**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM 10-Q**

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

 

**For thequarterly period ended March 31, 2008**

 

**or**

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

 

**Commission file number:**

**333-115490**

 

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**WIICOMPONENTS, INC.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**             | ** ** | **No. 73-1662631**              |
|--------------------------|------------|--------------------------------------|
| (State of Incorporation) | ** ** | (I.R.S. Employer Identification No.) |

 

**525 LincolnAvenue SE, St. Cloud, Minnesota 56304**

(Address of principal executive offices) (ZipCode)

 

**(320) 252-1503**

(Registrant’s telephone number, Including areacode)

 

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 of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days.

 

Yes x No o.

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

| Large accelerated filer o                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer x                       |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

 

Yes o No x.

 

Asof May 5, 2008, 100 shares of common stock, $.01 par value per share, wereoutstanding (all of which are owned by WII Holding, Inc.).

 

 

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**WII COMPONENTS, INC.**

 

**FORM 10-Q**

**Quarter Ended March 31, 2008**

 

**Table of Contents**

 
| **Part I—Financial Information**                                                                           |   |
|----------------------------------------------------------------------------------------------------------------------|--------|
| Item 1. Financial Statements                                                                                         |   |
| Condensed  Consolidated Balance Sheets (unaudited) as of March 31, 2008 and December 31,  2007             | 1      |
| Condensed  Consolidated Statements of Earnings (unaudited) for the Three Months Ended March 31,  2008 and 2007  | 2      |
| Condensed Consolidated Statements of Cash Flows  (unaudited) for the Three Months Ended March 31, 2008 and 2007 | 3      |
| Notes to  Condensed Consolidated Financial Statements (unaudited)                                                    | 4      |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                  | 8      |
| Item 3.  Quantitative and Qualitative Disclosures about Market Risk                                                  | 12     |
| Item 4. Controls and  Procedures                                                                                     | 12     |
|                                                                                                                 |   |
| **Part II-Other  Information**                                                                                  |   |
| Item 1. Legal Proceedings                                                                                            | 14     |
| Item  1A. Risk Factors                                                                                               | 14     |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                                 | 14     |
| Item 3.  Defaults Upon Senior Securities                                                                             | 14     |
| Item 4.  Submission of Matters to a Vote of Security Holders                                                         | 14     |
| Item 5. Other Information                                                                                            | 14     |
| Item 6. Exhibits                                                                                                     | 14     |
| Signatures                                                                                                           | 15     |

 

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**WIICOMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

**(Inthousands)**

 
| ** **                                    | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                    |       |                     |       |                        |       |
| Current Assets:                               |       |                     |       |                        |       |
| Cash                                          |       | $                        | 1,755      |                        | $          | 19,574 |   |
| Accounts receivable, net                      |       | 16,883                   |       | 13,669                      |       |
| Inventories                                   |       | 19,919                   |       | 20,825                      |       |
| Other current assets                          |       | 3,330                    |       | 2,480                       |       |
| Total current assets                          |       | 41,887                   |       | 56,548                      |       |
|                                          |       |                     |       |                        |       |
| Property, plant, and equipment, net           |       | 60,008                   |       | 60,647                      |       |
| Goodwill                                      |       | 112,748                  |       | 112,748                     |       |
| Customer relationship                         |       | 11,167                   |       | 11,581                      |       |
| Noncompete agreements                         |       | 90                       |       | 99                          |       |
| Other assets                                  |       | 5,973                    |       | 6,334                       |       |
| TOTAL                                         |       | $                        | 231,873    |                        | $          | 247,957 |   |
|                                          |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDER’S EQUITY** |       |                     |       |                        |       |
| Current Liabilities:                          |       |                     |       |                        |       |
| Current maturities of long-term debt          |       | $                        | 1,214      |                        | $          | 1,284 |   |
| Accounts payable                              |       | 4,718                    |       | 3,302                       |       |
| Accrued payroll                               |       | 3,769                    |       | 4,185                       |       |
| Due to Parent                                 |       | 4,953                    |       | 4,058                       |       |
| Other current liabilities                     |       | 6,641                    |       | 16,686                      |       |
| Total current liabilities                     |       | 21,295                   |       | 29,515                      |       |
|                                          |       |                     |       |                        |       |
| Long-term debt, net of current maturities     |       | 118,358                  |       | 123,448                     |       |
| Deferred income tax liability                 |       | 6,396                    |       | 6,396                       |       |
| Other long-term liabilities                   |       | 2,729                    |       | 2,729                       |       |
|                                          |       |                     |       |                        |       |
| Stockholder’s Equity:                    |       |                     |       |                        |       |
| Common stock                                  |       | —                   |       | —                      |       |
| Additional paid-in capital                    |       | 71,254                   |       | 71,241                      |       |
| Retained earnings                             |       | 11,841                   |       | 14,628                      |       |
| Total stockholders’ equity               |       | 83,095                   |       | 85,869                      |       |
| TOTAL                                         |       | $                        | 231,873    |                        | $          | 247,957 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

1

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF EARNINGS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                                      | ** ** | **Three Months  Ended  March 31, 2008** | ** ** | **Three Months  Ended  March 31,2007** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| NET SALES                                       |       | $                                                      | 56,019     |                                             | $          | 61,006 |   |
| COST OF SALES                                   |       | 48,192                                                 |       | 50,257                                           |       |
| Gross profit                                    |       | 7,827                                                  |       | 10,749                                           |       |
|                                            |       |                                                   |       |                                             |       |
| OPERATING EXPENSES:                             |       |                                                   |       |                                             |       |
| General and administrative                      |       | 2,760                                                  |       | 12,333                                           |       |
| Selling and marketing                           |       | 840                                                    |       | 863                                              |       |
| (Gain) loss on sale of assets                   |       | (1                                                     | )          | 15                                               |       |
| Total operating expenses                        |       | 3,599                                                  |       | 13,211                                           |       |
|                                            |       |                                                   |       |                                             |       |
| OPERATING INCOME (LOSS)                         |       | 4,228                                                  |       | (2,462                                           | )          |
|                                            |       |                                                   |       |                                             |       |
| OTHER INCOME (EXPENSE):                         |       |                                                   |       |                                             |       |
| Interest income                                 |       | 93                                                     |       | 52                                               |       |
| Interest expense                                |       | (3,308                                                 | )          | (4,023                                           | )          |
| Gain on extinguishment of debt                  |       | 1,725                                                  |       | —                                           |       |
| Other income (expense)                          |       | 3                                                      |       | (2                                               | )          |
| Total other income (expense)                    |       | (1,487                                                 | )          | (3,973                                           | )          |
|                                            |       |                                                   |       |                                             |       |
| INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES |       | 2,741                                                  |       | (6,435                                           | )          |
| INCOME TAXES                                    |       | 1,058                                                  |       | (4,094                                           | )          |
| NET EARNINGS (LOSS)                             |       | $                                                      | 1,683      |                                             | $          | (2,341 | ) |

 

See notes to condensed consolidated financial statements (unaudited).

