | 332 |   |
|                                        |       | 10,346                                               |       | 8,247                                               |       | 29,348 |   | 23,289 |   |
| Operating income                            |       | 15,857                                               |       | 6,889                                               |       | 39,373 |   | 15,057 |   |
| Interest expense                            |       | 492                                                  |       | 708                                                 |       | 2,666 |   | 2,145 |   |
| Income before income  taxes                 |       | 15,365                                               |       | 6,181                                               |       | 36,707 |   | 12,912 |   |
| Income taxes                                |       | 5,897                                                |       | 2,277                                               |       | 14,183 |   | 4,757 |   |
| Net income                                  |       | $                                                    | 9,468      |                                                | $          | 3,904 |   | $ | 22,524 |   | $ | 8,155 |   |
|                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Earnings per share:                         |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                       |       | $                                                    | 0.45       |                                                | $          | 0.24 |   | $ | 1.24 |   | $ | 0.49 |   |
| Diluted                                     |       | $                                                    | 0.45       |                                                | $          | 0.23 |   | $ | 1.23 |   | $ | 0.49 |   |
| Weighted average common  shares outstanding |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                       |       | 20,867,173                                           |       | 16,606,673                                          |       | 18,203,902 |   | 16,606,673 |   |
| Diluted                                     |       | 20,984,949                                           |       | 16,702,814                                          |       | 18,308,748 |   | 16,700,616 |   |

 

The accompanying Notesare an integral part of these Consolidated Financial Statements

4

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**HOUSTONWIRE & CABLE COMPANYConsolidated Statements of Cash Flows**(Unaudited)

(In thousands)

 
| ** **                                                                                   | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| **Operating activities**                                                                     |       |                                                |       |   |   |
| Net income                                                                                   |       | $                                                   | 22,524     |   | $ | 8,155 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                                                |       |   |   |
| Depreciation                                                                                 |       | 276                                                 |       | 332 |   |
| Amortization of  capitalized loan costs                                                      |       | 242                                                 |       | 93 |   |
| Amortization of  unearned stock compensation                                                 |       | 178                                                 |       | — |   |
| Deferred  interest                                                                           |       | —                                              |       | 691 |   |
| Provision for  doubtful accounts                                                             |       | —                                              |       | 48 |   |
| Provision for  inventory obsolescence                                                        |       | (345                                                | )          | 183 |   |
| Deferred income  taxes                                                                       |       | (52                                                 | )          | 234 |   |
| Changes in  operating assets and liabilities:                                                |       |                                                |       |   |   |
| Accounts  receivable                                                                         |       | (16,979                                             | )          | (11,791 | ) |
| Inventories                                                                                  |       | (22,675                                             | )          | 1,317 |   |
| Prepaid expenses                                                                             |       | (190                                                | )          | (177 | ) |
| Other assets                                                                                 |       | (28                                                 | )          | (5 | ) |
| Book overdraft                                                                               |       | 1,493                                               |       | 1,415 |   |
| Trade accounts  payable                                                                      |       | 5,454                                               |       | 4,250 |   |
| Accrued and  other current liabilities                                                       |       | 3,905                                               |       | 1,252 |   |
| Income taxes  payable                                                                        |       | 1,183                                               |       | 826 |   |
| Net cash provided by  (used in) operating activities                                         |       | (5,014                                              | )          | 6,823 |   |
| **Investing activities**                                                                     | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Expenditures for  property, plant, and equipment                                             |       | (334                                                | )          | (231 | ) |
| Net cash used in  investing activities                                                       |       | (334                                                | )          | (231 | ) |
| **Financing activities**                                                                     | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Borrowings on  revolver                                                                      |       | 240,651                                             |       | 146,359 |   |
| Payments on  revolver                                                                        |       | (274,928                                            | )          | (146,951 | ) |
| Payments on  long-term obligations                                                           |       | (10,300                                             | )          | — |   |
| Payments on  junior subordinated debt                                                        |       | —                                              |       | (6,000 | ) |
| Proceeds from  exercise of common stock options                                              |       | 6                                                   |       | — |   |
| Proceeds from  sale of common stock                                                          |       | 51,381                                              |       | — |   |
| Payment of  common stock offering costs                                                      |       | (1,482                                              | )          | — |   |
| Excess income  tax benefit for common stock options                                          |       | 20                                                  |       | — |   |
| Net cash provided by  (used in) financing activities                                         |       | 5,348                                               |       | (6,592 | ) |
| Net change in cash                                                                           |       | —                                              |       | — |   |
| Cash at beginning of  period                                                                 |       | —                                              |       | — |   |
| Cash at end of period                                                                        |       | $                                                   | —     |   | $ | — |   |

 

The accompanyingNotes are an integral part of these Consolidated Financial Statements.

5

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**HOUSTON WIRE & CABLE COMPANYNotes to Consolidated Financial Statements (Unaudited)(in thousands, except per share amounts)**

**1. Basis of Presentation**

Houston Wire & CableCompany (“HWC” or the “Company”) through its wholly owned subsidiaries, HWC Wire& Cable Company, Advantage Wire & Cable and Cable Management ServicesInc., distributes specialty electrical wire and cable to the U.S. electricaldistribution market through eleven locations in ten states throughout theUnited States.  The Company has no otherbusiness activity.

