SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

WESCO INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware		001-14989		25-1723345
(State or other jurisdiction		(Commission		(IRS Employer
of incorporation)		File Number)		Identification No.)

225 West Station Square Drive, Suite 700
Pittsburgh, Pennsylvania		15219
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: (412) 454-2200

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o		Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o		Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o		Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o		Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

Item 1.01. Entry into a Material Definitive Agreement.

1.75% Convertible Senior Debentures due 2026

     On October 26, 2006, WESCO International, Inc. (the “Company”) and WESCO Distribution, Inc. (“WESCO Distribution”) entered into a previously announced Purchase Agreement (the “Purchase Agreement”) with Lehman Brothers Inc., as representatives of the initial purchasers named therein (the “Initial Purchasers”), relating to the issuance and sale by the Company to the Initial Purchasers of $250 million in aggregate principal amount of 1.75% Convertible Senior Debentures due 2026 (the “Debentures”) and an unconditional guarantee of the Debentures on an unsecured senior subordinated basis by WESCO Distribution (the “Guarantee”). The offering and sale of the Debentures and the Guarantee to the Initial Purchasers pursuant to the Purchase Agreement was completed on November 2, 2006. The Initial Purchasers exercised their option to purchase an additional $50 million in aggregate principal amount of Debentures, and the additional Debentures also were sold to the Initial Purchasers on November 2, 2006.

     The Debentures and the Guarantee issued on November 2, 2006 were issued pursuant to an Indenture, dated November 2, 2006 (the “Indenture”), by and among the Company, WESCO Distribution and The Bank of New York, as trustee (the “Trustee”), in a transaction exempt from the registration requirements under the Securities Act of 1933, as amended (the “Securities Act”). The Debentures and the Guarantee were sold only to qualified institutional buyers in reliance on Rule 144A under the Securities Act.

     The Debentures bear interest at a rate of 1.75% per year. Beginning with the six-month period commencing November 15, 2011, the Company will also pay contingent interest during any six-month interest period in which the trading price of the Debentures, measured over a specified number of trading days preceding the applicable six-month interest period, is 120% or more of the principal amount of the Debentures. Interest on the Debentures is payable on November 15 and May 15 of each year, beginning on May 15, 2007. The Debentures will mature on November 15, 2026.

     The Debentures are convertible into cash and, in certain circumstances, shares of the Company’s common stock, $.01 par value (the “Conversion Shares”), at any time on or after November 15, 2024, or prior to November 15, 2024 in certain circumstances. The Debentures will be convertible based on an initial conversion rate of 11.3437 shares of common stock per $1,000 principal amount of the debentures (equivalent to an initial conversion price of approximately $88.15 per share). The conversion rate and the conversion price may be adjusted in certain circumstances.

     At any time on or after November 15, 2011, the Company may redeem all or a part of the Debentures at a redemption price equal to 100% of the principal amount of the Debentures plus accrued and unpaid interest (including contingent interest and additional interest, if any) to, but not including, the redemption date. Holders of Debentures may require the Company to repurchase all or a portion of their Debentures on November 15, 2011, November 15, 2016 and November 15, 2021 at a cash repurchase price equal to 100% of the principal amount of the

debentures, plus accrued and unpaid interest (including contingent interest and additional interest, if any) to, but not including, the repurchase date.

     If the Company undergoes certain fundamental changes prior to maturity, holders of Debentures will have the right, at their option, to require the Company to repurchase for cash some or all of their Debentures at a repurchase price equal to 100% of the principal amount of the Debentures being repurchased, plus accrued and unpaid interest (including contingent interest and additional interest, if any) to, but not including, the repurchase date. The Indenture limits the ability of the Company to consolidate or merge or to sell, convey, transfer or lease all or substantially all of its assets.

     If an event of default on the Debentures occurs, the principal amount of the Debentures, plus premium, if any, and accrued and unpaid interest (including contingent interest and additional interest, if any) may be declared immediately due and payable, subject to certain conditions set forth in the Indenture. These amounts automatically become due and payable in the case of certain types of bankruptcy or insolvency events of default involving the Company. The Indenture provides that events of default include (i) failure to make the payment of any interest on the Debentures when due and payable, with the failure continuing for a period of 30 days; (ii) failure to make the payment of any principal on any of the Debentures when due and payable; (iii) failure to comply with covenants or agreements in the Debentures, the Indenture or related documents; (iv) a default by the Company or any of its significant subsidiaries under other debt obligations that results in acceleration of the maturity of that debt, or failure to pay any such debt at maturity, in an amount greater than $35 million; (v) certain events involving bankruptcy, insolvency or reorganization of the Company or any of its significant subsidiaries; and (vi) any judgment or judgments for the payment of money in an aggregate amount in excess of $35 million that is rendered against the Company or any of its significant subsidiaries and that is not waived, satisfied or discharged for any period of 60 days following such judgment and is not discharged, waived or stayed within 10 days after notice.

     The Company, WESCO Distribution and the Initial Purchasers entered into a Registration Rights Agreement, dated November 2, 2006 (the “Registration Rights Agreement”), with respect to the Debentures and the Guarantee. Pursuant to the Registration Rights Agreement, the Company and WESCO Distribution agreed to file a shelf registration statement within 150 days after the issue date of the Debentures to register the Debentures, the Guarantee and the Conversion Shares for resale under the Securities Act. The Company and WESCO Distribution will use their reasonable best efforts to cause the registration statement to become effective within 210 days after the issue date of the Debentures.

     The foregoing is a summary of the material terms and conditions of the Indenture and the Registration Rights Agreement and is not a complete discussion of those documents. Accordingly, the foregoing is qualified in its entirety by reference to the full text of the Indenture and the Registration Rights Agreement, which are filed as Exhibits 4.1 and 4.2, respectively, to this Current Report and are incorporated herein by reference. A form of Debenture also is filed as Exhibit 4.3 to this Current Report and is incorporated herein by reference.

Item 2.01 Completion of Acquisition or Disposition of Assets.