 

2

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                                                                              | ** ** | **Three Months  Ended  March 31, 2008** | ** ** | **Three Months  Ended  March 31, 2007** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| OPERATING ACTIVITIES:                                                                   |       |                                                   |       |                                                   |       |
| Net earnings (loss)                                                                     |       | $                                                      | 1,683      |                                                   | $          | (2,341 | ) |
|                                                                                    |       |                                                   |       |                                                   |       |
| Adjustments to reconcile net earnings (loss) to net cash used in  operating activities: |       |                                                   |       |                                                   |       |
| Depreciation and amortization                                                           |       | 2,213                                                  |       | 2,160                                                  |       |
| (Gain) loss on sale of assets                                                           |       | (1                                                     | )          | 15                                                     |       |
| Amortization of debt issue costs                                                        |       | 382                                                    |       | 870                                                    |       |
| Gain on extinguishment of debt                                                          |       | (1,725                                                 | )          | —                                                 |       |
| Deferred income taxes                                                                   |       | —                                                 |       | (33                                                    | )          |
| Stock compensation expense                                                              |       | 13                                                     |       | 1,029                                                  |       |
| Current portion of tax benefit due to Seller                                            |       | —                                                 |       | (4,106                                                 | )          |
|                                                                                    |       |                                                   |       |                                                   |       |
| Change in operating assets and liabilities:                                             |       |                                                   |       |                                                   |       |
| Accounts receivable                                                                     |       | (3,214                                                 | )          | (4,059                                                 | )          |
| Inventories                                                                             |       | 906                                                    |       | 796                                                    |       |
| Other current assets                                                                    |       | (850                                                   | )          | (1,213                                                 | )          |
| Accounts payable                                                                        |       | 1,503                                                  |       | 1,001                                                  |       |
| Due to Parent                                                                           |       | 895                                                    |       | —                                                 |       |
| Accrued payroll and other current liabilities                                           |       | (10,462                                                | )          | (4,888                                                 | )          |
| Other long-term liabilities                                                             |       | —                                                 |       | 114                                                    |       |
| Net cash used in operating activities                                                   |       | (8,657                                                 | )          | (10,655                                                | )          |
|                                                                                    |       |                                                   |       |                                                   |       |
| INVESTING ACTIVITIES:                                                                   |       |                                                   |       |                                                   |       |
| Purchases of property, plant, and equipment                                             |       | (1,241                                                 | )          | (2,226                                                 | )          |
| Proceeds from sale of assets                                                            |       | 4                                                      |       | 2                                                      |       |
| DMI earn-out payment                                                                    |       | —                                                 |       | (4,000                                                 | )          |
| Net cash used in investing activities                                                   |       | (1,237                                                 | )          | (6,224                                                 | )          |
|                                                                                    |       |                                                   |       |                                                   |       |
| FINANCING ACTIVITIES:                                                                   |       |                                                   |       |                                                   |       |
| Principal payments under long-term financing agreements                                 |       | (10,034                                                | )          | (8,119                                                 | )          |
| Recapitalization – equity contribution                                             |       | —                                                 |       | 21,747                                                 |       |
| Debt issuance costs                                                                     |       | (21                                                    | )          | (3,616                                                 | )          |
| Recapitalization – repurchase of stock options                                     |       | —                                                 |       | (7,880                                                 | )          |
| Expenses paid on behalf of Parent                                                       |       | —                                                 |       | (1,196                                                 | )          |
| Distribution to Parent                                                                  |       | (4,470                                                 | )          | —                                                 |       |
| Borrowings of long-term debt                                                            |       | 6,600                                                  |       | 10,152                                                 |       |
| Net cash (used  in) provided by financing activities                                    |       | (7,925                                                 | )          | 11,088                                                 |       |
|                                                                                    |       |                                                   |       |                                                   |       |
| NET DECREASE IN CASH                                                                    |       | (17,819                                                | )          | (5,791                                                 | )          |
| CASH—Beginning of period                                                           |       | 19,574                                                 |       | 8,048                                                  |       |
|                                                                                    |       |                                                   |       |                                                   |       |
| CASH—End of period                                                                 |       | $                                                      | 1,755      |                                                   | $          | 2,257 |   |
|                                                                                    |       |                                                   |       |                                                   |       |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                                     |       |                                                   |       |                                                   |       |
| Cash paid for interest                                                                  |       | $                                                      | 6,194      |                                                   | $          | 6,309 |   |
|                                                                                    |       |                                                   |       |                                                   |       |
| Cash paid for income taxes–net                                                     |       | $                                                      | 294        |                                                   | $          | 265 |   |
| NONCASH ACTIVITY:                                                                       |       |                                                   |       |                                                   |       |
| Recapitalization – repurchase of common stock funded by the Parent                 |       | $                                                      | —     |                                                   | $          | 226 |   |
|                                                                                    |       |                                                   |       |                                                   |       |
| Future tax benefit due to Seller in:                                                    |       |                                                   |       |                                                   |       |
| Other current assets                                                                    |       | $                                                      | —     |                                                   | $          | (5,985 | ) |
| Other current liabilities                                                               |       | $                                                      | —     |                                                   | $          | 7,073 |   |
| Other long-term liabilities                                                             |       | $                                                      | —     |                                                   | $          | 2,004 |   |
| Deferred income taxes                                                                   |       | $                                                      | —     |                                                   | $          | 2,945 |   |
|                                                                                    |       |                                                   |       |                                                   |       |
| Capital expenditures in accounts payable                                                |       | $                                                      | 66         |                                                   | $          | 545 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

3

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED**

**CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.  BASIS OFPRESENTATION**

 

***Company Background-***  On January 9, 2007, WII Components, Inc.(the “Company”) was acquired by WII Holding, Inc. (“Parent”), a newlyformed investment entity controlled by investment funds managed by OlympusPartners.  For ease of reference, thesefunds are sometimes collectively referred to herein as the “Olympus Funds.”  The acquisition was consummated through amerger of WII Merger Corporation (“MergerCo”), a wholly owned subsidiary ofParent, with and into the Company with the Company being the survivingcorporation in the transaction (the “Transaction”).  The aggregate purchase price paid by Parentfor all of the shares of capital stock of the Company and options to purchaseshares of capital stock of the Company in the Transaction was approximately$293.1 million, less indebtedness and certain expenses.  The aggregate purchase price and related feesand expenses were funded by borrowings under new credit facilities by theCompany and private offerings of debt and equity securities by Parent.  The Transaction has been accounted for as arecapitalization in the Company’s financial statements, with no adjustments tothe historical basis of the Company’s assets and liabilities.  The Company did not push down the basisbecause of the significance of the publicly traded debt outstanding, whichhinders the Parent’s ability to control the form of ownership of the Company.

