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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM 10-Q**

 

**x****                             ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended March 31, 2010**

 

**or**

 

**o****                                ****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**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 has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files). Yes o  No o.

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting companyfiler.  See definition of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act.:

 

| Large Accelerated Filer  o |   | Accelerated Filer  o          |
|--------------------------------------|--------|-----------------------------------------|
|                                 |   |                                    |
| Non-accelerated Filer  x   |   | Smaller Reporting Company  o. |

 

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 10, 2010, 100 shares of common stock, $.01 par value per share,were outstanding (all of which are owned by WII Holding, Inc.).

 

 

 

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**WIICOMPONENTS, INC.**

 

**FORM 10-Q**

**QuarterEnded**

**March 31,2010**

 

**Table of Contents**

 
| **Part I—Financial  Information**                                                                           |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|
| Item  1. Financial Statements                                                                                         |   |
| Condensed  Consolidated Balance Sheets (unaudited) as of March 31, 2010 and  December 31, 2009              | 1      |
| Condensed  Consolidated Statements of Operations (unaudited) for the Three Months Ended  March 31, 2010 and 2009 | 2      |
| Condensed  Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended  March 31, 2010 and 2009 | 3      |
| Notes  to Condensed Consolidated Financial Statements (unaudited)                                                     | 4      |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                   | 9      |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                                   | 14     |
| Item 4T. Controls and Procedures                                                                                      | 14     |
|                                                                                                                  |   |
| **Part II-Other  Information**                                                                                   |   |
| Item  1. Legal Proceedings                                                                                            | 16     |
| Item  1A. Risk Factors                                                                                                | 16     |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                                  | 16     |
| Item 3. Defaults Upon Senior Securities                                                                               | 16     |
| Item 4.  Reserved                                                                                                     | 16     |
| Item  5. Other Information                                                                                            | 16     |
| Item 6.  Exhibits                                                                                                     | 16     |
| Signatures                                                                                                            | 17     |

 

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**WIICOMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

**(Inthousands)**

 
| ** **                                    | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                    |       |                     |       |                        |       |
| Current  Assets:                              |       |                     |       |                        |       |
| Cash                                          |       | $                        | 3,132      |                        | $          | 13,102 |   |
| Accounts  receivable, net                     |       | 19,231                   |       | 10,754                      |       |
| Inventories                                   |       | 14,453                   |       | 14,407                      |       |
| Other  current assets                         |       | 3,008                    |       | 2,662                       |       |
| Total  current assets                         |       | 39,824                   |       | 40,925                      |       |
|                                          |       |                     |       |                        |       |
| Property,  plant, and equipment, net          |       | 49,892                   |       | 51,279                      |       |
| Goodwill                                      |       | 99,152                   |       | 99,152                      |       |
| Customer  relationship                        |       | 7,852                    |       | 8,266                       |       |
| Noncompete  agreements                        |       | 22                       |       | 31                          |       |
| Other  assets                                 |       | 3,093                    |       | 3,424                       |       |
| TOTAL                                         |       | $                        | 199,835    |                        | $          | 203,077 |   |
|                                          |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY** |       |                     |       |                        |       |
| Current  Liabilities:                         |       |                     |       |                        |       |
| Current  maturities of long-term debt         |       | $                        | —     |                        | $          | — |   |
| Accounts  payable                             |       | 3,850                    |       | 3,990                       |       |
| Accrued  payroll                              |       | 3,750                    |       | 2,713                       |       |
| Due  to Parent                                |       | 4,535                    |       | 4,578                       |       |
| Other current liabilities                     |       | 5,806                    |       | 8,648                       |       |
| Total current liabilities                     |       | 17,941                   |       | 19,929                      |       |
|                                          |       |                     |       |                        |       |
| Long-term debt, net of current maturities     |       | 108,350                  |       | 108,350                     |       |
| Deferred income tax liability                 |       | 2,664                    |       | 3,174                       |       |
| Other long-term liabilities                   |       | 2,459                    |       | 2,324                       |       |
|                                          |       |                     |       |                        |       |
| Stockholders’ Equity:                    |       |                     |       |                        |       |
| Common stock                                  |       | —                   |       | —                      |       |
| Additional paid-in capital                    |       | 71,354                   |       | 71,341                      |       |
| Accumulated deficit                           |       | (2,933                   | )          | (2,041                      | )          |
| Total stockholders’ equity               |       | 68,421                   |       | 69,300                      |       |
| TOTAL                                         |       | $                        | 199,835    |                        | $          | 203,077 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                           | ** ** | **Three Months  Ended  March 31, 2010** | ** ** | **Three Months  Ended  March 31, 2009** | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| NET SALES                            |       | $                                            | 34,643     |                                         | $          | 32,805 |   |
| COST OF SALES                        |       | 29,862                                       |       | 28,338                                       |       |
| Gross profit                         |       | 4,781                                        |       | 4,467                                        |       |
|                                 |       |                                         |       |                                         |       |
| OPERATING EXPENSES:                  |       |                                         |       |                                         |       |
| General and administrative           |       | 2,365                                        |       | 2,300                                        |       |
| Selling and marketing                |       | 763                                          |       | 733                                          |       |
| Loss on sale of assets               |       | 1                                            |       | 11                                           |       |
| Total operating expenses             |       | 3,129                                        |       | 3,044                                        |       |
|                                 |       |                                         |       |                                         |       |
| OPERATING INCOME                     |       | 1,652                                        |       | 1,423                                        |       |
|                                 |       |                                         |       |                                         |       |
| OTHER INCOME (EXPENSE):              |       |                                         |       |                                         |       |
| Interest income                      |       | —                                       |       | 4                                            |       |
| Interest expense                     |       | (3,056                                       | )          | (3,026                                       | )          |
| Other income/expense                 |       | 2                                            |       | 1                                            |       |
| Total other income (expense)         |       | (3,054                                       | )          | (3,021                                       | )          |
|                                 |       |                                         |       |                                         |       |
| LOSS BEFORE BENEFIT FOR INCOME TAXES |       | (1,402                                       | )          | (1,598                                       | )          |
| INCOME TAX BENEFIT                   |       | (510                                         | )          | (593                                         | )          |
| NET LOSS                             |       | $                                            | (892       | )                                            | $          | (1,005 | ) |