     On November 3, 2006, the Company announced the completion of its acquisition of Communications Supply. On that day, a wholly-owned subsidiary of WESCO Distribution merged with and into Communications Supply, which became a wholly-owned subsidiary of WESCO Distribution. The Company paid at closing a cash merger price of approximately $525 million, of which $17 million is held in escrow following closing to address working capital adjustments and potential indemnification claims of WESCO Distribution. Up to $12 million of the amount held in escrow may be released at any time on or after June 30, 2007 under certain circumstances, with any remaining amount held in escrow being eligible for release after January 31, 2008. To fund the merger price paid at closing, WESCO Distribution borrowed approximately $105 million under its accounts receivable securitization facility and approximately $102 million under the Revolving Credit Facility and used approximately $292 million of net proceeds from the offering of Debentures and approximately $26 million of other available cash. The acquisition was completed pursuant to the terms and conditions of the Agreement and Plan of Merger, dated October 2, 2006 (the “Merger Agreement”), by and among WESCO Distribution, WESCO Voltage, Inc., a Delaware corporation, Communications Supply and Harvest Partners, LLC, as Stockholders’ Representative. The Merger Agreement is filed as Exhibit 2.1 to this Current Report and is incorporated herein by reference.

     On November 3, 2006, the Company issued a press release regarding the completion of the acquisition of Communications Supply. A copy of that press release is filed as Exhibit 99.1 to this Current Report and is incorporated herein by reference.

Item 9.01. Financial Statements and Exhibits

     (a) Financial statements of business acquired

     The following historical financial information of Communications Supply is attached to this Current Report and is incorporated by reference in this Item 9.01.

Report of Independent Auditors		F-1
Consolidated Balance Sheet as of December 30, 2005 and December 31, 2004		F-2
Consolidated Statement of Operations of Communications Supply Holdings, Inc. for the year ended December 30, 2005 and the period from inception (May 4, 2004) through December 31, 2004 and of the Predecessor for the period from December 27, 2003 through May 3, 2004		F-3
Consolidated Statement of Stockholders’ Equity of Communications Supply Holdings, Inc. for the year ended December 30, 2005 and the period from inception (May 4, 2004) through December 31, 2004 and of the Predecessor for the period from December 27, 2003 through May 3, 2004		F-4
Consolidated Statement of Cash Flows of Communications Supply Holdings, Inc. for the year ended December 30, 2005 and the period from December 27, 2003 through May 3, 2004		F-5
Notes to Consolidated Financial Statements		F-6
Condensed Consolidated Balance Sheet as of June 30, 2006 (unaudited) and December 30, 2005		F-20
Condensed Consolidated Statements of Operations and Other Comprehensive Income for the six-month periods ended June 30, 2006 and July 1, 2005 (unaudited)		F-21
Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2006 and July 1, 2005 (unaudited)		F-22
Notes to Condensed Consolidated Financial Statements (unaudited)		F-23

     (b) Pro forma financial information

     The following pro forma financial information is attached to this Current Report and is incorporated by reference in this Item 9.01.

Unaudited Pro Forma Condensed Combined Financial Information		P-1
Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2006		P-2
Unaudited Pro Forma Condensed Combined Statement of Income for the six months ended June 30, 2006		P-3
Unaudited Pro Forma Condensed Combined Statement of Income for the year ended December 31, 2005		P-4
Notes to Unaudited Pro Forma Condensed Combined Financial Information.		P-5

Report of Independent Auditors

The Board of Directors
Communications Supply Holdings, Inc.

     We have audited the accompanying consolidated balance sheets of Communications Supply Holdings, Inc. & Subsidiary as of December 30, 2005 and December 31, 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 30, 2005 and the period from inception (May 4, 2004) through December 31, 2004, and of the Predecessor for the period from December 27, 2003 through May 3, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Communications Supply Holdings, Inc. as of December 30, 2005 and December 31, 2004, and the consolidated results of its operations and its cash flows for the year ended December 30, 2005 and for the period from inception (May 4, 2004) through December 31, 2004 for the Company, and for the period from December 27, 2003 through May 3, 2004 for the Predecessor, in conformity with accounting principles generally accepted in the United States.

/s/ Ernst & Young LLP

March 10, 2006

COMMUNICATIONS SUPPLY HOLDINGS, INC. & SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

		December 30,				December 31,
		2005				2004
		(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	3,963			$	2,219
Accounts receivable, net of allowance of $1,746 in 2005 and $1,979 in 2004			72,335				70,136
Inventory			59,667				46,834
Deferred income taxes			5,034				6,065
Prepaid expenses and other assets			9,302				8,271
Total current assets			150,301				133,525
Property and equipment, net			5,187				4,501
Intangible assets, net			37,540				—
Goodwill			95,249				119,945
Deferred financing costs, net of accumulated amortization of $761 in 2005 and $303 in 2004			2,515				2,956
Other assets			376				764
		$	291,168			$	261,691
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	31,885			$	29,713
Accrued expenses			15,712				12,457
Current portion of long-term debt			1,494				2,906
Total current liabilities			49,091				45,076
Deferred income taxes			19,854				3,571
Long-term debt, less current portion			77,841				76,186
Senior subordinated notes			41,077				40,264
Stockholders’ equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, 804,459 and 801,288 shares issued and outstanding in 2005 and 2004, respectively			8				8
Common stock, $0.01 par value, 15,000,000 shares authorized, 9,012,500 and 9,000,990 shares issued and outstanding in 2005 and 2004, respectively			90				90
Additional paid-in capital			90,787				90,435
Notes receivable from stockholders			(518	)			(525	)
Accumulated other comprehensive loss			117				(217	)
Retained earnings			12,821				6,803
			103,305				96,594
		$	291,168			$	261,691

See accompanying notes.

COMMUNICATIONS SUPPLY HOLDINGS, INC. & SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

		Successor								Predecessor
						Period from				Period from
		Year Ended				May 4, 2004				December 27, 2003
		December 30,				through December 31,				through May 3,
		2005				2004				2004
		(Dollars in thousands)
Net sales		$	430,671			$	272,431			$	119,878
Cost of sales			326,526				205,475				90,604
Gross profit			104,145				66,956				29,274
Selling, general and administrative expenses			72,184				45,793				21,274
Depreciation and amortization			9,007				1,587				692
Merger transaction expenses			—				—				7,186
Income from operations			22,954				19,576				122
Interest expense, net			12,254				7,773				4,944
Income (loss) before provision for income taxes			10,700				11,803				(4,822	)
Provision for (benefit from) income taxes			4,682				5,000				(1,679	)
Net income (loss)		$	6,018			$	6,803				(3,143	)

See accompanying notes.