 

TheCompany prepared the accompanying unaudited condensed consolidated financialstatements following the requirements of the Securities and Exchange Commissionfor interim reporting.  As permittedunder those rules, certain notes or other financial information normallyrequired by accounting principles generally accepted in the United States ofAmerica have been condensed or omitted. Therefore, the Company suggests that these financial statements be readin conjunction with the consolidated financial statements and accompanyingnotes for the year ended December 31, 2007 included in its Form 10-Kas filed with the Securities and Exchange Commission on March 28,2008.  The condensed consolidated balancesheet as of December 31, 2007 has been derived from the audited consolidatedfinancial statements at that date, but does not include all the information andnotes required by accounting principles generally accepted in the United Statesof America for complete presentation.

 

In our opinion, theaccompanying unaudited condensed consolidated financial statements include alladjustments (consisting of normal recurring items) considered necessary topresent fairly, when read in conjunction with the consolidated financialstatements and accompanying notes for the period ended December 31, 2007included in our Form 10-K as filed with the Securities and Exchange Commissionon March 28, 2008, our financial position, results of operations and cashflows for the periods presented.

 

Theunaudited condensed consolidated financial statements include the accounts ofthe Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in thepreparation of the consolidated financial statements.

 

**2. SIGNIFICANT ACCOUNTING POLICIES**

 

***Inventories***—Inventories consisted of the following (inthousands):

 
| ** **         | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials |       | $                        | 10,694     |                        | $          | 11,021 |   |
| Work in process    |       | 5,097                    |       | 5,187                       |       |
| Finished goods     |       | 3,996                    |       | 4,198                       |       |
| LIFO adjustment    |       | 132                      |       | 419                         |       |
|               |       | $                        | 19,919     |                        | $          | 20,825 |   |

 

Themajority of inventory is valued at the lower of last-in, first-out (“LIFO”)cost or market. The remainder of the inventory is valued under the first-in,first-out method (“FIFO”).  As of March 31,2008 and December 31, 2007, inventory on the LIFO method represented 67%and 65%, respectively, of consolidated inventories.

 

***Goodwill***—TheCompany evaluates goodwill for impairment at least annually or when events orchanges in circumstances indicate impairment. The Company has elected to perform its annual tests for goodwillimpairment as of December 31 of each year. Fair value is measured using a market multiple valuation method.  The carrying amount of goodwill was $112.7million at December 31, 2007 and March 31, 2008.

 

***CustomerRelationship—***Customerrelationships relate to intangible assets recorded through previousacquisitions for relationships with significant customers. The original cost ofthese customer relationships was $16.6 million, and the related accumulatedamortization as of March 31, 2008 is $5.4 million.  The intangible assets are being amortizedover the estimated life of 10 years. Amortization was $414,000 for thethree-month periods ended March 31, 2008 and 2007.  Expected annual amortization is 

 

4

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asfollows for the years ending December 31 (in thousands):

 
| 2008      |   | $     | 1,657  |   |
|-----------|--------|-------|--------|--------|
| 2009      |   | 1,658 |   |
| 2010      |   | 1,657 |   |
| 2011      |   | 1,658 |   |
| 2012      |   | 1,657 |   |
| 2013-2015 |   | 3,294 |   |

 

***Noncompete Agreement***—Noncompete agreements primarily relate toagreements with the former owners of Brentwood, Grand Valley, and DimensionMoldings, Inc. The original cost of these noncompete agreements was $2.4million, and the related accumulated amortization as of March 31, 2008 is$2.3 million.  Noncompete rights arebeing amortized over the applicable terms of the agreements (5 years,7 years, and 5 years, respectively). The noncompete agreement with the former owner of Brentwood was fullyamortized in July 2007.  Thenoncompete agreement with the former owners of Grand Valley and DimensionMoldings, Inc. are expected to be fully amortized by April 2011 and July 2010,respectively.  Amortization was $9,000and $86,000 for the three-month periods ended March 31, 2008 and 2007,respectively.  Expected annualamortization is as follows for the years ending December 31 (inthousands):

 
| 2008 |   | $  | 34     |   |
|------|--------|----|--------|--------|
| 2009 |   | 34 |   |
| 2010 |   | 26 |   |
| 2011 |   | 5  |   |

 

***New Accounting Pronouncements***—In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements*. SFAS No. 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue measurements.  This Statementapplies under other accounting pronouncements that require or permit fair valuemeasurements, the FASB having previously concluded in those accountingpronouncements that fair value is the relevant measurement attribute.  Accordingly, this Statement does not requireany new fair value measurements.

 

In February 2007,FASB Issued SFAS No. 159, *Establishingthe Fair Value Option for Financial Assets and Liabilities*(SFAS159).  The Financial Accounting StandardsBoard has issued SFAS 159 to permit all entities to choose to elect, atspecified election dates, to measure eligible financial instruments at fairvalue.

 

                The Company adopted FAS 157 & 159 on January 1,2008.  The Company did not elect the fair value of accounting option forany eligible assets; therefore, the adoption of these standards had no impacton our financial statements

 

**3. RECAPITALIZATION AND OTHER ACQUISITIONS**

 

On January 9, 2007, the Company was acquired byParent, a newly formed investment entity controlled by the Olympus Funds.  The aggregate purchase price paid by Parentfor all of the shares of capital stock of the Company and options to purchase sharesof capital stock of the Company in the Transaction was approximately $293.1million, less indebtedness and certain expenses.  The aggregate purchase price and related feesand expenses were funded by borrowings under new credit facilities by the Companyand private offerings of debt and equity securities by Parent.  The Transaction has been accounted for as arecapitalization in the Company’s consolidated financial statements, with noadjustments to the historical basis of the Company’s assets and liabilities.

 

                In conjunction withthe Transaction, the Company entered into a new senior credit facility (the “NewSenior Credit Facility”), with Credit Suisse, Cayman Islands Branch, whichprovided for (i) a senior secured first lien term loan facility in anaggregate principal amount of $150.0 million (the “First Lien Term Facility”)and (ii) a senior secured first lien revolving credit facility in anaggregate principal amount up to $25.0 million, subject to certain conditions(the “Revolving Facility” and, together with the First Lien Term Facility, the “FirstLien Facilities”), of which $10.0 million is available through a subfacility inthe form of letters of credit.