 

See notes to condensed consolidated financial statements (unaudited).

 

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                                                                   | ** ** | **Three Months  Ended  March 31, 2010** | ** ** | **Three Months  Ended  March 31, 2009** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| OPERATING ACTIVITIES:                                                        |       |                                         |       |                                         |       |
| Net loss                                                                     |       | $                                            | (892       | )                                            | $          | (1,005 | ) |
|                                                                         |       |                                         |       |                                         |       |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                         |       |                                         |       |
| Depreciation and amortization                                                |       | 2,042                                        |       | 2,144                                        |       |
| Loss on sale of assets                                                       |       | 1                                            |       | 11                                           |       |
| Amortization of debt issuance costs                                          |       | 375                                          |       | 369                                          |       |
| Deferred income tax benefit                                                  |       | (510                                         | )          | —                                       |       |
| Stock compensation expense                                                   |       | 12                                           |       | 13                                           |       |
|                                                                         |       |                                         |       |                                         |       |
| Change in operating assets and liabilities:                                  |       |                                         |       |                                         |       |
| Accounts receivable                                                          |       | (8,477                                       | )          | (4,185                                       | )          |
| Inventories                                                                  |       | (46                                          | )          | (2,549                                       | )          |
| Other current assets                                                         |       | (346                                         | )          | (1,339                                       | )          |
| Accounts payable                                                             |       | (140                                         | )          | 2,137                                        |       |
| Accrued payroll and other current liabilities                                |       | (1,805                                       | )          | (3,140                                       | )          |
| Other long term liabilities                                                  |       | 135                                          |       | —                                       |       |
| Net cash used in operating activities                                        |       | (9,651                                       | )          | (7,544                                       | )          |
|                                                                         |       |                                         |       |                                         |       |
| INVESTING ACTIVITIES:                                                        |       |                                         |       |                                         |       |
| Purchases of property, plant, and equipment                                  |       | (235                                         | )          | (244                                         | )          |
| Proceeds from sale of property, plant and equipment                          |       | 3                                            |       | 10                                           |       |
| Net cash used in investing activities                                        |       | (232                                         | )          | (234                                         | )          |
|                                                                         |       |                                         |       |                                         |       |
| FINANCING ACTIVITIES:                                                        |       |                                         |       |                                         |       |
| Principal payments under long-term financing  agreements                     |       | —                                       |       | (3,597                                       | )          |
| Debt issuance costs                                                          |       | (44                                          | )          | (136                                         | )          |
| Due to Parent                                                                |       | (43                                          | )          | (26                                          | )          |
| Net cash used in financing activities                                        |       | (87                                          | )          | (3,759                                       | )          |
|                                                                         |       |                                         |       |                                         |       |
| NET DECREASE IN CASH                                                         |       | (9,970                                       | )          | (11,537                                      | )          |
| CASH—Beginning of period                                                |       | 13,102                                       |       | 14,721                                       |       |
|                                                                         |       |                                         |       |                                         |       |
| CASH—End of period                                                      |       | $                                            | 3,132      |                                         | $          | 3,184 |   |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                          |       |                                         |       |                                         |       |
| Cash paid for interest                                                       |       | $                                            | 5,449      |                                         | $          | 5,486 |   |
|                                                                         |       |                                         |       |                                         |       |
| Cash paid for income taxes                                                   |       | $                                            | 49         |                                         | $          | 69 |   |