COMMUNICATIONS SUPPLY HOLDINGS, INC. & SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

		Successor																Predecessor																				Notes								Accumulated
		8% Redeemable																8% Redeemable																Additional				Receivable								Other				Total
		Preferred Stock								Common Stock								Preferred Stock								Common Stock								Paid-In				from				Retained				Comprehensive				Stockholders
		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Capital				Stockholders				Earnings				Income (Loss)				Equity
		(Dollars in thousands)
Balance December 27, 2003			—			$	—				—			$	—				20,000			$	3,120				15,808,427			$	36,409			$	—			$	(529	)		$	36,823			$	—			$	75,823
Preferred Dividends			—				—				—				—				—				53				—				—				—				—				(53	)			—				—
Repayment of notes receivable			—				—				—				—				—				—				—				—				—				2				—				—				2
Compensation recognized on stock options			—				—				—				—				—				—				—				463				—				—				—				—				463
Net loss			—				—				—				—				—				—				—				—				—				—				(3,143	)			—				(3,143	)
Balance May 3, 2004			—				—				—				—				20,000				3,173				15,808,427				36,872				—				(527	)			33,627				—				73,145
Merger transaction			801,063				8				8,998,490				90				(20,000	)			(3,173	)			(15,808,427	)			(36,872	)			89,007				27				(33,627	)			—				15,460
Issuance of warrants in connection with senior subordinated notes			—				—				—				—				—				—				—				—				1,403				—				—				—				1,403
Issuance of preferred and common stock			225				—				2,500				—				—				—				—				—				25				(25	)			—				—				—
Comprehensive income (loss):
Change in fair market value of derivatives, net of tax of $(139)			—				—				—				—				—				—				—				—				—				—				—				(217	)			(217	)
Net income			—				—				—				—				—				—				—				—				—				—				6,803				—				6,803
Total comprehensive income			—				—				—				—				—				—				—				—				—				—				6,803				(217	)			6,586
Balance December 31, 2004			801,288				8				9,000,990				90				—				—				—				—				90,435				(525	)			6,803				(217	)			96,594
Issuance of preferred and common stock			3,441				—				14,540				—				—				—				—				—				382				—				—				—				382
Purchase and retirement of treasury stock			(270	)			—				(3,030	)			—				—				—				—				—				(30	)			—				—				—				(30	)
Repayment of notes receivable			—				—				—				—				—				—				—				—				—				7				—				—				7
Comprehensive income (loss):
Change in fair market value of derivatives, net of tax of $215			—				—				—				—				—				—				—				—				—				—				—				334				334
Net income			—				—				—				—				—				—				—				—				—				—				6,018				—				6,018
Total comprehensive income			—				—				—				—				—				—				—				—				—				—				6,018				334				6,352
Balance December 30, 2005			804,459			$	8				9,012,500			$	90				—			$	—				—			$	—			$	90,787			$	(518	)		$	12,821			$	117			$	103,305

See accompanying notes.

COMMUNICATIONS SUPPLY HOLDINGS, INC. & SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Successor								Predecessor
						Period from
						May 4, 2004				Period from
		Year Ended				through				December 27,
		December 30,				December 31,				2003 through
		2005				2004				May 3, 2004
		(Dollars in thousands)
Operating activities
Net income (loss)		$	6,018			$	6,803			$	(3,143	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			9,007				1,587				692
Deferred income taxes			(949	)			2,588				(1,645	)
Amortization of deferred financing costs			457				303				1,537
Loss on sale of assets			54				—				—
Compensation expense recognized on stock options			—				—				463
Noncash interest accreted to subordinated notes			813				667				1,689
Changes in operating assets and liabilities:
Accounts receivable			(2,199	)			(8,361	)			(2,290	)
Inventory			(12,833	)			2,977				(6,008	)
Prepaid expenses and other assets			(664	)			(5,024	)			2,861
Accounts payable			2,172				550				6,208
Accrued expenses			3,611				(2,435	)			2,302
Net cash provided by (used in) operating activities			5,487				(345	)			2,666
Investing activities
Additions to property and equipment			(1,447	)			(1,203	)			(837	)
Proceeds from sale of assets			8				—				—
Acquisition, net of cash acquired			(2,890	)			(197,092	)			—
Net cash used in investing activities			(4,329	)			(198,295	)			(837	)
Financing activities
Repayments of stockholders’ notes receivable			7				2				2
Proceeds from issuance of common stock			38				8,490				—
Repurchase and retirement of treasury stock			(30	)			—				—
Proceeds from issuance of preferred stock			344				75,533				—
Proceeds from issuance of long-term debt			—				85,050				—
Proceeds from issuance of senior subordinated notes			—				41,000				—
Payment of deferred financing costs			(16	)			(3,259	)			—
Revolving credit facility borrowings (repayments)			3,149				(4,020	)			8,700
Term loan repayments			(2,906	)			(1,937	)			(11,077	)
Net cash provided by (used in) financing activities			586				200,859				(2,375	)
Net increase (decrease) in cash			1,744				2,219				(546	)
Cash at beginning of period			2,219				—				3,279
Cash at end of period		$	3,963				2,219			$	2,733
Supplemental cash flow information
Interest paid		$	10,063			$	5,892			$	2,449
Income taxes paid		$	4,831			$	169			$	1,473

See accompanying notes.

COMMUNICATIONS SUPPLY HOLDINGS, INC. & SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DEVELOPMENT AND DESCRIPTION OF BUSINESS

     Communications Supply Holdings, Inc. (“Holdings”) was incorporated in Delaware in 2004 for the purpose of acquiring and holding ownership of Communications Supply Corporation (“CSC”). Effective May 4, 2004, CSC became a wholly owned subsidiary of Holdings via a Merger Transaction, which is described in Note 3. Holdings, on a consolidated basis with CSC, is referred to herein as the “Company.”

     CSC was incorporated in Connecticut in 1977 and is a leading national distributor of wire, cable, network infrastructure, and low voltage specialty system products for data, voice, and security network communication applications. CSC sells its products through its 28 distribution centers and sales offices located throughout the continental United States.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

     The consolidated financial statements of the Company include the accounts of Holdings and its wholly owned operating subsidiary, CSC. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made in the prior years’ financial statements to conform to the current year presentation.

     The Company traditionally operates on a 52- to 53-week fiscal year ending on the last Friday in December.