 

Inconjunction with the Transaction, the Parent entered into Note PurchaseAgreements with OCM Mezzanine Fund II, L.P. and Olympus Growth Fund IV,L.P.  The Note Purchase Agreement withOCM Mezzanine Fund II, L.P. consisted of $43.0 million senior payment-in-kindnotes with no required principal amortization. The Note Purchase Agreement with Olympus Growth Fund IV, L.P. consistedof $43.0 million junior payment-in-kind notes with no required principalamortization.  These notes (the “ParentNotes”) are scheduled to mature in April 2012.  During the term of the Parent Notes, Parentis able at its option to pay interest on the Parent Notes through the issuanceof additional notes.  The Company is notliable for, and has not otherwise guaranteed, any of the obligations of Parentwith respect to the Parent Notes.  TheCompany is, however, subject to a number of restrictive covenants under theNote Purchase Agreements. The Company was in compliance with the restrictivecovenants at March 31, 2008.  Inaddition, the Company is limited in its ability to pay dividends or otherwisemake distributions to Parent under the New Senior Credit Facility and theindenture governing the 10% Senior Notes due 2012 (the “Senior Notes”).  The Parent Notes are not reflected in theCompany’s consolidated balance sheet due to the significance of the public debtholders’ influence on the Company’s ability to control the form of 

 

5

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ownership.  Effective as of June 13, 2007, theParent issued an additional $20.0 million of Parent Notes to Olympus GrowthFund IV, L.P., and purchased $20.0 million of Parent Notes from OCM MezzanineFund II, L.P.  During the three month period ended March 31, 2008, the Companydistributed $4.5 million to the Parent for payment on the Parent Notes.  This distribution to the Parent was recordedas a reduction in retained earnings.

 

In conjunction with the Transaction, Parentissued equity securities of approximately $86.2 million (including rolloverequity from management) to fund the equity necessary for the acquisition,consisting of $81.0 million of preferred equity securities and $5.2 million ofcommon equity securities.  Preferreddividends accrue and accumulate on the outstanding preferred equity securitiesat the rate of 10% per annum, compounding quarterly, on the sum of itsliquidation value per share ($1,000) plus all accumulated and unpaid dividendsthereon.  Dividends are payable as andwhen declared by Parent’s board of directors out of funds legally available forthe payment of dividends.  Such dividendsaccrue, whether or not they have been declared and whether or not there areprofits, surplus or other funds of Parent legally available for the payment ofdividends, until such time as such dividends are actually paid by Parent.  The holders of a majority of the outstandingpreferred equity securities at any time and from time to time may demand thatParent redeem all or any portion of the outstanding preferred equity securitiesby delivering to the holder(s) thereof (i) an amount of cash pershare equal to the sum of its liquidation value per share ($1,000) plus allaccumulated and unpaid dividends thereon and (ii) a number of shares ofParent’s common equity securities as determined in accordance with theredemption procedures contained in Parent’s certificate of incorporation.  If Parent does not have funds legallyavailable for any particular redemption, Parent is obligated to use those fundsthat are legally available for the redemption of such securities to redeem themaximum possible number of preferred equity securities which would otherwise beredeemed in connection with such redemption. Thereafter, when additional funds of Parent are legally available forredemption of such securities, Parent is obligated to redeem the balance ofsuch securities.  Parent is prohibitedfrom redeeming any preferred equity securities if any such redemption isprohibited under any credit facility or indenture to which Parent or any of itssubsidiaries is a party or is otherwise bound. The Company is not liable for, and has not otherwise guaranteed, any ofthese obligations of Parent with respect to the equity securities issued byParent.  These equity securities are notreflected in the Company’s consolidated balance sheet due to the significanceof the public debt holders’ influence on the Company’s ability to control theform of ownership.

 

In conjunctionwith the Transaction, the previous stockholders of the Company will receive thebenefit of certain negotiated transaction related tax deductions whenever suchdeductions are realized.  Due to this agreement,there was $6.2 million paid during the three-month period ended March 31,2008.  As of March 31, 2008, $0.5million is included in Other Current Liabilities and $2.3 million is includedin Other Long-Term Liabilities under this agreement.

 

The Company recorded expenses of $9.9 millionin the three months ended March 31, 2007 related to the Transaction.  These expenses comprised $1.0 million ofcompensation expense related to accelerated vesting of stock options, $0.2million of employer related payroll taxes for the accelerated vesting of stockoptions, $1.3 million of transaction incentive expenses, $7.0 million oftransaction costs and $0.4 million of deferred financing costs related torefinanced indebtedness.  In addition tothese amounts, the Company capitalized $4.0 million of transaction costs intogoodwill related to the accelerated earn-out, and $3.6 million of deferredfinancing costs relating to the New Senior Credit Facility.  Parent made a capital contribution of $21.7million to the Company in connection with these transaction costs.

 

On July 28, 2005, the Company acquiredsubstantially all of the assets of a moldings manufacturing company operatingunder the name of DMI.  The Company paida cash purchase price at closing of $9.3 million, of which one-half wasfunded by the sale of shares of the Company’s voting common stock to theCompany’s former stockholders, and the remainder with operating cash and a drawdown on the Company’s senior secured credit facility.  In addition, the Company was required to payup to an aggregate of $7.0 million if certain earnings targets are met at theend of each calendar year from 2005 to 2010, which may be accelerated uponcertain events.  The Company paid $2.0 millionof the earn-out consideration in the first quarter 2006.  As a result of the change in control causedby the Transaction, the remaining $5.0 million potential earn-out obligationwas accelerated and paid on January 9, 2007.  As a result of the additional earn-outconsideration paid, the total purchase price, including earn-out oracceleration obligations, resulted in goodwill of $5.1 million due to thepurchase price in excess of the net assets acquired.  The acquired assets of DMI are now operatedand owned by Woodcraft Industries, Inc., the Company’s subsidiary.

 

**4. FINANCING ARRANGEMENTS**

 

The Company has outstanding 10%Senior Notes due in 2012.  During thethree months ended March 31, 2008, the Company purchased and canceledapproximately $11.5 million in principal amount of the Senior Notes for paymentof $9.8 million resulting in a gain on extinguishment of debt of approximately$1.7 million.  The Company used availablecash and borrowings under its Revolving Facility for payment thereof.

 

In conjunction with the Transaction on January 9,2007, the Company entered into the New Senior Credit Facility with CreditSuisse, Cayman Islands Branch, which provided for (i) the First Lien TermFacility in an aggregate principal amount of $150.0 million and (ii) theRevolving Facility in an aggregate principal amount up to $25.0 million,subject to certain conditions, of which $10.0 million is available through asubfacility in the form of letters of credit. Subject to certain conditions, the First Lien Term 

 

6

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Facility may be increased by up to $30.0 millionduring the life of the First Lien Term Facility at the request of the Companywith the consent from those lenders that agree to participate in suchincrease.  Subject to the foregoing,effective as of April 30, 2007, no additional borrowings are availableunder the First Lien Term Facility beyond the $9.8 million outstanding at March 31,2007.  As of March 31, 2008, themaximum amount of borrowings available to the Company under the Revolving Facilitywas $12.5 million.  As of March 31,2008, borrowings of $4.2 million were outstanding under the First Lien TermFacility and $6.6 million was outstanding under the Revolving Facility.  As of March 31, 2008, the outstandingprincipal of such indebtedness bears interest at a fluctuating rate equal toeither the base rate plus 2.75%per annum or LIBOR plus 3.75% per annum (effective rate of 6.45% at March 31,2008).  We must comply with certain financial covenants under our New SeniorCredit Facility, including maintenance of an interest coverage ratio, a seniorleverage ratio and a total leverage ratio. We were in compliance with such covenants as of March 31, 2008.  TheNew Senior Credit Facility is collateralized by substantially all assets of theCompany and is scheduled to mature in January 2013.