 

See notes to condensed consolidated financialstatements (unaudited).

 

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**WIICOMPONENTS, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED**

**CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.  BASIS OF PRESENTATION**

 

***Company Background***— OnJanuary 9, 2007, WII Components, Inc. (the “Company”) was acquired byWII Holding, Inc. (“Parent”), a newly formed investment entity controlledby two investment funds managed by Olympus Partners.  For ease of reference, these funds aresometimes 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 newaccounting basis because of the significance of the publicly traded debtoutstanding, which hinders Parent’s ability to control the form of ownership ofthe Company.

 

The Company prepared theaccompanying unaudited condensed consolidated financial statements followingthe requirements of the Securities and Exchange Commission for interimreporting.  As permitted under thoserules, certain notes or other financial information normally required byaccounting principles generally accepted in the United States of America havebeen condensed or omitted.  Therefore,the Company suggests that these financial statements be read in conjunctionwith the consolidated financial statements and accompanying notes for the yearended December 31, 2009 included in its Form 10-K as filed with theSecurities and Exchange Commission on March 31, 2010.  The condensed consolidated balance sheet asof December 31, 2009 was derived from the audited consolidated financialstatements at that date, but does not include all the information and notesrequired by accounting principles generally accepted in the United States ofAmerica for complete presentation.

 

In management’s opinion, the accompanying unauditedcondensed consolidated financial statements include all adjustments (consistingof normal recurring items) considered necessary to present fairly, when read inconjunction with the consolidated financial statements and accompanying notesfor the period ended December 31, 2009 included in our Form 10-K asfiled with the Securities and Exchange Commission on March 31, 2010, ourfinancial position, results of operations and cash flows for the periodspresented.

 

The unaudited condensedconsolidated financial statements include the accounts of the Company and itswholly owned subsidiaries.  Allintercompany accounts and transactions have been eliminated in the preparationof the consolidated financial statements.

 

**2.SIGNIFICANT ACCOUNTING POLICIES**

 

***Revenue Recognition***—Sales are recognized when revenue is realized orrealizable and has been earned.  TheCompany’s policy is to recognize revenue and the related cost of sales whenrisk and title passes to the customer. This is generally on the date of shipment, however, certain sales areshipped FOB destination and revenue is recognized when received by thecustomer.  Freight billed to customers isincluded in sales and shipping costs are included in cost of sales.  The Company records an estimate foranticipated sales returns and customer discounts at the time revenue isrecognized based on historical experience and current trends.  These estimates have been consistent with theCompany’s actual experiences.  Provisionsfor estimated sales returns and customer discounts are recorded as a reductionof net sales.  For the three months endedMarch 31, 2010 and 2009, the provision for estimated sales returns andcustomer discounts as a percentage of net sales was approximately 2% and 3%,respectively.