     The Company’s results of operations for the period prior to its May 4, 2004 Merger Transaction (see Note 3) are presented as the results of operations of the Predecessor. The Company’s results of operations, including the Merger Transaction and thereafter, are presented as the results of the Successor and include the period of May 4, 2004 through December 31, 2004, and the 52 weeks ended December 30, 2005.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Fair Value of Financial Instruments

     The Company’s financial instruments include cash and cash equivalents, trade accounts receivable, accounts payable, preferred stock, and debt obligations. The carrying values of these financial instruments approximate their estimated fair values.

Concentrations of Credit Risk

     Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of accounts receivable. Credit risk on accounts receivable is minimized as a result of the large and diverse nature of the Company’s customer base. No single customer represents greater than 5% of total accounts receivable. The Company maintains an allowance for losses based on the expected collectibility of accounts receivable determined by past collection history and specific risks identified among uncollected accounts. Credit losses have historically been within management’s expectations. The Company does not generally require collateral related to its accounts receivable but does have enforceable lien rights in certain circumstances.

COMMUNICATIONS SUPPLY HOLDINGS, INC. & SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Receivables and Allowance for Doubtful Accounts

     The Company carries its accounts receivable at their face value, less applicable allowance for doubtful accounts. Regularly, the Company evaluates its accounts receivable and the allowance for doubtful accounts based upon a combination of customer specific conditions as well as the length of time the receivables are past due, historical experience, and existing economic conditions. In accordance with this policy, the allowance for doubtful accounts was $1.7 million and $2.0 million as of December 30, 2005 and December 31, 2004, respectively.

Inventory

     Inventory consists primarily of finished goods and is stated at the lower of cost or market. Cost is determined by the average-cost method, and market is determined on the basis of estimated realizable values. Inventory reserves are recorded for obsolete or slow-moving inventory based on assumptions about future demand and marketability of products, inventory turns, and specific identification of items, such as product discontinuance.

Property and Equipment

     Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using straight-line and accelerated methods over the estimated useful lives of the respective assets, or in the case of leasehold improvements, over the shorter of the estimated useful life or the life of the lease, as follows:

Machinery and computer equipment			3 to 7 years
Furniture and fixtures			3 to 7 years
Leasehold improvements			1 to 10 years

     Upon sale or retirement, the cost and related depreciation are removed from the respective accounts. Gains or losses resulting from dispositions are included in income or expenses. Betterments and renewals, which improve and extend the life of an asset, are capitalized; maintenance and repair costs are expensed.

Long-Lived Assets

     In accordance with Statement of Financial Accounting Standards No. 144 (SFAS No. 144), Accounting for the Impairment or Disposal of Long-lived Assets, a long-lived asset (including amortizable identifiable intangibles) or asset group is tested for recoverability whenever events or changes in circumstances indicate that its carrying value may not be recoverable. When such events occur, a comparison is made between the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of a long-lived asset or asset group. If this comparison indicates that there is an impairment, the amount of the impairment is typically calculated using discounted expected future cash flows. The discount rate applied to these cash flows is based on a weighted-average cost of capital, risk adjusted where appropriate, which represents the blended after-tax costs of debt and equity.

Goodwill and Other Intangibles

     Statement of Financial Accounting Standards No. 142 (SFAS No. 142), Goodwill and Other Intangible Assets, requires goodwill to be tested for impairment on an annual basis or more frequently if an event occurs or conditions change that would more likely than not reduce the fair value of the reporting unit below the carrying value. We evaluate the recoverability of goodwill by estimating the future discounted cash flows of the businesses to which the goodwill relates. We use a rate corresponding to our cost of capital, risk adjusted where appropriate, in determining discounted cash flows. When estimated future discounted cash flows are less than the carrying value of the net assets (tangible and identifiable intangibles) and related goodwill, we perform an impairment test to measure the amount

COMMUNICATIONS SUPPLY HOLDINGS, INC. & SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of the impairment loss if any. Impairment losses, limited to the carrying value of goodwill, represent the excess of the carrying amount of a reporting unit’s goodwill over the implied fair value of that goodwill. In determining the estimated future cash flows, we consider current and projected future levels of income based on management’s plans for that business, as well as business trends, prospects and market and economic conditions.

     SFAS No. 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. A trade name has been assigned an indefinite life as it was deemed that these trade names are currently anticipated to contribute cash flows to the Company indefinitely. Indefinite-lived intangible assets will not be amortized but are required to be evaluated at each reporting period to determine whether the indefinite useful life is appropriate.

     We review indefinite-lived intangibles for impairment annually and whenever market or business events indicate there may be a potential impact on that intangible. For the trade name, the fair value is compared to the book value. Our predominant method of approximating fair value in determining whether an impairment exists is the relief-from-royalty approach. Fair value is represented by the present value of hypothetical royalty income over the remaining useful life. If the carrying amount of the asset exceeds its fair value, an impairment loss is recorded in an amount equal to that excess.

     The Company completed its impairment tests as of December 30, 2005, and determined that no impairment exists.

Deferred Financing Costs

     Deferred financing costs are amortized using the straight-line method, which approximates the effective interest method, as additional interest expense over the term of the related debt.

     Total amortization of deferred financing costs was approximately $0.5 million, $0.3 million, and $1.5 million for the year ended December 30, 2005, the period ended December 31, 2004, and the period ended May 3, 2004, respectively.

Interest Rate Agreements

     The Company is exposed to the impact of fluctuating interest rates and may periodically utilize derivatives to manage this exposure. The Company’s hedging policy and strategy is to structure its derivative transactions to be highly effective cash flow hedges. In accordance with Statement of Financial Accounting Standards No. 133 (SFAS No. 133), Accounting for Derivative Instruments and Hedging Activities, any resulting gains or losses from hedge ineffectiveness are reflected directly in income or expenses. Net payments for the cash flow hedges are recorded as interest expense for the appropriate period. The Company does not enter into interest rate transactions for speculative purposes.

Revenue Recognition

     The Company recognizes sales when title transfers, which is upon shipment of product.

Shipping and Handling Costs

     Shipping and handling costs of approximately $9.6 million, $6.2 million, and $2.7 million are included in selling, general and administrative expenses in the statements of operations for the year ended December 30, 2005, the period ended December 31, 2004, and the period ended May 3, 2004, respectively. The Company records shipping and handling costs billed to customers in net sales.