 

Our New Senior Credit Facility and the indenture for theSenior Notes impose certain restrictions on our ability to incur indebtedness,pay dividends, make investments, grant liens, sell our assets and engage incertain other activities.  Indebtednessfor borrowed money incurred under our New Senior Credit Facility is secured bysubstantially all of our assets, including our real and personal property,inventory, accounts receivable, intellectual property and other intangibles.

 

**5. RELATED-PARTY TRANSACTIONS**

 

TheCompany has noncompete agreements with the former owners of Brentwood, GrandValley, and Dimension Moldings, Inc .

 

Parenthas a management services agreement with Olympus Advisory Partners, an affiliateof the Parent’s largest stockholder. Parent is obligated to pay a transaction fee to the affiliate forservices provided for each financing, refinancing, acquisition, or similarnonrecurring transaction.  The affiliatewill be paid $0.6 million annually by Parent for ongoing services provided tothe Parent and Company.  The Company paida total of $150,000 and $100,000 to the Parent for these services during thethree-month periods ended March 31, 2008 and 2007, respectively.

 

The Company and its Parent file a consolidated federalincome tax return, and federal income taxes are allocated to the Company basedupon the respective taxable earnings or loss. The Companyrecords income tax liabilities as an amount due to Parent.   As of March 31, 2008 and December 31,2007, the Company included a total of $5.0 million and $4.1 million,respectively as an amount due to Parent for these income tax liabilities.

 

**6. BUSINESS SEGMENTS**

 

                The Company conducts 94% of its business within onereportable market segment: the wood kitchen and bath products segment.  The Company has two primary productcategories: hardwood products and engineered wood products. Hardwood productsproduce a comprehensive line of hardwood doors and components.  Engineered wood products includes rigidthermofoil doors and components, veneer raised panels, and wrapped profiles.

 

                The Company’s sales by product category are asfollows (in thousands):

 
| ** **               | ** ** | **Period Ended March 31,** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|
| ** **               | ** ** | **2008**                                  | ** ** | **2007** | ** ** |
| Hardwood products        |       | $                                         | 46,493     |   | $ | 50,253 |   |
| Engineered wood products |       | 9,526                                     |       | 10,753 |   |
| Total                    |       | $                                         | 56,019     |   | $ | 61,006 |   |

 

                Substantially all sales are made within NorthAmerica.

 

7

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**Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

Asused in this Management’s Discussion and Analysis of Financial Condition andResults of Operations, the terms “we,” “us” or “our” refer to WII Components, Inc.and its consolidated subsidiaries and their respective predecessors.

 

**Forward-Looking Statements**

 

Certainstatements in this report are “forward-looking statements” within the meaningof the Private Securities Litigation Reform Act of 1995. Statements that arepredictive in nature, that depend upon or refer to future events or conditionsor that include words such as “believe,” “anticipate,” “expect,” “estimate,” “may,”“will,” “should,” “continue,” “plans,” “intends,” “likely” or other similarexpressions are forward-looking statements. We caution you that forward-lookingstatements involve unknown risks, uncertainties and other factors that maycause our actual results and performance to differ materially from any futureresults or performance expressed or implied by these forward-lookingstatements.  Please also see ourdiscussion of risk factors contained in Item 1A. Part II of this Report onForm 10-Q.

 

Withoutlimiting the generality of the preceding statement, all statements in thisreport providing estimates and projections concerning or relating to thefollowing matters are forward-looking statements:

 

·                  financial results andconditions;

 

·                  margins, costs andexpenditures;

 

·                  cash flows and growthrates;

 

·                  demand for our products;

 

·                  industry trends;

 

·                  new product and customerinitiatives;

 

·                  our current plans forcapital expenditures;

 

·                  manufacturing and othercost-saving initiatives; and

 

·                  our liquidity and capitalresources.

 

Inaddition, we, through our senior management, from time to time makeforward-looking public statements concerning our expected future operations andperformance and other developments. Such forward-looking statements arenecessarily estimates reflecting our judgment based upon current informationand involve a number of risks and uncertainties. There can be no assurance thatother factors will not affect the accuracy of these forward-looking statementsor that our actual results will not differ materially from the resultsanticipated in such forward-looking statements. Although we believe that theseforward-looking statements are based on reasonable assumptions, you should be awarethat many factors could affect our actual financial results or results ofoperations and could cause actual results to differ materially from thoseexpressed in the forward-looking statements. Those factors include, among otherthings:

 

·                  our high degree ofleverage and significant debt service obligations;

 

·                  our ability to integrateacquired businesses;

 

·                  our need for additionalmanufacturing capacity;

 

·                  restrictions under theindenture governing the notes and our senior secured credit facility;

 

·                  changes in interest ratesand general economic conditions;

 

·                  a downturn in thehomebuilding or home repair and remodeling industry;

 

·                  changes in the price ofraw materials;

 

·                  interruptions indeliveries of raw materials or finished goods;

 

·                  the highly competitivenature of our industry; and

 

·                  increases in the cost oflabor.

 

8

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**Overview**

 

We believethat we are one of the leading manufacturers of hardwood doors, hardwoodcomponents and engineered wood products for the kitchen and bath cabinet marketin the United States. Our products include (1) hardwood cabinet doorcomponents, face frames and drawer fronts, (2) fully assembled hardwoodcabinet doors, (3) rigid thermofoil, or RTF, cabinet doors and components,(4) veneer raised panels, or VRPs, and (5) a variety of laminated andprofile-wrapped components. We generate approximately 94% of our sales from thekitchen and bath cabinet manufacturing industry. Our customers, in turn,distribute their products through various sales channels, including specialtykitchen and bath cabinet dealers, home center retailers and homebuilders. Weconduct all of our operations through our Woodcraft, PrimeWood and Brentwoodsubsidiaries and we operate thirteen manufacturing facilities located inMinnesota, North Dakota, Oregon, Ohio, Kansas, Pennsylvania, Utah, NorthCarolina, Washington and Kentucky that allow us to distribute our productsnationwide.

 

In the past ten years, we have consummatedfour strategic acquisitions that have enhanced our market position, productbreadth and geographic reach.  In June 1998,we acquired PrimeWood, a manufacturer of RTF, VRP and profile-wrappedengineered wood products based in North Dakota. In July 2002, we acquired Brentwood, a manufacturer of solid woodand RTF cabinet doors located in Oregon. In April 2004, we acquired Grand Valley, a manufacturer of solid woodcabinet doors located in Ohio.  In July 2005,we acquired substantially all of the assets of Dimension Moldings, Inc.(DMI), which was in the business of manufacturing hardwood component moldingsat a facility located in Middlefield, Ohio. Following the acquisition, our Woodcraft subsidiary manufactureshardwood component moldings at the Middlefield facility.