The consolidatedfinancial statements as of September 30, 2006 and for the three and nine monthsended September 30, 2006 and 2005 have been prepared in accordance withgenerally accepted accounting principles for interim financial information andArticle 10 of Regulation S-X. Accordingly they do not include all of the information and footnotesrequired by U.S. generally accepted accounting principles (“GAAP”) for completefinancial statements.  In the opinion ofmanagement, all adjustments, consisting only of normal recurring accruals,considered necessary for a fair presentation of the results of these interimperiods have been included.  The resultsof operations for the interim periods are not necessarily indicative of the resultsthat may be expected for the full year.

The preparation of thefinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes.  Themost significant estimates are those relating to the allowance for doubtfulaccounts, the inventory obsolescence reserve and the accrual for vendorrebates.  These estimates are continuallyreviewed and adjusted as necessary, but actual results could differ from thoseestimates.

On March 23, 2006, theCompany amended its certificate of incorporation to increase its authorizedcapital stock from 10,000 shares of common stock to 100,000 shares of commonstock and 5,000 shares of preferred stock. All references to authorized shares in the accompanying consolidatedfinancial statements have been retroactively restated for such increase inauthorized shares.

On May 16, 2006, theCompany effected a 1.875-for-1 stock split for its outstanding common stock inthe form of a stock dividend.  Allstockholder equity balances and disclosures in the accompanying consolidatedfinancial statements have been retroactively restated for such stock split.

On June 20, 2006, theCompany completed its initial public offering (“IPO”). See Note 3, InitialPublic Offering.

*RecentAccounting Pronouncements*

In June 2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes — aninterpretation of FASB Statement 109* (“FIN 48”).  FIN 48clarifies the accounting for uncertainty in income taxes by prescribing arecognition threshold for tax positions taken or expected to be taken in a taxreturn.  FIN 48 requires that entities recognize in their financialstatements the impact of a tax position if that position is more likely thannot of being sustained on audit, based on the technical merits of theposition.  The cumulative effect of applying the provisions of FIN 48 willbe reported as an adjustment to the opening balance of retained earnings uponadoption.  FIN 48 is effective for fiscal years beginning after December15, 2006.  The Company will adopt FIN 48 on January 1, 2007 and iscurrently evaluating the impact FIN 48 will have on its financial position andresults of operations.

**2.Earnings Per Share**

Basic earnings per shareis calculated by dividing the net income by the weighted-average number ofcommon shares outstanding. Diluted earnings per share includes the dilutiveeffects of stock option awards.  Thenumerator used in the calculation of both basic and diluted net income pershare for all periods presented was net income. The denominator for each period presented was determined as follows:

 

|                                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                  | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted average common  shares for basic earning per share |       | 20,867                                               |       | 16,607                                              |       | 18,204 |   | 16,607 |   |
| Effect of dilutive  securities                              |       | 118                                                  |       | 96                                                  |       | 105 |   | 94 |   |
| Denominator of diluted earnings per share                   |       | 20,985                                               |       | 16,703                                              |       | 18,309 |   | 16,701 |   |

 

6

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**Notes toConsolidated Financial Statements (Unaudited)(in thousands, except per share amounts)**

The Company adopted thefair value recognition provisions of Statement of Financial AccountingStandards 123(R), *Share Based**Payments*(“SFAS 123(R)”), on January 1, 2006, using the prospective transitionmethod.  The adoption of SFAS 123(R)results in lower diluted shares outstanding that would have been calculated hadcompensation cost not been recorded for stock options and stock issuances underthe employee stock purchase plan.  Thisis due to a modification required by SFAS 123(R) of the treasury stock methodcalculation utilized to compute the dilutive effect of stock options.  The weighted average number of stock-basedawards not included in the calculation of the dilutive effect of stock basedawards was 50 and 17 for the three months and nine months ended September 30,2006, respectively.  There were nostock-based awards excluded from the calculation for the other periods presented.

**3. Initial Public Offering**

On June 14, 2006, aRegistration Statement relating to the Company’s initial public offering ofcommon stock was declared effective by the Securities and ExchangeCommission.  As a result, the Companyissued 4,250 shares of common stock which were subsequently sold to the publicfor $13 per share.  Certain sellingstockholders sold an additional 5,525 shares which also were resold to thepublic for $13 per share. The Company received net proceeds of $49,900 afterdeducting the underwriting discounts and offering expenses.  The net proceeds were used to repay a portionof the outstanding debt.

**4.****Debt**

The Company’s current loan andsecurity agreement, which currently includes a $55,000 revolving loan and a$4,500 Term A loan, matures on May 1, 2007. The agreement was amended on November 3, 2006. See Note 7, SubsequentEvent.

**5. Stock Based Compensation**

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 areforfeited in the event the employee or director terminates, other than byretirement, his or her employment or relationship with the Company. Theseoptions generally vest over one to five years. All option plans containanti-dilutive provisions that permit an adjustment of the number of shares ofthe Company’s common stock represented by each option for any change incapitalization.

The Company adopted the fair value recognitionprovisions of SFAS 123(R) on January 1, 2006, using the prospectivetransition method. The fair values of the options granted after January 1,2006,  are estimated using aBlack-Scholes option-pricing model and amortized to expense over the options’vesting period. Prior to adoption of SFAS 123(R), the Company accountedfor stock based payments under the recognition and measurement provisions ofAccounting Principles Board Opinion No. 25 (“APB 25”), and related Interpretations,as permitted by SFAS 123 Accounting for Stock Based Compensation. 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). Results for prior periodshave not been restated. Total stock compensation expense for the three monthsand nine months ended September 30, 2006 was $122 and $178 respectively.  There was no material effect on the Company’sincome before income taxes and net income for the three-months and nine-monthsended September 30, 2006, as a result of adopting SFAS 123(R) instead ofcontinuing to account for stock based compensation under APB 25.