COMMUNICATIONS SUPPLY HOLDINGS, INC. & SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Income Taxes

     Provision for income taxes includes deferred taxes resulting from temporary differences in determining income for financial and U.S. income tax purposes. In accordance with Statement of Financial Accounting Standards No. 109 (SFAS No. 109), Accounting for Income Taxes, the Company establishes temporary differences based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Stock-Based Compensation

     Under the provisions of Statement of Financial Accounting Standards (SFAS No. 123), Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of SFAS No. 123, the Company has elected to continue to apply the intrinsic value method of Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and its related interpretations in accounting for its stock-based compensation plans. In accordance with APB 25, compensation cost for the Company’s fixed stock options issued were measured as the excess, if any, of the fair market price of the Company’s stock at the date of the grant over the option exercise price. Any excess would be charged to operations over the vesting period. Accordingly, because the options were granted at market value, no compensation expense has been recognized in the consolidated statements of operations for the stock option plans.

     Disclosure of pro forma information regarding net income is required by SFAS No. 123, and has been determined as if the Company has accounted for its stock options using SFAS No. 123. To value option grants in accordance with SFAS No. 123, the Company used the minimum value method. The following assumptions were utilized in the valuation for options granted.

Successor

Predecessor

Period from

Year

May 4, 2004

Period from

Ended

through

December 27,

December 30,

December 31,

2003 through

2005

2004

May 3, 2004

Risk-free interest rate

4.26

%

4.72

%

4.00

%

Expected dividend yield

—

—

—

Expected life of options

6 years

6 years

8 years

     The following table illustrates the effect on net income as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:

		Successor								Predecessor
						Period from
		Year				May 4, 2004				Period from
		Ended				through				December 27,
		December 30,				December 31,				2003 through
		2005				2004				May 3, 2004
						(In thousands)
Net income (loss), as reported		$	6,018			$	6,803			$	(3,143	)
Add stock-based compensation expense included in net income (loss), as reported, net of related tax effects			—				—				282
Less total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(28	)			(17	)			(557	)
Pro forma net income (loss)		$	5,990			$	6,786			$	(3,418	)

COMMUNICATIONS SUPPLY HOLDINGS, INC. & SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     These pro forma effects of applying the provisions of SFAS No. 123 may not be representative of the net income of the Company in future years.

New Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123R (SFAS No. 123R), Share-Based Payment, which requires that the compensation cost relating to share-based payment transactions be recognized in financial statements based on alternative fair value models. The share-based compensation cost will be measured based on the fair value of the equity or liability instruments issued. Currently, the Company discloses pro forma compensation expense by calculating the stock option grants’ fair value using the minimum value method and disclosing the impact on earnings in a note to the consolidated financial statements. Upon adoption, pro forma disclosure will no longer be an alternative. The Company will begin to apply SFAS 123R using the most appropriate fair value model beginning in fiscal year 2006. The Company will no longer be able to apply the minimum value method and must, therefore, adopt the prospective application method allowed under SFAS No. 123R. The impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future.

3. MERGER TRANSACTIONS AND ACQUISITIONS

     On May 3, 2004, CSC entered into a merger agreement (the Merger Agreement) with Holdings and its wholly owned subsidiary CSC Acquisition Inc. The Merger Agreement provided for the acquisition of all shares of CSC’s then-outstanding common stock, the redemption of all outstanding preferred stock and accumulated dividends, payments to holders of vested options and warrants, and the repayment of all debt outstanding.

     CSC Acquisition Inc. as then merged with, and into, CSC, with CSC continuing as a wholly owned subsidiary of Holdings. Holdings is controlled by affiliates of Harvest Partners, Inc. The completion of the aforementioned transactions constitutes the merger transaction (the Merger Transaction). Total consideration at the time of the close for the Merger Transaction was $204.9 million, which excludes $9.9 million of certain Merger Transaction related costs, including legal and investment banking fees, which have been classified as Merger Transaction expenses and interest expense in the Predecessor’s statement of operations for the period ended May 3, 2004.

     The Merger Transaction was financed by an $80.1 million investment in preferred stock of Holdings and a $9.0 million investment in the common stock of Holdings by affiliates of Harvest Partners, Inc., two minority co-investors, and management. Management’s investment included $5.1 million in the form of an exchange of a portion of management’s ownership in the Predecessor’s common stock. Additional financing was provided by the issuance of $41.0 million in senior subordinated notes due in 2011 and warrants and borrowings under a new $102.5 million senior secured credit facility, consisting of a $77.5 million term loan and a $25.0 million revolving credit facility, of which $7.55 million was drawn at the time of the Merger Transaction. In 2005, an additional $2.9 million was paid to the Sellers related to additional income tax benefits due them. This adjustment was treated as additional purchase price and was recorded as an adjustment to goodwill. In addition, goodwill was also adjusted based on a final valuation which resulted in the identification of certain intangible assets and an increase in the basis of certain fixed assets.

COMMUNICATIONS SUPPLY HOLDINGS, INC. & SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The Merger Transaction was accounted for using the purchase method of accounting. The purchase price, including the adjustments described above, was allocated to the assets acquired and liabilities assumed as shown below. The figures presented reflect the 2005 final purchase price allocation (in thousands).

Assets
Cash		$	2,733
Accounts receivable			61,775
Inventory			49,811
Prepaid expenses and other			3,120
Property and equipment			7,566
Goodwill			95,249
Identifiable intangibles			43,150
Other noncurrent assets			1,206
Total assets required		$	264,610
Liabilities
Accounts payable		$	29,163
Accrued expenses			14,546
Deferred income taxes			13,105
Total liabilities assumed		$	56,814
Net assets acquired		$	207,796

     The primary factors that contributed to the purchase price resulting in the recognition of goodwill include:

	•		The Company’s significant market presence as one of three national distributors of its product lines;
	•		The Company’s experienced work force; and
	•		The Company’s industry leading financial and operational performance.

4. PROPERTY AND EQUIPMENT

     Property and equipment are summarized as follows:

		December 30,				December 31,
		2005				2004
		(In thousands)
Machinery and computer equipment		$	7,660			$	4,546
Furniture and fixtures			1,244				646
Leasehold improvements			1,108				719
Construction in progress			92				136
			10,104				6,047
Less accumulated depreciation			(4,917	)			(1,546	)
		$	5,187			$	4,501

     The 2005 amounts reflect the final purchase price allocation related to the Company’s merger transaction (see Note 3).