 

***Concentration of Credit Risk***—The Company receives a significant portionof its revenue from two customers.  Forthe three months ended March 31, 2010 and 2009, the Company’s two largestcustomers accounted for approximately 57% and 55%, respectively, of its netsales.  As of March 31, 2010 and December 31,2009, these two largest customers accounted for approximately 75% and 73%,respectively, of the Company’s consolidated accounts receivables balance.  The permanent loss of, or a significantdecrease in the level of purchases by, one or more of our major customers couldhave a material adverse effect on our results of operations and future cashflows.

 

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

 
| ** **       | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw  materials   |       | $                        | 7,530      |                        | $          | 7,338 |   |
| Work  in process |       | 3,165                    |       | 3,213                       |       |
| Finished  goods  |       | 2,481                    |       | 2,322                       |       |
| LIFO  adjustment |       | 1,277                    |       | 1,534                       |       |
|             |       | $                        | 14,453     |                        | $          | 14,407 |   |

 

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The majority of inventoryis valued at the lower of last-in, first-out (“LIFO”) cost or market.  The remainder of the inventory is valued atthe lower of first-in, first-out method (“FIFO”) cost or market.  As of March 31, 2010 and December 31,2009, inventory on the LIFO method represented 65% and 62%, respectively, ofconsolidated inventories.

 

If LIFO inventories had been valued at current costsdetermined on a FIFO basis the effect on costs of sales would be a decrease of$0.3 million for the three months ended March 31, 2010, and an increase of$0.5 million for the three months ended March 31, 2009.

 

***Goodwill***—The Company evaluates goodwill forimpairment at least annually or when events or changes in circumstancesindicate impairment.  The Company haselected to perform its annual tests for goodwill impairment as of December 31of each year.  Since December 31,2009, the Company concluded there were no events or changes in circumstancesrequiring an interim goodwill impairment analysis to be completed as of March 31,2010.  Fair value is measured using amarket multiple valuation method.  Thecarrying amount of goodwill was $99.2 million at March 31, 2010 and December 31,2009.

 

***Customer Relationship—***Customer relationships relate tointangible assets recorded through previous acquisitions for relationships withsignificant customers.  The original costof these customer relationships was $16.6 million, and the related accumulatedamortization as of March 31, 2010 is $8.7 million.  The intangible assets are being amortizedover the estimated life of 10 years. Amortization was $0.4 million for the three-month periods ended March 31,2010 and 2009.  Expected annualamortization is as follows for the years ending December 31 (inthousands):

 
| 2010       |   | $      | 1,657  |   |
|------------|--------|--------|--------|--------|
| 2011       |   | 1,658  |   |
| 2012       |   | 1,657  |   |
| 2013       |   | 1,658  |   |
| 2014       |   | 1,636  |   |
| Thereafter |   | — |   |

 

***Noncompete Agreement***—Noncompete agreements primarily relate to agreementswith the former owners of Brentwood, Grand Valley, and Dimension Moldings, Inc.(DMI).  The original cost of thesenoncompete agreements was $2.4 million, and the related accumulatedamortization as of March 31, 2010 is $2.3 million.  Noncompete rights are being amortized overthe applicable terms of the agreements (5 years, 7 years, and 5years, respectively).  The noncompeteagreement with the former owner of Brentwood was fully amortized in July 2007.  The noncompete agreement with the formerowners of Grand Valley and DMI are expected to be fully amortized by April 2011and July 2010, respectively. Amortization was $9,000 for the three-month periods ended March 31,2010 and 2009.  Expected annualamortization is as follows for the years ending December 31 (inthousands):

 
| 2010 |   | $ | 26     |   |
|------|--------|---|--------|--------|
| 2011 |   | 5 |   |

 

***New Accounting Pronouncements***—In January 2010, the FASB issued ASU No. 2010-06,“Fair Value Measurements andDisclosures (Topic 820)—Improving Disclosures about Fair Value Measurements”.  This guidance requires reportingentities to provide information about movements of assets among Levels 1 and 2of the three-tier fair value hierarchy established by ASC 820 and provide areconciliation of purchases, sales, issuance, and settlements of financialinstruments valued with a Level 3 method, which is used to price the hardest tovalue instruments. Entities must provide fair value measurement disclosures foreach class of financial assets and liabilities. The guidance is effective for interim and annual periods that beginafter December 15, 2009.  Theadoption of this guidance did not have a material impact on the Company’sconsolidated financial statements.