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 flowsresulting from the tax benefits resulting from tax deductions in excess of thecompensation cost recognized for those options (excess tax benefits) to beclassified as financing cash flows.

For the three and nine months ended September 30,2006, the Company granted 45 and 60 stock options respectively. The fair valueof each option awarded is estimated on the date of grant using a Black-Scholesoption-pricing model. Expected volatilities are based on historical volatilityon the Company’s stock and the historical volatility of the stock of similarcompanies, and other factors. The Company will use historical data to estimateoption exercises and employee terminations within the valuation model. 

7

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The expected life of options granted represent theperiod of time that options granted are expected to be outstanding. Therisk-free rate for periods within the life of the option is based on theU.S. Treasury yield curve in effect at the time of grant.

The following assumptions were used to calculate the fairvalue of the Company’s options on the date of grant during the nine monthsended September 30, 2006:

 

|                          | ** ** | **2006**    | ** ** |
|--------------------------|------------|-------------|------------|
| Expected  volatility     |       | 45%         |       |
| Expected life in  years  |       | 5.5  years  |       |
| Risk-free  interest rate |       | 4.97%-5.15% |       |
| Dividend yield           |       | 0%          |       |

 

The following table presents a summary of the Company’sstock options outstanding at September 30, 2006, and stock option activityduring the nine months ended September 30, 2006 (“Price” reflects the weightedaverage exercise price per share):

|                                                       | ** ** | **Options** | ** ** | **Price** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------------------------|------------|-------------|------------|-----------|------------|-------------------------------------------------------------|------------|---------------------------------|------------|
|  Outstanding — December 31, 2005            |       | 256         |       | $         | 1.30       |                                                        |       |                            |       |   |
|  Granted                                         |       | 60          |       | 16.24     |       |                                                        |       |                            |       |
|  Exercised                                       |       | (11         | )          | 0.53      |       |                                                        |       |                            |       |
|  Forfeited                                       |       | —      |       | —    |       |                                                        |       |                            |       |
|  Expired                                         |       | —      |       | —    |       |                                                        |       |                            |       |
|                                                  |       |        |       |      |       |                                                        |       |                            |       |
|  Outstanding — September 30, 2006           |       | 305         |       | $         | 4.26       |                                                        | 7.40       |                            | $          | 4,435 |   |
|                                                  |       |        |       |      |       |                                                        |       |                            |       |
|  Exercisable — September 30, 2006           |       | 121         |       | $         | 0.53       |                                                        | 5.02       |                            | 2,203      |   |
|  Weighted average fair value per option  granted |       | $           | 7.89       |      |       |                                                        |       |                            |       |   |
|                                                       |            |             |            |           |            |                                                             |            |                                 |            |  |  |  |

 

As of September 30, 2006,1,740 shares of Common Stock were available for grant under the Company’s 2006Stock Plan.

The total intrinsic value of options exercised duringthe nine months ended September 30, 2006 was $131.

A summary of the Company’s nonvested options atSeptember 30, 2006, and changes during the nine months ended September 30,2006, is presented below:

 
| ****                                | ** ** | **Options** | ** ** | **Weighted  Average   Grant Date  Fair Value** | ** ** |
|-------------------------------------|------------|-------------|------------|---------------------------------------------------------------|------------|
| Nonvested — December  31, 2005 |       | 158         |       | $                                                             | 3.87       |   |
| Granted                             |       | 60          |       | 7.89                                                          |       |
| Vested                              |       | (34         | )          | (0.07                                                         | )          |
| Forfeited                           |       | —      |       | —                                                        |       |
| Nonvested — September 30, 2006 |       | 184         |       | $                                                             | 5.86       |   |

 

Vesting dates range fromDecember 31, 2006 to December 31, 2010, and expiration dates range from June26, 2010 to June 20, 2016 at exercise prices and average contractual lives asfollows:

8

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| **Exercise Prices** | ** ** | ** ** | **Outstanding  as of  9/30/06** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Exercisable  as of  9/30/06** | ** ** |
|--------------------------|------------|------------|--------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------|------------|
| $0.53                    |       |       | 153                                  |       |                                                |       | 5.35                                 |       |   |   | 121 |   |   |   |
| $2.67                    |       |       | 92                                   |       |                                                |       | 9.25                                 |       |   |   | — |   |   |   |
| $13.00                   |       |       | 15                                   |       |                                                |       | 9.75                                 |       |   |   | — |   |   |   |
| $16.98                   |       |       | 30                                   |       |                                                |       | 9.80                                 |       |   |   | — |   |   |   |
| $17.98                   |       |       | 15                                   |       |                                                |       | 9.86                                 |       |   |   | — |   |   |   |
|                     |       |       |                                 |       |                                                |       |                                 |       |   |   |   |   |   |   |
|                     |       |       | 305                                  |       |                                                |       |                                 |       |   |   | 121 |   |   |   |

 

As of September 30, 2006,there was $855 of total unrecognized compensation cost related to nonvestedshare-based compensation arrangements. The cost is expected to be recognizedover a weighted average period of approximately thirty three months.