COMMUNICATIONS SUPPLY HOLDINGS, INC. & SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5. INTANGIBLE ASSETS

     The following table reflects the gross carrying value and accumulated amortization by asset class and is based upon the final purchase price allocation related to the Company’s merger transaction (see Note 3).

		December 30, 2005
		Gross								Net				Weighted-
		Carrying				Accumulated				Carrying				Average
		Value				Amortization				Value				Useful Life
		(In thousands, except weighted-average useful life)
Indefinite-lived intangible assets — trade name		$	7,900			$	—			$	7,900				—
Supplier and customer relationships			35,000				(5,517	)			29,483				13.1
Other			250				(93	)			157				4.5
Total		$	43,150			$	(5,610	)		$	37,540

     The Company expects to record intangible amortization for each of the next fiscal years as follows:

2006		$	5,573
2007			5,573
2008			2,622
2009			1,107
2010			1,107

6. GOODWILL

     The following table reflects the change in the carrying value of goodwill during the 2005 fiscal year:

		December 30,
		2005
		(In thousands)
Carrying value of Goodwill as of December 31, 2004		$	119,945
Additional purchase price paid			2,890
Effect of final purchase price allocation			(27,586	)
Carrying value of Goodwill as of December 30, 2005		$	95,249

7. LONG-TERM DEBT

     Long-term debt consists of the following:

		December 30,				December 31,
		2005				2004
		(In thousands)
Revolving credit facility (interest rates ranging from 7.25% to 9.25% at December 30, 2005)		$	6,679			$	3,530
Term loan (interest rates ranging from 6.10% to 9.75% at December 30, 2005)			72,656				75,562
Senior subordinated notes, net of original issuance discount of $1,278			41,077				40,264
			120,412				119,356
Less current portion			(1,494	)			(2,906	)
		$	118,918			$	116,450

COMMUNICATIONS SUPPLY HOLDINGS, INC. & SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Effective March 3, 2006, the Company replaced its revolving credit facility and term loan with a new credit agreement which provides for funding of up to $160 million. Borrowings under the new revolving credit facility are limited to $30.0 million, are subject to the amount of the Company’s eligible inventory, accounts receivable and uncleared check deposits, and expire on March 3, 2012, at which time all outstanding revolver borrowings are payable in full. Pursuant to the new term loan, $25 million relates to a delayed draw available only upon consummation of a pending transaction for which the Company has signed a Letter of Intent. The new term loan is due in quarterly installments of $262,500 on June 30, 2006, and $325,000 from September 30, 2006 through December 31, 2011, with a final payment of $122,587,500 due March 3, 2012. This assumes full borrowing under the delayed draw.

     In 2004, the Company issued and sold senior subordinated notes (the Subordinated Notes), warrants to purchase 141,696 shares of common stock, and warrants to purchase 12,614 shares of Preferred Stock to certain private investors for proceeds of $41.0 million. Those Subordinated Notes accrue interest at 14.0%, of which 12.0% is paid in cash on a quarterly basis and 2.0% is paid in-kind. Prepayments during the first five years since issuance are subject to a premium varying from 9% to 1% of the principal amount, which reduces each successive year. If the prepayment is due to a change of control, the premium is applicable for the first three years since issuance and range from 3% to 1%, which reduces each successive year. For the period ended December 30, 2005 and December 31, 2004, $1,168,000 and $542,000 of accumulated paid in-kind interest was accreted to the Subordinated Notes.

     The warrants issued in conjunction with the Subordinated Notes are exercisable at any time through May 2014 at $0.01 per share. The fair value of the warrants of $1.4 million reduced the carrying value of the Subordinated Notes and subsequently will be accreted to the principal value of $41.0 million through interest expense over the related term.

     Effective March 3, 2006, the Company also entered into an amended and restated Securities Purchase Agreement (the Amendment). Under the Amendment, the Company conditionally sold an additional $8 million of Subordinated Notes to existing note holders, the proceeds of which would be available only upon consummation of the pending transaction as noted above. The additional $8 million of Subordinated Notes would accrue interest at 12.5%, of which 11.0% would be paid in cash on a quarterly basis and 1.5% would be paid in-kind. Pursuant to the Amendment, the Subordinated Notes maturity date was modified to November 2012, at which time all amounts outstanding, including paid in-kind interest, are due.

     Borrowings made are collateralized by all of the Company’s assets. The credit agreement requires the Company, among other things, to meet certain financial covenants and maintain financial ratios in such amounts and for such periods as set forth therein, and also restricts the payment of dividends. Interest accrues at a rate primarily equal to the London Interbank Offered Rate (LIBOR) plus an applicable margin of 1.50% to 2.75%, which varies based upon the achievement of certain financial ratios. A commitment fee is payable quarterly based upon the unused portion of the revolver of 0.50% annually.

COMMUNICATIONS SUPPLY HOLDINGS, INC. & SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The current portion of long-term debt on the balance sheet, the debt maturity schedule noted below, and the terms as described above reflect the terms of the new credit agreement and Amendment as well as payments required under the terms of the previous agreements prior to March 3, 2006. Maturities of long-term debt outstanding at December 30, 2005, including the fully amortized original issue discount of $1.3 million on the Subordinated Notes, are as follows (in thousands):

Fiscal year ending
2006		$	1,494
2007			1,050
2008			1,050
2009			1,050
2010			1,312
2011 and thereafter			115,734

     The Company may use interest rate swaps to reduce its exposure to adverse fluctuations in interest rates. In 2004, the Company entered into interest rate agreements that effectively fix or cap, for a period of time, the LIBOR component of the interest rate on a portion of its floating rate debt. These instruments, described further below, have been designated as cash flow hedges related to the Company’s floating rate term loan. There were no hedges or derivatives in place for the Predecessor periods presented herein.

     At December 30, 2005, the Company had two interest rate swap agreements outstanding with an aggregate notional amount of $18.8 million. These swap agreements obligate the Company to pay a fixed rate of approximately 3.85% through December 2007. At December 30, 2005, the Company had two interest rate cap agreements outstanding with an aggregate notional amount of $17.6 million. These cap agreements obligate the Company to receive payments to the extent that LIBOR exceeds 5.0%, through December 2007.