 

**3.RECAPITALIZATION**

 

OnJanuary 9, 2007, the Company was acquired by Parent, a newly formedinvestment 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 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 consolidated financial statements, with noadjustments to the historical basis of the Company’s assets and liabilities.

 

Inconjunction with the Transaction, the Company entered into a senior creditfacility (the “Senior Credit Facility”), with Credit Suisse, Cayman IslandsBranch, which provided for (i) a senior secured first lien term loan facilityin an aggregate principal amount of $150.0 million (the “First Lien TermFacility”) and (ii) a senior secured first lien revolving credit facilityin an aggregate 

 

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principalamount up to $25.0 million, subject to certain conditions (the “RevolvingFacility” and, together with the First Lien Term Facility, the “First LienFacilities”), of which $10.0 million is available through a sub facility in theform of letters of credit.  Please seeNote 4 below regarding recent amendments to the Company’s Senior CreditFacility.

 

In conjunction with theTransaction, Parent entered into note purchase agreements with OCM MezzanineFund II, L.P. and Olympus Growth Fund IV, L.P (the “Note Purchase Agreements”).  The Note Purchase Agreement with OCMMezzanine Fund II, L.P. consisted of $43.0 million senior payment-in-kind noteswith 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.  Parentand its Subsidiaries (including the Company) are, however, subject to a numberof restrictive covenants under the Note Purchase Agreements.  Parent and its Subsidiaries (including theCompany) were in compliance with all covenants as of March 31, 2010.  In addition, the Company is limited in itsability to pay dividends or otherwise make distributions to Parent under theSenior Credit Facility and the indenture governing the 10% Senior Notes due2012 (the “Senior Notes”). The Parent Notes are not reflected in the Company’s consolidated balancesheet as the Company did not push down the new accounting basis because of thesignificance of the public debt holders’ influence on the Company’s ability tocontrol the form of ownership.

 

Effective as of June 13,2007, Parent issued an additional $20.0 million of Parent Notes to OlympusGrowth Fund IV, L.P., and repurchased $20.0 million of Parent Notes from OCMMezzanine Fund II, L.P.  During thetwelve month periods ended December 31, 2009 and December 31, 2008,the Company had no distributions and distributions totaling $4.5 million,respectively.  The 2008 distribution toParent was recorded as a reduction in retained earnings.

 

In conjunction with the Transaction, Parent issued equity securities ofapproximately $86.2 million (including rollover equity from management) to fundthe equity necessary for the acquisition, consisting of $81.0 million ofpreferred equity securities and $5.2 million of common equity securities.  Preferred dividends accrue and accumulate onthe outstanding preferred equity securities at the rate of 10% per annum,compounding quarterly, on the sum of its liquidation value per share ($1,000)plus all accumulated and unpaid dividends thereon.  Dividends are payable as and when declared byParent’s board of directors out of funds legally available for the payment ofdividends.  Such dividends accrue,whether or not they have been declared and whether or not there are profits,surplus or other funds of Parent legally available for the payment of dividends,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 by Parent.  These equity securities are not reflected inthe Company’s consolidated balance sheet due to the significance of the publicdebt holders’ influence on the Company’s ability to control the form ofownership.

 

In conjunctionwith the Transaction, the previous stockholders of the Company will receive thebenefit of certain negotiated transaction related tax deductions whenever suchdeductions are realized.  As of March 31,2010, the entire liability for the agreement is $1.8 million and is included inOther Long-Term Liabilities.

 

**4.FINANCING ARRANGEMENTS**

 

***Senior Notes***** **The Company has outstanding 10% Senior Notes due in2012.  Each of the Company**’**s subsidiaries, which are all 100% ownedsubsidiaries of the Company, have fully and unconditionally guaranteed theSenior Notes on a joint and several basis. The Company has no assets or operations independent of itssubsidiaries.  As a result, the Companyhas not presented separate financial statements of the subsidiary guarantors.