**6. Contingencies**

In September 2000, HWC losta court case brought by a vendor for alleged breach of contract. The jury foundin favor of the vendor and awarded the vendor the sum of $1,300 plus accruedinterest, which totaled approximately $1,600. The breach of contract occurredprior to the acquisition of the Company from its previous owner (“ALLTEL”). HWCcontended that this liability should be borne by ALLTEL. In 2001, HWC filedsuit against ALLTEL under the terms of the purchase agreement, in which HWC isto be indemnified by ALLTEL for any liability either disclosed or undisclosedin the agreement of sale. In October 2004, the court rendered its verdict onthe suit. HWC was awarded approximately $672 for ALLTEL’s breach under oneportion of the suit which amount was received in January 2005 and included inlitigation settlements in the accompanying 2005 statement of income, while thecourt found in favor of ALLTEL on the second portion of the suit. HWC appealedthe decision on the second portion of the suit, but this decision was affirmedby the Illinois Appellate Court in March 2006.

HWC, along with manyother defendants, has been named in a number of lawsuits in the state courts ofNorth 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 in questionor whether HWC, in fact, distributed the wire and cable alleged to have causedany injuries. In addition, HWC did not manufacture any of the wire and cable atissue, and HWC would rely on any warranties from the manufacturers of suchcable if it were determined that any of the wire or cable that HWC distributedcontained asbestos which caused injury to any of these plaintiffs. Inconnection 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.

Other than the foregoing cases, there are no legalproceedings pending against or involving the Company that, in management’s opinion,based on the current known facts and circumstances, are expected to have a material adverse effect on the Company’sconsolidated financial position, cash flows, or results from operations.

**7. Subsequent Event**

On November 3, 2006 theCompany amended and restated its loan and security agreement with its currentbank syndication group. The agreement now provides for a $45,000 revolving loanfacility that expires on May 21, 2010. Accordingly, the revolver portion of theshort-term obligations on the balance sheet at September 30, 2006 has beenreclassified as a long term obligation. The Term A loan was paid off in full on October 26, 2006 with proceedsfrom the revolving loan.

**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

The following Management’sDiscussion and Analysis (“MD&A”) is intended to help the reader understandthe Company’s financial position and results of operations.  MD&A is provided as a supplement to theCompany’s Consolidated Financial 

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Statements (unaudited)and the accompanying Notes to Consolidated Financial Statements (unaudited) andshould be read in conjunction with the MD&A included in the Company’sProspectus dated June 14, 2006.

**Overview**

We are one of the largestdistributors of specialty wire and cable and related services to the U.S.electrical distribution market. We serve approximately 2,600 customers,including virtually all of the top 200 electrical distributors in the U.S. Wehave strong relationships with leading wire and cable manufacturers and providethem with efficient access to the fragmented electrical distribution market. Wedistribute approximately 20,000 SKUs (stock-keeping units) to over 8,300customer locations nationwide from eleven strategically located distributioncenters in ten states. We are focused on providing our electrical distributorcustomers with a single-source solution for specialty wire and cable andrelated services by offering a large selection of in-stock items, exceptionalcustomer service and high levels of product expertise.

We offer products in mostcategories of specialty wire and cable, including:

·                  continuousand interlocked armor cable (cable encapsulated in either a seamless orinterlocked aluminum protective sheath);

·                  controland power cable (single or multiple conductor industrial cable);

·                  electronicwire and cable (computer, audio and signal cable);

·                  flexibleand portable cords (flexible, heavy duty industrial cable);

·                  instrumentationand thermocouple cable (cables used for transmitting signals for instrumentsand heat sensing devices);

·                  leadand high temperature cable (single conductor cable used for low or hightemperature applications);

·                  mediumvoltage cable (cables used for applications between 2,001 volts and 35,000volts); and

·                  premiseand category wire and cable (cable used for home and high speed dataapplications).

We alsooffer private branded products, including our LifeGuardTM low-smoke,zero-halogen cable. Low-smoke, zero halogen products are made with compoundsthat produce no halogen gases and very little smoke while under combustion.

Inaddition to our product offerings, we provide comprehensive value-addedservices including: standard same day shipment from our extensive inventory anddistribution network; application engineering support through our knowledgeablesales and technical support staff; custom cutting of wire and cable to exactspecifications; inventory management programs that provide job-specific assetmanagement and just-in-time delivery; job-site delivery and logistics support;24/7/365 customer service provided by our own employees; and customizedinternet-based ordering capabilities.

**Critical Accounting Policies**

Criticalaccounting policies are those that both are important to the accurate portrayalof a company’s financial condition and results, and require subjective orcomplex judgments, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain.

In orderto prepare financial statements that conform to accounting principles generallyaccepted in the United States, commonly referred to as GAAP, we make estimatesand assumptions that affect the amounts reported in our financial statementsand accompanying notes. Certain estimates are particularly sensitive due totheir significance to the financial statements and the possibility that futureevents may be significantly different from our expectations.

We haveidentified the following accounting policies as those that require us to makethe most subjective or complex judgments in order to fairly present ourconsolidated financial position and results of operations. Actual results inthese areas could differ materially from management’s estimates under differentassumptions and conditions.