     At December 30, 2005, the fair market value of outstanding interest rate agreements was a $0.2 million asset and was included in other assets. The impact of the interest rate agreements was to increase interest expense by $0.2 million and $0.3 million for the year ended December 30, 2005 and the period May 4, 2004 through December 31, 2004, respectively.

8. COMMITMENTS AND CONTINGENCIES

Operating Leases

     The Company has operating leases covering various office, warehouse, and other equipment rentals. A certain number of thee are long-term operating leases which include rent escalation clauses. Most operating leases entered into for office and warehouse space contain renewal options. Future minimum lease payments for noncancelable operating leases as of December 30, 2005, are as follows (in thousands):

Fiscal year ending
2006		$	3,980
2007			3,421
2008			3,258
2009			2,787
2010			2,054
2011 and thereafter			594
		$	16,094

     Rent expense for the year ended December 30, 2005, the period ended December 31, 2004, and the period ended May 3, 2004, totaled $4.4 million, $2.9 million, and $1.4 million, respectively.

COMMUNICATIONS SUPPLY HOLDINGS, INC. & SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9. STOCKHOLDERS’ EQUITY

Redeemable Preferred Stock

     The Company has 804,459 shares of 8.0% Cumulative Redeemable Preferred Stock (the Preferred Stock) outstanding with a par value of $0.01 per share. Dividends on the Preferred Stock are cumulative and recorded when declared. For the periods ended December 30, 2005 and December 31, 2004, there were $10.6 million of dividends ($13.18 per share) and $4.3 million of dividends ($5.33 per share), respectively, in arrears. The Preferred Stock is nonvoting and redeemable at the option of the Company at the original issue price of $100 per share plus all accrued but unpaid dividends, which also represents the liquidation preference.

Notes Receivable from Stockholders

     The notes receivable from stockholders bear interest at 6% to 8% per annum, are repayable in various installments through 2009, and are secured by preferred stock and common shares held.

Stock-Based Compensation

Successor

     In May 2004, Holdings adopted the Communications Supply Holdings, Inc. 2004 Stock Incentive Plan (the Plan). The Compensation Committee of the Board of Directors of Holdings (the Committee) administers the Plan and selects eligible executives, employees, consultants, and directors of the Company to receive options. The Committee also will determine the number and type of shares of stock covered by options granted under the Plan, the terms under which options may be exercised, the exercise price of the options, and other terms and conditions of the options in accordance with the provisions of the Plan. If Holdings undergoes a change in control, as defined in the Plan, all outstanding time-based options become immediately exercisable, while the performance-based options may become immediately exercisable upon achievement of certain specified criteria described further below. The Committee may adjust outstanding options by substituting stock or other securities of any successor or another party to the change in control transaction, or cash out such outstanding options, in any such case, generally based on the consideration received by its stockholders in the transaction. Subject to particular limitations specified in the Plan, the Committee may amend or terminate the Plan. The Plan will terminate no later than ten years following its effective date; however, any options outstanding under the option plan will remain outstanding in accordance with their terms.

     The Company is authorized to issue an aggregate of 2,500,000 shares of common stock in connection with the Plan. Options were granted at fair market value on the grant date and are exercisable under varying terms for up to ten years. The options granted under the Plan include the following:

	•		Options to purchase shares of Holdings’ common stock at the fair market value on the date of grant, which will vest 20% annually on each of the first five anniversaries of the grant date (time-based options;
	•		Options to purchase shares of Holdings’ common stock at the fair market value on the date of grant which will vest upon the occurrence of a liquidity event, as defined in the Plan, and the achievement of two specified internal rate of return and absolute return thresholds on the funds invested by Harvest Partners, Inc., vesting 50% upon achieving the first threshold and 100% upon achieving the second threshold, as defined.

COMMUNICATIONS SUPPLY HOLDINGS, INC. & SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Stock option activity during the period May 4, 2004 through December 31, 2004 and the fiscal year ended December 30, 2005, is summarized below:

		December 30,								May 3, 2004 - December 31,
		2005								2004
						Weighted-								Weighted-
						Average								Average
						Exercise								Exercise
		Options				Price				Options				Price
Outstanding at beginning of year:			1,652,365			$	1.00
Granted			43,620			$	2.63				1,652,365			$	1.00
Canceled/expired			(4,000	)		$	1.00				—				—
Outstanding at end of year			1,691,985			$	1.04				1,652,365			$	1.00
Exercisable at end of year			181,320			$	1.00				—				—
Weighted-average fair value of options granted during the year			—			$	0.59				—			$	0.25

     Options outstanding and exercisable as of December 30, 2005, by price range:

						Outstanding								Exercisable
						Weighted-				Weighted-								Weighted-
						Average				Average								Average
						Remaining				Exercise								Exercise
Exercise Prices		Shares				Life in Years				Price				Shares				Price
$1.00			1,648,365				8.34			$	1.00				181,320			$	1.00
$2.63			43,620				9.60			$	2.63				—
			1,691,985												181,320

Predecessor

     The Predecessor had granted options to purchase common stock to key employees of the Company under its 1996 Option Plan for Key Employees (the 1996 Plan). The Predecessor was authorized to issue an aggregate of 2,550,000 shares of common stock in connection with the 1996 Plan. The stock options vested after five to seven years and were exercisable over an eight- to ten-year period from original grant dates. The vesting of certain classes of options were subject to acceleration if certain financial performance criteria were met or upon a change in control.

     In connection with the Merger Transaction, all 1,847,463 exercisable options were exercised. The difference between the number of exercisable options at the time of the merger and the prior year end was due principally to the predetermined acceleration provisions of the Plan upon a change of control. The remaining outstanding options were canceled.

COMMUNICATIONS SUPPLY HOLDINGS, INC. & SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     A summary of the status of the 1996 Plan and changes during the year ended May 3, 2004, is as follows:

		2004
						Weighted-Average
		Options				Exercise Price
Outstanding at beginning of period Exercised			2,071,012			$	2.80
Canceled/expired			(1,847,463	)			2.58
Outstanding at end of period			(223,549	)			4.62
			—			$	—
Exercisable at end of period			—			$	—
Weighted-average fair value of options granted during the period						$	—

10. INCOME TAXES

     The significant components of the Company’s deferred tax assets and liabilities were as follows:

		As of December 30,				As of December 31,
		2005				2004
		(In thousands)
Deferred tax assets:
Reserve for slow-moving inventory		$	2,288			$	1,992
Allowance for doubtful accounts			691				772
Inventory capitalization — UNICAP			903				617
NOL carryforward			—				1,372
Other accrued liabilities			842				1,142
Other			310				170
Total deferred tax assets			5,034				6,065
Deferred tax liabilities:
Intangible assets			(11,661	)			—
Tradename			(3,124	)			—
Amortization of goodwill			(4,493	)			(3,571	)
Fixed asset depreciation			(576	)			—
Total deferred tax liabilities			(19,854	)			(3,571	)
Net deferred tax assets (liabilities)		$	(14,820	)		$	2,494

     As of December 31, 2004, the Company had an NOL carryforward in the amount of $3.5 million. This amount was fully utilized in 2005.