 

***CreditFacility***** Inconjunction with the Transaction, the Company entered into the Senior CreditFacility, with Credit Suisse, Cayman Islands Branch, which provided for (i) theFirst Lien Term Facility in an aggregate principal amount of $150.0 million and(ii) the Revolving Facility in an aggregate principal amount up to $25.0million, subject to certain conditions, of which $10.0 million is availablethrough a sub facility in the form of letters of credit.  On March 31, 2009, the Company repaidall amounts outstanding under the First Lien Term Facility, and no additionalborrowings were available thereunder.  Asof March 31, 2010, the maximum amount of borrowings available to theCompany under the Revolving Facility was $12.5 million.  As of March 31, 2010, the Company had nooutstanding borrowings under the Revolving Facility.  Borrowings under the Revolving Facility bearinterest at a fluctuating 

 

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rateequal to either the base rate plus 4.75% per annum or LIBOR plus 5.75% per annum(effective rate of 8.00% and 6.2% at March 31, 2010 and 2009,respectively).

 

On March 26, 2010, the Company entered into anamendment to its Senior Credit Facility, which among other things: (i) extendedthe date by which the Company must amend the indenture governing the SeniorNotes to eliminate certain of the restrictive covenants contained therein(including covenants related to the incurrence of indebtedness and liens) orredeem the Senior Notes to March 31, 2011; (ii) increased the maximumtotal leverage ratio the Company may have at the end of each quarterly periodfrom March 31, 2010 through December 31, 2010; (iii) added anasset-based borrowing base as a condition to borrowing under the Senior CreditFacility; (iv) extended the Company’s ability to continue to pay cashdividends to enable Parent to make cash interest payments on the Parent Notesto March 31, 2011; and (v) decreased the minimum interest coverageratio the Company is required to maintain at the end of each quarterly periodfrom March 31, 2010 through December 31, 2010.  The Company must comply with certainfinancial covenants under its Senior Credit Facility, including maintenance ofan interest coverage ratio and a total leverage ratio.  The Company was in compliance with suchcovenants as of March 31, 2010.

 

TheSenior Credit Facility is collateralized by substantially all assets of theCompany including real and personal property, inventory, accounts receivable,intellectual property and other intangibles. The Senior Credit Facility is scheduled to mature January 2013.

 

***Restrictions on Indebtedness ***OurSenior Credit Facility and the indenture for the Senior Notes impose certainrestrictions on the Company’s ability to incur indebtedness, pay dividends,make investments, grant liens, sell assets and engage in certain otheractivities.  The subsidiary guarantors are generally not restricted intheir ability to dividend or otherwise distribute funds to the Company except forrestrictions imposed under applicable state corporate law.  The Company islimited in its ability to pay dividends or otherwise make other distributionsto Parent under the Senior Credit Facility and the indenture governing theSenior Notes.  Specifically, the Senior Credit Facility, as amended,prohibits the Company from making any distributions to Parent except forlimited purposes, including, but not limited to: (i) prior to March 31,2011, the Company may pay cash dividends and distributions to Parent to enableParent to make cash interest payments on the acquisition loan, providedthat(x) after giving pro forma effect to such dividend or distribution, theconsolidated first lien leverage ratio does not exceed 1.0 to 1.0, and (y) theamount of such dividends and distributions shall not exceed $3,225,000 in anycalendar quarter, (ii) customary and reasonable out-of-pocket expenses,legal and accounting fees and expenses and overhead of Parent incurred in theordinary course of business to the extent attributable to the business of theCompany and its subsidiaries and in the aggregate not to exceed $500,000 in anyfiscal year, and (iii) the Company may pay management fees of Parent notto exceed $750,000 in any fiscal year, as well as any previously accrued butunpaid management fees for any previous fiscal years without regard to this$750,000 limitation, so long as the amount accrued in any such previous fiscalyear did not exceed $750,000, in each case, so long as no default has occurred. The indenture provides that the Company can generally pay dividends andmake other distributions to Parent in an amount not to exceed (i) 50% ofthe Company’s consolidated net income for the period beginning April 1,2004 and ending as of the end of the last fiscal quarter before the proposedpayment, plus (ii) 100% of the net cash proceeds received by the Companyfrom the issuance and sale of capital stock, plus (iii) the net return ofcertain investments, provided that certain conditions are satisfied, includingthat the Company has a consolidated interest coverage ratio of greater than 2.0to 1.0.  For the period ended March 31,2010, the Company’s consolidated interest coverage ratio was less than 2.0 to1.0.