**Allowance for Doubtful Accounts**

Wemaintain an allowance for doubtful accounts receivable for estimated lossesresulting from the inability of our customers to make required payments. Weperform periodic credit evaluations of our customers and typically do notrequire collateral. Consistent with industry practices, we require payment frommost customers within 30 days of invoice date. We have an estimation procedure,based on historical data and recent changes in the aging of these receivables,which we use to record reserves throughout the year. In the last five years,write-offs against our allowance for doubtful accounts have averagedapproximately $165,000 per year. A 20% change in our estimate at September 30,2006 would have resulted in a change in income before income taxes ofapproximately $91,000 for the nine months ended September 30, 2006.

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**Inventory Obsolescence**

Wecontinually monitor our inventory levels at each of our distribution locations.Our reserve for inventory obsolescence is based on the age of the inventory, movementsof our inventory over the prior twelve months and the experience of ourpurchasing and sales departments in estimating demand for the product in thesucceeding year. Our inventories are generally not susceptible to technologicalobsolescence. A 20% change in our estimate at September 30, 2006 would haveresulted in a change in income before income taxes of approximately $409,000for the nine months ended September 30, 2006.

**Vendor Rebates**

Many ofour arrangements with our vendors entitle us to receive a rebate of a specifiedamount when we achieve any of a number of measures, generally related to thevolume of purchases from the vendor. We account for these rebates as areduction of the prices of the vendor’s products, which reduces inventory untilwe sell the product, at which time these rebates reduce cost of sales.Throughout the year, we estimate the amount of rebates earned based on ourpurchases to date and our estimate of purchases to be made for the remainder ofthe year relative to the purchase levels that mark our progress toward earningthe rebates. We continually revise these estimates to reflect actual purchaselevels. A 20% change in our estimate of total rebates earned during the ninemonths ended September 30, 2006 would have resulted in a change in incomebefore income taxes of approximately $967,000 for this period.

**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 September 30, 2006, our net goodwill balance was $3.0million, representing 2.5% of our total assets.

 In 2002, we adopted the provisions ofStatement of Financial Accounting Standards No. 142, Goodwill and Other IntangibleAssets (“SFAS 142”). Under SFAS 142, we test goodwill for impairment annually,or more frequently if indications of possible impairment exist, by applying afair value-based test. In October 2006, we performed our annual goodwillimpairment tests for goodwill and other indefinite-lived intangible assets,and, as a result of this test, we believe the goodwill on our balance sheet isnot impaired.

If circumstances changeor events 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.

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**Results of Operations**

The following tableshows, for the periods indicated, information derived from our consolidatedstatements of income, expressed as a percentage of net sales for the periodspresented.

** **

|                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Sales                          |       | 100.0                                                | %          | 100.0                                               | %          | 100.0 | % | 100.0 | % |
| Cost of sales                  |       | 70.9                                                 | %          | 74.0                                                | %          | 71.4 | % | 74.1 | % |
| Gross profit                   |       | 29.1                                                 | %          | 26.0                                                | %          | 28.6 | % | 25.9 | % |
| ** **                     | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating expenses:            |       |                                                 |       |                                                |       |   |   |   |   |
| Salaries and  commissions      |       | 6.7                                                  | %          | 8.2                                                 | %          | 7.1 | % | 9.1 | % |
| Other operating  expenses      |       | 4.7                                                  | %          | 5.6                                                 | %          | 4.9 | % | 6.6 | % |
| Management fee                 |       | 0.0                                                  | %          | 0.2                                                 | %          | 0.1 | % | 0.3 | % |
| Recovery from  litigation      |       | —                                               |       | —                                              |       | — |   | (0.5 | )% |
| Depreciation and  amortization |       | 0.1                                                  | %          | 0.2                                                 | %          | 0.1 | % | 0.2 | % |
|                           |       |                                                 |       |                                                |       |   |   |   |   |
| Total operating  expenses      |       | 11.5                                                 | %          | 14.1                                                | %          | 12.2 | % | 15.7 | % |
|                           |       |                                                 |       |                                                |       |   |   |   |   |
| Operating income               |       | 17.6                                                 | %          | 11.8                                                | %          | 16.4 | % | 10.2 | % |
| Interest expense               |       | 0.5                                                  | %          | 1.2                                                 | %          | 1.1 | % | 1.4 | % |
|                           |       |                                                 |       |                                                |       |   |   |   |   |
| Income before income  taxes    |       | 17.1                                                 | %          | 10.6                                                | %          | 15.3 | % | 8.7 | % |
| Income tax provision           |       | 6.6                                                  | %          | 3.9                                                 | %          | 5.9 | % | 3.2 | % |
|                           |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                     |       | 10.5                                                 | %          | 6.7                                                 | %          | 9.4 | % | 5.5 | % |

 

Note:** **Dueto rounding, percentages may not add up to operating expenses, operatingincome, income before taxes or net income.

**Comparisonof the Three Months Ended September 30, 2006 and 2005**

**Sales**
| ** **             | ** ** | **Three Months Ended** | ** ** |
|------------------------|------------|----------------------------------|------------|
| ** **             | ** ** | **September 30,**           | ** ** |
| **(in millions)** | ** ** | ** **                       | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
| Sales                  |       | $                                | 90.0       |   | $ | 58.3 |   | $ | 31.6 |   | 54.3 | % |
|                        |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 

Internal growth accountedfor the entire increase in sales. The Company estimates that  the 54% growth in sales is composed of 10-15%from higher commodity prices for certain components of the Company’s products,principally copper and polymers. Approximately 5-10 % of real growth, net ofinflation, is attributable to increased demand from its core distributorbusiness, and 30-40 % represents real growth, net of inflation, from the fivemajor growth initiatives, encompassing Emission Controls, Engineering &Construction, Industrials, LifeGuardTM (and other private branded products) andUtility Power Generation. This growth occurred despite the fact that the saleslevels from 2005 were positively impacted by last year’s hurricanes.