COMMUNICATIONS SUPPLY HOLDINGS, INC. & SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The components of the provision for (benefit from) income taxes are as follows:

						Period from				Period from
						May 4, 2004				December 27,
		Year Ended				through				2003 through
		December 30,				December 31,				May 3,
		2005				2004				2004
		(In thousands)
Current:
Federal		$	4,595			$	1,791			$	—
State			947				445				—
			5,542				2,236				—
Deferred:
Federal			(708	)			2,214				(1,345	)
State			(152	)			550				(334	)
			(860	)			2,764				(1,679	)
		$	4,682			$	5,000			$	(1,679	)

     The Company’s effective tax rate differs from the 35% federal statutory rate primarily due to state income taxes in all periods and nondeductible merger expenses in the period ended May 3, 2004.

11. RELATED-PARTY TRANSACTIONS

Successor

     The Company has a management agreement with Harvest Partners, Inc., under which Harvest Partners, Inc. received a one-time fee of $4.0 million for structuring and executing the acquisition of the Company. This fee was considered additional purchase price. Additionally, Harvest Partners, Inc. receives an annual management fee of $750,000 for financial advisory and strategic planning services rendered to the Company. The agreement also provides for Harvest Partners, Inc. to receive a transaction fee in connection with any financings, acquisitions, or divestitures of the Company based upon a percentage of the applicable transaction. Management fees of $750,000 and $500,000 were incurred for the year ended December 30, 2005, and the period ended December 31, 2004, respectively. The Company also reimburses Harvest Partners, Inc. for all out-of-pocket expenses.

Predecessor

     The Predecessor had a management agreement with UBS Capital Partners. Pursuant to this agreement, fees totaling $25,000 were incurred for the period ended May 3, 2004.

12. PROFIT-SHARING PLAN

     The Company and its Predecessor maintain a defined-contribution 401(k) profit-sharing plan for the benefit of eligible employees. The plan is subject to the provisions of ERISA. Pursuant to plan provisions, each participant may elect to defer a portion of annual compensation subject to certain limitations. Contributions to the plan are determined at the discretion of the Board of Directors. Discretionary profit-sharing contribution expenses of $57,000 and $67,000, respectively, were recorded in the periods ended December 31, 2004 and May 3, 2004. In addition, discretionary matching contributions equal to a percentage of participant contributions totaled $596,000, $368,000, and $192,000 for the periods ended December 30, 2005, December 31, 2004, and May 3, 2004, respectively.

COMMUNICATIONS SUPPLY HOLDINGS, INC. & SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

13. CONTINGENT LIABILITIES

     The Company is involved in legal proceedings, which arise in the ordinary course of its business. While any litigation contains an element of uncertainty, the Company believes that the outcome of such proceedings will not have a material adverse effect on its operations or financial condition.

14. SUBSEQUENT EVENTS

     On March 3, 2006, the Company acquired all the assets of Calvert Wire and Cable Corporation, a privately held distributor of network infrastructure, and industrial wire and cable products. The purchase price was approximately $33.4 million. The acquisition will be accounted for using the purchase method of accounting and the purchase price will be allocated to the assets and liabilities acquired upon finalization of a pending valuation.

     On March 3, 2006, the Company also entered into various debt agreements including a new revolving credit facility, term loan and subordinated notes providing the Company with up to $160 million in funds as described in Note 7.

COMMUNICATION SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

		June 30,				December 30,
		2006				2005
		(Unaudited)
		(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents		$	23				3,963
Accounts receivable, net of allowance of			111,491				72,335
$2,060 in 2006 and $1,746 in 2005 Inventory			85,386				59,667
Deferred income taxes			5,720				5,034
Prepaid expenses and other assets			6,635				9,302
Total current assets			209,255				150,301
Property and equipment, net			5,835				5,187
Intangible assets, net			59,375				37,540
Goodwill			126,819				95,249
Deferred financing costs, net of accumulated amortization of $2,579 in 2006 and $761 in 2005			2,399				2,515
Other assets			407				376
		$	404,090			$	291,168
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	50,675				31,885
Accrued expenses			22,779				15,712
Current portion of long-term debt			1,300				1,494
Total current liabilities			74,754				49,091
Deferred income taxes			27,389				19,854
Other non-current liabilities			617				—
Long-term debt, less current portion			138,216				77,841
Senior subordinated notes			49,812				41,077
Stockholders’ equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, 851,423 and 804,459 shares issued and outstanding in 2006 and 2005, respectively			8				8
Common stock, $0.01 par value, 15,000,000 shares authorized, 9,139,012 and 9,012,500 shares issued and outstanding in 2006 and 2005, respectively			91				90
Additional paid-in capital			96,014				90,787
Notes receivable from stockholders			(765	)			(518	)
Accumulated other comprehensive income			162				117
Retained earnings			17,792				12,821
			113,302				103,305
		$	404,090			$	291,168

The accompanying notes are an integral part of the condensed consolidated financial statements

COMMUNICATION SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

		Six Months Ended
		June 30,				July 1,
		2006				2005
		(Unaudited)
		(Dollars in thousands)
Net Sales		$	284,824			$	207,815
Cost of sales			215,040				162,243
Gross Profit			69,784				45,572
Selling, general, and administrative expenses			46,547				31,381
Depreciation and amortization			5,228				1,116
Income from operations			18,009				13,075
Interest expense			9,520				6,036
Income before provision for income taxes			8,489				7,039
Provision for income taxes			3,518				2,745
Net income			4,971				4,294
Other comprehensive income, net of tax:
Fair value change in interest rate derivatives classified as cash flow hedges			45				—
Total Other Comprehensive Income		$	5,016			$	4,294