 

                OnJanuary 9, 2007, WIIComponents, Inc. (the “Company”) was acquired by WII Holding, Inc. (“Parent”),a newly formed investment entity controlled by investment funds managed byOlympus Partners.  For ease of reference,these funds are sometimes collectively referred to herein as the “OlympusFunds.”  The acquisition wasconsummated through a merger of WII Merger Corporation (“MergerCo”), a whollyowned subsidiary of Parent, with and into the Company with the Company beingthe surviving corporation in the transaction (the “Transaction”).  The aggregate purchase price paid by Parentfor all of the shares of capital stock of the Company and options to purchaseshares of capital stock of the Company in the Transaction was approximately$293.1 million, less indebtedness and certain expenses.  The Transaction has been accounted for as arecapitalization in the Company’s financial statements, with no adjustments tothe historical basis of the Company’s assets and liabilities.  The Company did not push down the basisbecause of the significance of the publicly traded debt outstanding, whichhinders the Parent’s ability to control the form of ownership of the Company.

 

**Results of Operations**

 

***Three Months Ended March 31, 2008Compared to the Three Months Ended March 31, 2007***

 

Thefollowing table outlines, for the three months ended March 31, 2008 and2007, selected operating data derived from our condensed consolidatedstatements of earnings and presents this information as a percentage of netsales:

 
| ** **                     | ** ** | **WII Components, Inc.**                           | ** ** |
|--------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                     | ** ** | **Three Months  Ended   March 31, 2008** | ** ** | **Three Months  Ended   March 31, 2007** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**                         | ** ** |
| Net sales                      |       | $                                                            | 56,019     |   | $ | 61,006 |   |
| *% of net sales*               | * *   | *100.0*                                                      | *%*        | *100.0* | *%* |
| Cost of sales                  |       | 48,192                                                       |       | 50,257 |   |
| *% of net sales*               | * *   | *86.0*                                                       | *%*        | *82.4* | *%* |
| * *                       | * *   | * *                                                     | * *   | * * | * * |
| Gross profit                   |       | 7,827                                                        |       | 10,749 |   |
| *% of net sales*               | * *   | *14.0*                                                       | *%*        | *17.6* | *%* |
| Operating expenses             |       | 3,599                                                        |       | 13,211 |   |
| *% of net sales*               | * *   | *6.5*                                                        | *%*        | *21.6* | *%* |
| * *                       | * *   | * *                                                     | * *   | * * | * * |
| Operating income (loss)        |       | 4,228                                                        |       | (2,462 | ) |
| *% of net sales*               | * *   | *7.5*                                                        | *%*        | *-4.0* | *%* |
| Other expenses (income):       |       |                                                         |       |   |   |
| Interest expense               |       | 3,308                                                        |       | 4,023 |   |
| *% of net sales*               | * *   | *5.9*                                                        | *%*        | *6.6* | *%* |
| Other income, net              |       | (1,821                                                       | )          | (50 | ) |
| *% of net sales*               | * *   | *(3.3*                                                       | *)%*       | *-0.0* | *%* |
| Income tax provision (benefit) |       | 1,058                                                        |       | (4,094 | ) |
| *% of net sales*               | * *   | *1.9*                                                        | *%*        | *-6.7* | *%* |
| * *                       | * *   | * *                                                     | * *   | * * | * * |
| Net earnings (loss)            |       | 1,683                                                        |       | (2,341 | ) |
| *% of net sales*               | * *   | *3.0*                                                        | *%*        | *-3.8* | *%* |
|                                |            |                                                              |            |  |  |  |  |

 

9

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*Net sales.*  Net sales decreased$5.0 million, or 8.2%, from $61.0 million for the three months ended March 31,2007 to $56.0 million for the three months ended March 31, 2008.  Sales in our hardwood and engineered woodproduct line decreased $3.8 million and $1.2 million, respectively.  These decreases are attributable to a combinationof (i) an overall slowdown in the market that began in the second half of2006, and (ii) lower selling prices in conjunction with lower materialcosts.

 

*Cost of sales.*  Cost of sales decreased$2.1 million, or 4.2%, from $50.3 million for the three months ended March 31,2007 to $48.2 million for the three months ended March 31, 2008.  This decrease in cost of sales is primarilyattributable to lower material, labor and overhead costs as a result of lowervolume of sales, but other factors include (i) lower stock compensationexpense and (ii) lower hardwood material costs. These were partiallyoffset by (i) unfavorable LIFO cost of material adjustment in 2008 versus2007, (ii) higher labor costs due to lower efficiencies in conjunctionwith lower sales volume, and (iii) higher overhead costs due to addedproduction facilities with lower sales volume in 2008.

 

*Gross profit.*  Gross profit decreased$2.9 million, or 27.1%, from $10.7 million for the three months endedMarch 31, 2007 to $7.8 million for the same period in 2008.  As a percentage of net sales, our grossprofit decreased 360 basis points from 17.6% for the three months ended March 31,2007 to 14.0% for the same period in 2008. This decrease is related to (i) higher labor costs due to lowerefficiencies in conjunction with lower sales volume (ii) higher overheadcosts due to added production facilities with lower sales volume, (iii) highermaterial cost in 2008 due to the LIFO material cost adjustment and (iv) lowerselling prices in 2008 in conjunction with indexed material cost decreases thathave occurred over the past year.

 

*Operating expenses.*  Operating expenses decreased$9.6 million, or 72.7%, from $13.2 million for the three months endedMarch 31, 2007 to $3.6 million for the same period in 2008.  The decrease consists of approximately; (i) $7.2million of transaction expenses in 2007 related to the Transaction, (ii) $0.4million in 2007 related to efforts to refinance a portion of the outstandingdebt, (iii) $1.0 million in transaction incentives incurred in 2007 inconnection with the Transaction, and (iv) $1.0 million related to lowerstock compensation expense and lower salaries due to eliminated positions in2008.

 

*Operating income.*  Operating income increased by$6.7 million, from a loss of $2.5 million for the three months ended March 31,2007 versus an income of $4.2 million for the three months ended March 31,2008 as a result of the net effect of the factors described above.

 

*Interest expense.*  Interest expense decreased $0.7 million,or 17.5%, from $4.0 million for the three months ended March 31, 2007to $3.3 million for the three months ended March 31, 2008.  This decrease relates to (i) thewrite-off of deferred financing fees in 2007 for the 2005 Senior CreditFacility, and (ii) lower interest expense in 2008 due to lower debtbalances for the Senior Notes and the First Lien Term Facility.

 

*Other income.*  Other income was $50,000 and$1.8 million for the three months ended March 31, 2007 and March 31,2008, respectively.  This incomerepresents interest received from our interest bearing accounts and 2008 alsoincludes $1.7 million for gain on the extinguishment of debt.

 

*Income tax expense.*  Income tax expense increased$5.1 million, from an income tax benefit of $4.1 for the three months ended March 31,2007 versus an income tax expense of $1.0 for the three months ended March 31,2008 due to increased earnings in 2008. The effective tax rate decreased from 63.6% in 2007 to 38.6% in 2008 dueto permanent differences associated with the Transaction in 2007.