**Gross Profit**
| ** **                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **September 30,**           | ** ** |
| **(in millions)**             | ** ** | ** **                       | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
| Gross profit                       |       | $                                | 26.2       |   | $ | 15.1 |   | $ | 11.1 |   | 73.1 | % |
| Gross profit as a percent of sales |       | 29.1                             | %          | 26.0 | % | 3.1 | % |   |   |
|                                    |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 

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The increase in theCompany’s gross margin for the third quarter of 2006 as compared to the thirdquarter of 2005 was principally a result of a favorable product mix andimproved price realization from the Company’s decision to increase productavailability and service through higher inventory levels.  In addition, increased demand for value-addedservices such as Cable Management enhanced gross margin. We believe that the29.1% gross margin the Company achieved in the third quarter to be a peak andlikely not sustainable in the future.

**Operating Expenses**
| ** **                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **September 30,**           | ** ** |
| **(in millions)**             | ** ** | ** **                       | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
| Operating Expenses:                |       |                             |       |   |   |   |   |   |   |
| Salaries and  commissions          |       | $                                | 6.0        |   | $ | 4.8 |   | $ | 1.2 |   | 26 | % |
| Other operating  expenses          |       | 4.2                              |       | 3.3 |   | 1.0 |   | 31 | % |
| Management fee                     |       | —                           |       | 0.1 |   | (0.1) | ~~-~~ | (100 | )% |
| Depreciation and  amortization     |       | 0.1                              |       | 0.1 |   | — |   | (16 | )% |
|                               |       |                             |       |   |   |   |   |   |   |
| Total operating  expenses          |       | $                                | 10.3       |   | $ | 8.2 |   | $ | 2.1 |   | 25 | % |
|                               |       |                             |       |   |   |   |   |   |   |
| Operating expenses as a % of sales |       | 11.5                             | %          | 14.1 | % | (2.6 | )% |   |   |
|                                    |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 

Note:  Due to rounding, numbers may not add up tototal operating expenses.

The increase in salariesand commissions primarily reflects increased commissions due to the increase insales and gross profit dollars.  Salariesand commissions as a percentage of net sales decreased to 6.7% for the threemonths ended September 30, 2006 from 8.2% from the comparable period in 2005 assales and gross profit dollars increased at a faster rate than the comparativeincrease in salaries and commissions.

Other operating expensesprimarily increased due to the higher level of business activity and publiccompany expenses which were not incurred in the comparable period in 2005.

Operating expenses as apercent of net sales decreased from the third quarter of 2005 as we continuedto leverage our existing distribution infrastructure and sales and marketingbase to support the sales growth.

**Interest Expense**

Interest expensedecreased $0.2 million or 30.5%, due to the use of the IPO proceeds to reducethe outstanding debt balance.

**Income Taxes**

The increase in incometaxes is due to the $9.2 million increase in income before income taxes and anincrease in our effective income tax rate to 38.4% for the third quarter of2006 from 36.8% for the comparative period in 2005. The increase in the effectiveincome tax rate reflects the non-taxable nature of the litigation settlementreceived in 2005 and an increase in the state income tax rates in 2006.

**Net Income**

The Company achievedrecord third quarter net income of $9.5 million in 2006 compared to net incomeof $3.9 million in 2005, an increase of 142.5%. The Company estimates that netincome benefited by $1.5 to $ 2.0 million due to the effect of inflation,principally copper and polymers, during the third quarter of 2006.

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**Comparisonof the Nine Months Ended September 30, 2006 and 2005**

**Sales**
| ** **             | ** ** | **Nine Months Ended** | ** ** |
|------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **September 30,**          | ** ** |
| **(in millions)** | ** ** | ** **                      | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
| Sales                  |       | $                               | 240.6      |   | $ | 148.1 |   | $ | 92.5 |   | 62.5 | % |
|                        |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 

Internal growth accountedfor the entire increase in sales. The Company estimates that the 62% growth insales is composed of 10-15 % from higher commodity prices for certaincomponents of the Company’s products, principally copper and polymers.  Furthermore, the Company estimates that 5-10% reflects real growth, net of inflation, in core distributor demand, and 35-45% in real growth, net of inflation, from the five major end-user market growthinitiatives, encompassing Emission Controls, Engineering & Construction,Industrials, LifeGuardTM (and other private branded products) and Utility PowerGeneration.

**Gross Profit**
| ** **                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **September 30,**          | ** ** |
| **(in millions)**             | ** ** | ** **                      | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
| Gross profit                       |       | $                               | 68.7       |   | $ | 38.3 |   | $ | 30.4 |   | 79.2 | % |
| Gross profit as a percent of sales |       | 28.6                            | %          | 25.9 | % | 2.7 | % |   |   |
|                                    |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 

The increase in theCompany’s gross margin for the three quarters of 2006 as compared to the threequarters of 2005 was principally a result of an improved product mix andimproved price realization, a result of a decision to improve productavailability and service through increased inventory levels.  Additionally, advance inventory purchasesearlier in the year tempered price increases from suppliers.

**Operating Expenses**
| ** **                               | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **September 30,**          | ** ** |
| **(in millions)**                   | ** ** | ** **                      | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
| Operating expenses                       |       |                            |       |   |   |   |   |   |   |
| Salaries and  commissions                |       | $                               | 17.0       |   | $ | 13.5 |   | $ | 3.6 |   | 27 | % |
| Other operating  expenses                |       | 11.8                            |       | 9.8 |   | 2.0 |   | 21 | % |
| Management fee                           |       | 0.2                             |       | 0.4 |   | (0.2 | ) | (45 | )% |
| Recovery from  litigation                |       | —                          |       | (0.7 | ) | 0.7 |   | 100 | % |
| Depreciation and  amortization           |       | 0.3                             |       | 0.3 |   | — |   | (17 | )% |
| Total operating  expenses                |       | $                               | 29.3       |   | $ | 23.3 |   | $ | 6.1 |   | 26 | % |
|                                     |       |                            |       |   |   |   |   |   |   |
| Operating expenses as a percent of sales |       | 12.2                            | %          | 15.7 | % | (3.5 | )% |   |   |
|                                          |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 

The increase in salariesand commissions primarily reflects increased commissions due to the increase insales and gross profit dollars.  Salariesand commissions as a percentage of net sales decreased to 7.1% in 2006 from9.1% from the comparable period in 2005 as sales and gross profit dollarsincreased at a faster rate than the comparative increase in salaries andcommissions.

The largest components tothe increase in other operating expenses are related to supporting the higherlevel of business activity and the new public company expenses not incurred in2005.

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Operating expenses as apercent of net sales decreased from the first nine months of 2006 as we were ableto leverage the cost of our existing distribution infrastructure and personnelbase to support the continued sales growth.

**Interest Expense**

Interest expenseincreased $0.5 million between periods as the effective interest rate increasedand the average debt outstanding increased to fund the increase in our workingcapital requirements.

**Income Taxes**

The increase in incometaxes is due to the $23.8 million increase in income before income taxes and anincrease in our effective income tax rate to 38.6% for the nine months endedSeptember 30, 2006 from 36.8% for the comparable period in 2005.  In the 2006 period, state tax rates increasedand in the prior year period, the litigation settlement was not taxable forfederal tax purposes.

**Net Income**

The Company achievedrecord net income of $22.5 million for the first three quarters of 2006compared to net income of $8.2 million for the first three quarters of 2005, anincrease of 176.2%.  The Companyestimates that net income benefited by an estimated $4.0 to $5.5 million due tothe effect of inflation, principally copper and polymers, during the firstthree quarters of 2006.

**Impact ofInflation and Commodity Prices**

Our results of operationsare affected 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. To the extent we are unable topass on to our customers cost increases due to inflation or rising commodityprices, it could adversely affect our operating results.  A decrease in copper prices could have anegative impact on the Company’s sales and earnings per share.  As the Company turns its inventory in excessof four times a year, the impact of decreasing copper prices would primarilyaffect the results of the succeeding calendar quarter.

**Liquidityand Capital Resources**

Our primary capital needsare for working capital obligations and other general corporate purposes andcapital expenditures. Our primary sources of working capital are cash fromoperations supplemented by bank borrowings. During 2006 we have funded ourcapital expenditures through cash from operations. Our working capital amountedto $79.2 million at September 30, 2006, compared to $51.4 million atDecember 31, 2005.

Working capital increasedat September 30, 2006 over December 31, 2005 primarily due to (i) higheraccounts receivable, which increased $17.0 million as a result of improvedsales, and (ii) greater inventory, which increased $23.0 million as aresult of demand for more product. These increases were offset by(i) higher accounts payable, which increased $5.5 million as a result ofour increased purchases, (ii) higher accrued and other current liabilitieswhich increased by $3.9 million as the business operations continued to expand,and (iii) an increase in taxes payable, which increased $1.2 million dueto increased profitability.

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:

• the adequacy ofavailable bank lines of credit;

• the ability to attractlong-term capital with satisfactory terms;

• cash flows generatedfrom operating activities;

• capital expendituresand

• acquisitions.

**Comparisonof the Nine Months Ended September 30, 2006 and 2005**

Our netcash used by operations for the nine months ended September 30, 2006 was $5.0million compared with net cash provided of $6.8 million in the prior yearperiod.  As sales of product increasedsignificantly in 2006 versus 2005, our cash flow demands moved in severalareas.  Cash from net income increasedfrom $8.2 million in the first nine months of 2005 to $22.5 million in the sameperiod in 2006, but this was offset by an increase in inventory investment of$22.7 million during the 2006 period as sales 

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and productcosts increased.  Accounts receivablealso increased during this period by $17.0 million.  Offsetting these were increases in accountspayable and accrued liabilities of $9.4 million and taxes payable of $1.2million.

Net cashused in investing activities was $0.3 million in 2006 and $0.2 million in the2005 period, as demands for additional capital resources were low.

Net cashprovided by financing activities was $5.3 million in the 2006 period comparedto the $6.6 million used in the prior year period.  This change was primarily due to the pay downon our revolving debt facility from the net funds generated by the sale ofstock at the public offering.

**Indebtedness**

Our principal source ofliquidity at September 30, 2006 was working capital of $79.2 millioncompared to $51.4 million at December 31, 2005. We also had availableborrowing capacity in the approximate amount of $42.4 million at September 30,2006 and $1.5 million at December 31, 2005 under our loan andsecurity agreement with the bank syndication group. Upon completion of the IPO,we repaid approximately $49.9 million of our outstanding debt.