 

*Net earnings.*  Net earnings increased$4.0 million, from net loss of $2.3 million for the three monthsended March 31, 2007 versus a net earnings of $1.7 million for the threemonths ended March 31, 2008 as a result of the factors described above.

 

**Liquidity and Capital Resources**

 

Our primary cash needs areworking capital, capital expenditures and debt service. We have historicallyfinanced these cash requirements through internally generated cash flow andfunds borrowed under our existing senior secured credit facilities.

 

The Company has outstanding 10% Senior Notes due in2012.  During the three months ended March 31,2008, the Company purchased and canceled approximately $11.5 million inprincipal amount of the Senior Notes for payment of $9.8 million resulting in again on extinguishment of debt of approximately $1.7 million.  The Company used available cash andborrowings under its Revolving Facility for payment thereof.

 

Eachof the Company’s subsidiaries, which are all 100% owned subsidiaries of theCompany, have fully and unconditionally guaranteed the Senior Notes on a jointand several basis. The Company has no assets or operations independent of its 

 

10

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subsidiariesother than the Senior Notes and its investments in such guarantorsubsidiaries.  As a result, the Companyhas not presented separate financial statements of the subsidiary guarantors.

 

In conjunction with the Transaction on January 9,2007, the Company entered into the New Senior Credit Facility with CreditSuisse, Cayman Islands Branch, which provided for (i) the First Lien TermFacility in an aggregate principal amount of $150.0 million and (ii) theRevolving Facility in an aggregate principal amount up to $25.0 million,subject to certain conditions, of which $10.0 million is available through asubfacility in the form of letters of credit. Subject to certain conditions, the First Lien Term Facility may be increasedby up to $30.0 million during the life of the First Lien Term Facility at therequest of the Company with the consent from those lenders who agree toparticipate in such increase.  Subject tothe foregoing, effective as of April 30, 2007, no additional borrowingsare available under the First Lien Term Facility beyond the $9.8 millionoutstanding at March 31, 2007.  Asof March 31, 2008, the maximum amount of borrowings available to theCompany under the Revolving Facility was $12.5 million.  As of March 31, 2008, borrowings of $4.2million were outstanding under the First Lien Term Facility and $6.6 millionwas outstanding under the Revolving Facility. As of March 31, 2008, the outstanding principal of suchindebtedness bears interest at a fluctuating rate equal to either the base rateplus 2.75% per annum orLIBOR plus 3.75% per annum (effective rate of 6.45% at March 31,2008).  We must comply with certain financial covenants under our New SeniorCredit Facility, including maintenance of an interest coverage ratio, a seniorleverage ratio and a total leverage ratio. We were in compliance with such covenants as of March 31, 2008.  Indebtedness for borrowed money incurred under ourNew Senior Credit Facility is secured by substantially all of our assets,including our real and personal property, inventory, accounts receivable,intellectual property and other intangibles and is scheduled to mature in January 2013.

 

As of March 31, 2008, the weighted average interestrate for the Company’s outstanding debt was 9.7%.

 

Our New Senior Credit Facility and the indenture for theSenior Notes impose certain restrictions on our ability to incur indebtedness,pay dividends, make investments, grant liens, sell our assets and engage incertain other activities.

 

As of March 31,2008 and December 31, 2007, we had $0.5 million of capital leaseobligations, all of which was classified as current.

 

As of March 31,2008, we had $1.8 million of cash and cash equivalents available for anycorporate purposes, compared to $19.6 million as of December 31,2007.  Cash and cash equivalents as of December 31,2007 included approximately $6.2 million related to income tax refunds due toprevious stockholders of the Company, which is included in Other CurrentLiabilities on the Balance Sheet as of December 31, 2007.  The $6.2 million related to income taxrefunds to previous stockholders of the Company was paid in the three monthsended March 31, 2008.

 

*Cash flow from operating activities.*  Cashused by operating activities was $8.7 million for the three months ended March 31,2008, and $10.7 million for the three months ended March 31, 2007.  The decreased use of cash for operatingactivities is mainly attributable to higher net income in 2008.  The cash used by operating activities for thethree months ended March 31, 2008 includes the payment of $6.2 million forincome tax refunds that were due to previous stockholders of the Companyrelated to deductible transaction costs.

 

*Cash flow from investing activities.*  Netcash used in investing activities was $1.2 million for the three months ended March 31,2008 and $6.2 million for the three months ended March 31, 2007. Capitalexpenditures in the three months ended March 31, 2008 were $1.2 millioncompared to $2.2 million for the three months ended March 31, 2007.The decrease in capital expenditures in 2008 is primarily due to lower capitalexpenditures needed for capacity requirements. Net cash used in investing activities for the three months ended March 31,2007 includes $4.0 million due to an accelerated Dimension Moldings, Inc.earn-out payment in conjunction with the Transaction.

 

*Cash flow from financing activities.*  Netcash used by financing activities for the three months ended March 31,2008 totaled $7.9 million primarily due to (i) the purchase and cancellation of approximately $11.5 million in principalamount of the Senior Notes at a net of discount cost of $9.8 million, (ii) capitallease payments of $0.1 million, (iii) principal payments on the New SeniorCredit Facility of $0.2 million, and (iv) a distribution on behalf of theParent for principal and interest on a portion of the Parent Notes of $4.5million.  The net cash used by financingactivities for the three months ended March 31, 2008 was offset by anadvance on the Revolving Facility of $6.6 million.  Net cash provided by financing activities forthe three months ended March 31, 2007 totaled $11.1 million primarily dueto (i) capital contributions of $21.7 million that funded debt issuancecosts of $3.6 million and stock option payments of $7.9 million, (ii) borrowingsof long-term debt under the New Senior Credit Facility of $10.2 million thatfunded the repayment of the 2005 Senior Credit Facility of $7.5 million, (iii) capitallease payments of $0.1 million, (iv) principal payments on the New SeniorCredit Facility of $0.4 million, and (v) a distribution on behalf of theParent for costs in conjunction with the Transaction of $1.2 million.

 

Weanticipate that the funds generated by operations and funds available under theNew Senior Credit Facility will be sufficient to meet working capitalrequirements and to finance capital expenditures for the foreseeable future,including the next twelve months. We cannot provide assurances that ourbusiness will generate sufficient cash flow from operations, that anticipatednet sales growth and operating improvements will be realized or that futureborrowings will be available under our New Senior Credit 

 

11

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Facilityin an amount sufficient to enable us to service our indebtedness, including theSenior Notes, or to fund our other liquidity needs. In addition, we cannotprovide assurances that we will be able to refinance any of our indebtedness,including our New Senior Credit Facility and the Senior Notes, on commerciallyreasonable terms, if at all.  We intendto incur additional capital expenditures in the ordinary course of business.