We believe that we willhave adequate availability of capital to fund our present operations, meet ourcommitments on our existing debt, and fund anticipated growth for theforeseeable future, including expansion in existing and targeted market areas.We continually seek potential acquisitions and from time to time holddiscussions with acquisition candidates. If suitable acquisition opportunitiesor working capital needs arise that would require additional financing, webelieve that our financial position and earnings history provide a solid basefor obtaining additional financing resources at competitive rates and terms.Additionally, we may issue additional shares of common or preferred stock toraise funds.

**Loan and Security Agreement**

We have a loan andsecurity agreement with a bank syndication group. The lenders have a securityinterest in all of our assets, including accounts receivable and inventory. Asa result of a new amendment dated November 3, 2006, the agreement now providesfor a single $45 million revolving loan facility, which bears interest at thelender’s base interest rate and expires on May 21, 2010.  Portions of the outstanding loan may beconverted to LIBOR loans in minimum amounts ranging between $100,000 to $1million and integral multiples of $100,000. Upon such conversion, interest ispayable at varying rates from LIBOR plus 1.25% to LIBOR plus 0.75% dependingupon certain financial ratios.  We haveentered into a series of one-month LIBOR loans, which, upon maturity, areeither rolled back into the revolving loan or renewed under a new LIBORcontract.

**ContractualObligations**

The following tabledescribes our loan commitment at September 30, 2006:
| ** **                    | ** ** | **Total**               | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
|-------------------------------|------------|-------------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **(In thousands)** | ** ** |
| Term loans and loans  payable |       | $                       | 16,829     |                            | $          | 4,200              |       | —             |       | $                                | 12,629     |   | — |   |
|                               |            |                         |            |                                 |            |                    |            |                    |            |                                  |            |  |  |  |

 

There were no newmaterial changes in operating lease obligations or non-cancellable purchaseobligations since December 31, 2005.

**CautionaryStatement for Purposes of the “Safe Harbor”**

Forward-lookingstatements in this report are made in reliance upon the safe harbor provisionsof the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements may relateto, but are not limited to, information or assumptions about our sales andmarketing strategy, sales (including pricing), income, operating income orgross margin improvements, working capital, cash flow, interest rates, impactof changes in accounting standards, future economic performance, management’splans, goals and objectives for future operations, performance and growth orthe assumptions relating to any of the forward-looking statements.  These statements can be identified by thefact that they do not relate strictly to historical 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.  The Companycautions that forward-looking statements are not guarantees because there are inherentdifficulties in predicting future results. Actual results could differ materially from those expressed or impliedin the forward-looking statements.  Thefactors listed under “Risk Factors” in the Company’s Prospectus dated June 14,2006, as well as 

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any cautionary languagein this report, provide examples of risks, uncertainties and events that maycause our actual results to differ materially from the expectations we describein our forward-looking statements.

**Item 3.Quantitative and Qualitative Disclosures about Market Risk**

**Interest Rate Risk**

There have been nomaterial changes from what we reported in the Prospectus dated June 14, 2006.

**Item 4.Controls and Procedures**

As of September 30, 2006,an evaluation was performed by the Company’s management, under the supervisionand with the participation of the Company’s chief executive officer and chieffinancial officer, of the effectiveness of the Company’s disclosure controlsand procedures.  Based on thatevaluation, the chief executive officer and the chief financial officerconcluded that the Company’s disclosure controls and procedures wereeffective.  There were no changes in theCompany’s internal control over financial reporting that occurred during thequarter ended September 30, 2006 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

**Part II.Other Information**

**Item 1 — Not applicable and hasbeen omitted.**

**Item 1A —Risk Factors**

There have been nomaterial changes in our risk factors from those disclosed in the Prospectusdated June 14, 2006.

**Items 2 -5 are not applicable and have been omitted.**

**Item 6.Exhibits**

**(a) Exhibits required byItem 601 of Regulation S-K.**

 
| Exhibit Number | ** ** | **Document  Description**                                                                                                                                                        |
|----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |       |                                                                                                                                                                             |
| 31.1           |       | Certification by Charles A. Sorrentino pursuant to  Rule 13a-14(a) and 15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.          |
|           |       |                                                                                                                                                                             |
| 31.2           |       | Certification by Nicol G. Graham pursuant to  Rule 13a-14(a) and 15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                |
|           |       |                                                                                                                                                                             |
| 32.1           |       | Certification by Charles A. Sorrentino and Nicol G.  Graham pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

**Signatures**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| Date: November 6, 2006 | ** ** | **HOUSTON WIRE & CABLE COMPANY**                                                                  |
|------------------------|------------|-------------------------------------------------------------------------------------------------------|
|                   |       |           BY:/s/  Nicol G. Graham                        |
|                   |       |                                                                                                  |
|                   |       | Nicol G. Graham, Chief Financial Officer,   and duly authorized signatory on behalf of the Registrant |

 

17

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**EXHIBITINDEX**

 
| Exhibit Number | ** ** | **Document  Description**                                                                                                                                                        |
|----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |       |                                                                                                                                                                             |
| 31.1           |       | Certification by Charles A. Sorrentino pursuant to  Rule 13a-14(a) and 15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.          |
|           |       |                                                                                                                                                                             |
| 31.2           |       | Certification by Nicol G. Graham pursuant to  Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                |
|           |       |                                                                                                                                                                             |
| 32.1           |       | Certification by Charles A. Sorrentino and Nicol G.  Graham pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

18

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