 

**Inflation**

 

Ourcost of sales is subject to inflationary pressures on labor costs, prices ofthe raw materials we use and various overhead costs. We generally have beenable over time to offset the effects of inflation and price fluctuationsthrough a combination of sales price increases and operational efficiencies.

 

**Seasonality**

 

Oursales historically have been moderately seasonal, reflecting the temporary slowdown in consumer purchasing activity during the winter holiday season and thesummer months.

 

### **Critical AccountingPolicies**

### ** **

In our Annual Report on Form 10-Kfor the year ended December 31, 2007, we identified the critical accountingpolicies, which affect our more significant estimates and assumptions used inpreparing our consolidated financial statements.  We have not changed these policies from thosepreviously disclosed in our annual report.

 

**NewAccounting Standards**

 

SeeNote 2 of the Condensed Consolidated Financial Statements for informationpertaining to recently adopted accounting standards or accounting standards tobe adopted in the future.

 

### **Item 3. Quantitative andQualitative Disclosures about Market Risk**

### ** **

We are subject to variousmarket risks such as fluctuating lumber prices, interest rates, and marketconditions.

 

*Commodity price risk.* Hardwood lumber accounts for the largest portion of our material costs.Our profitability is therefore affected by the prices of lumber which mayfluctuate based on a number of factors beyond our control, including, amongothers, changes in supply and demand, general economic conditions, labor costs,competition and, in some cases, government regulation. Though we are not dependenton any single supplier for our raw materials, we have no long-term supplycontracts and thus, are subject to changes in the prices charged by oursuppliers. The prices for the primary hardwood species we use in the productionof our hardwood doors and components are subject to some volatility.

 

*Interest rate risk.*  We are exposed to market riskrelating to changes in interest rates in respect of a portion of our long-termdebt and a portion of our capital leases. Asof March 31, 2008, we had $4.2 million outstanding under the First LienTerm Facility, which bears interest at variable rates.  In addition, as of that date, we hadapproximately $0.3 million of capital leases that bear interest at variablerates. We believe that a one percent (1%) increase in the interest ratescurrently in effect would not have a material adverse effect on our financialcondition or results of operations.

 

*Market conditions. *The Company derives a significant portion of its revenue as a result ofthe demand for its products created by the building of new homes, and repairand remodeling of existing homes.  Duringthe second half of 2006, the home building, repair and remodeling industryexperienced a slowdown as a result of general economic conditions.  This slowdown has continued into 2008, andhas had a negative impact on our results of operations for the quarterly periodended March 31, 2008.  If thisslowdown were to continue or worsen over an extended period of time, it couldhave a material adverse effect on the Company’s business, financial conditionor results of operations.

 

### **Item 4. Controls andProcedures**

### ** **

(a)           Evaluation of disclosure controls and procedures.

 

Asrequired by Rule 13a-15 under the Securities Exchange Act of 1934, wecarried out an evaluation under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of our disclosure controls and procedures as of March 31,2008. In designing and evaluating our disclosure controls and procedures, weand our management recognize that any controls and procedures, no matter howwell designed and operated, can provide only reasonable assurance of achievingthe desired control objectives, and our management necessarily was required toapply its judgment in evaluating and implementing possible controls andprocedures. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that they believe that, as of March 31,2008, our disclosure controls and procedures were reasonably 

 

12

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effectiveto ensure that information required to be disclosed by us in the reports wefile or submit under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the Securities and ExchangeCommission’s rules and forms. The Chief Executive Officer and ChiefFinancial Officer have also concluded that controls and procedures are designedto ensure that information required to be disclosed is accumulated andcommunicated to our management, including our principal executive and principalfinancial officers as appropriate to allow timely decisions regarding requireddisclosure.  We will continue to reviewand document our disclosure controls and procedures on an ongoing basis, andmay from time to time make changes aimed at enhancing their effectiveness andto ensure that our systems evolve with our business.

 

(b)          Changes in internal controls overfinancial reporting.

 

None.

 

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**PART II—OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

No pending material legalproceedings.

 

**Item 1A. Risk Factors**

 

The Company has included in its Annual Report on Form 10-Kfor the year ended December 31, 2007, a description of certain risks anduncertainties that could affect the Company’s business, future performance orfinancial condition (the “Risk Factors”). The Risk Factors are hereby incorporated in Part II, Item IA ofthis Form 10-Q.  Investors shouldconsider the Risk Factors prior to making an investment decision with respectto the Company’s securities.

 

In addition, the following Risk Factor should beconsidered prior to making an investment decision with respect to the Company’ssecurities:

 

***If the current slowdown in thehome building, repair and remodeling industry continues for an extended periodof time, it could have a material adverse effect on the Company’s business,financial condition or results of operations. ***TheCompany derives a significant portion of its revenue as a result of the demandfor its products created by the building of new homes, and repair andremodeling of existing homes.  During thesecond half of 2006, the home building, repair and remodeling industryexperienced a slowdown as a result of general economic conditions.  This slowdown has continued into 2008, andhas had a negative impact on our results of operations for the quarterly periodended March 31, 2008.  If thisslowdown were to continue or worsen over an extended period of time, it couldhave a material adverse effect on the Company’s business, financial conditionor results of operations.

 

**Item 2. Unregistered Sales of Equity Securities andUse of Proceeds**

 

None.

 

**Item 3. Defaults Upon Senior Securities**

 

None.

 

**Item 4. Submission of Matters to a Vote of SecurityHolders**

 

None.

 

**Item 5. Other Information**

 

### **None.**

### ** **

### **Item 6. Exhibits**

### ** **

31.1                         Certification of Vice President, Treasurerand Secretary of WII Components, Inc., pursuant to Rules 13a-14(a) and15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of2002

31.2                         Certification of Chief Executive Officer ofWII Components, Inc., pursuant to Rules 13a-14(a) and 15d-14(a),as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*                  Certification of Vice President, Treasurerand Secretary of WII Components, Inc., pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*                  Certification of Chief Executive Officer ofWII Components, Inc., pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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*Thiscertification shall not be deemed “filed” for purposes of Section 18 ofthe Securities Exchange Act of 1934, or otherwise subject to the liability ofthat section, nor shall it be deemed to be incorporated by reference into anyfiling under the Securities Act of 1933 or the Securities Exchange Act of 1934.

 

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**SIGNATURES**

 

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

 
|                      | WII  COMPONENTS, INC. |
|---------------------------|-----------------------|
|                      |                  |
| Dated:  May 12, 2008 | By:                   |
|                      |                  | /s/  John Fitzpatrick |
|                      |                  | John  Fitzpatrick |
|                      |                  | President  and Chief Executive Officer |
|                      |                  | (Principal  Executive Officer) |
| Dated:  May 12, 2008 |                  |   |
|                      |                  | /s/  Dale B. Herbst |
|                      |                  | Dale  B. Herbst |
|                      |                  | Chief  Financial Officer, Treasurer and Secretary |
|                      |                  | (Principal  Financial and Accounting Officer) |

 

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