 

**5.RELATED-PARTY TRANSACTIONS**

 

The Company hasnoncompete agreements with the former owners of Grand Valley and DimensionMoldings, Inc.

 

Parent has a managementservices agreement with an affiliate of Olympus Growth Fund IV, L.P., Parent’slargest stockholder.   Parent isobligated to pay a transaction fee to the affiliate for services provided toParent and its subsidiaries, including the Company, for each financing,refinancing, acquisition, or similar nonrecurring transaction.   Underthis agreement, the Parent paid approximately $3.0 million for services relatedto the Transaction, of which, $0.7 million was recorded as deferred financingfees on the Company’s consolidated financial statements, while the remaining$2.3 million was recorded on Parent’s financial statements.  In addition,the affiliate will be paid a $150,000 quarterly advisory fee by Parent, unlesslowered by the affiliate, for ongoing services provided to Parent and itssubsidiaries, including the Company. Effective July 1, 2008, the quarterly advisory fee was reduced to$135,000.  In 2009 and for the first quarter 2010, the quarterly advisoryfee was not paid but continued to be accrued at the reduced amount of $135,000per quarter.  In connection with the March 30,2009 amendments to the Note Purchase Agreements related to the Parent Notes,the quarterly fee payment was deferred for 2009, and will be payable in 2010 orthereafter.  Currently, the Company iscontinuing to accrue but not pay the quarterly advisory fee.  Although neither the Company nor any of itssubsidiaries is party to this Agreement, the Company has recorded this expensein its statement of operations because most of the services relate to itsoperations.

 

The Company and Parentfile a consolidated federal income tax return, and federal income taxes areallocated to the Company based upon the respective taxable earnings orloss.  The Company records income taxliabilities as an amount due to Parent.  As of March 31, 2010 and December 31, 2009, the Companyincluded a total of $4.5 million and $4.6 million, respectively as an amount dueto Parent for these income tax liabilities.

 

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**6.BUSINESS SEGMENTS**

 

The Company conducts 93% 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 products produce a comprehensiveline of hardwood doors and components. Engineered wood products includes rigid thermofoil doors and components,veneer raised panels, and wrapped profiles.

 

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

 
| ** **               | ** ** | **Three  Months  Ended March 31,** | ** **   |
|--------------------------|------------|------------------------------------|--------------|
| ** **               | ** ** | **2010**                           | ** **   | **2009** | ** ** |
| Hardwood products        |       | $                                  |  27,681 |   | $ | 26,112 |   |
| Engineered wood products |       |  6,962                        |         | 6,693 |   |
| Total                    |       | $                                  |  34,643 |   | $ | 32,805 |   |

 

Substantially all assets are located and sales aremade within North America.

 

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**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

As used in thisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and elsewhere in this Quarterly Report on Form 10-Q, the terms “we,”“us” or “our” refer to WII Components, Inc. and its consolidatedsubsidiaries and their respective predecessors.

 

**Forward-LookingStatements**

 

Certain statements inthis report are “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer tofuture events or conditions or that include words such as “believe,” “anticipate,”“expect,” “estimate,” “may,” “will,” “should,” “continue,” “plans,” “intends,” “likely”or other similar expressions 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.

 

Without limiting thegenerality of the preceding statement, all statements in this report providingestimates and projections concerning or relating to the following matters areforward-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.

 

In addition, we, throughour senior management, from time to time make forward-looking public statementsconcerning our expected future operations, performance 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 that other factorswill not affect the accuracy of these forward-looking statements or that ouractual results will not differ materially from the results anticipated in suchforward-looking statements.  Although webelieve that these forward-looking statements are based on reasonableassumptions, you should be aware that many factors could affect our actualfinancial results or results of operations and could cause actual results todiffer materially from those expressed in the forward-looking statements.  Those factors include, among other things:

 

·                  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;

 

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·                  the highly competitivenature of our industry; and

 

·                  changes in the cost oflabor.

 

**Overview**

 

We are one of the leadingmanufacturers of hardwood cabinet doors, hardwood components and engineeredwood products in the United States.  Ourproducts include (1) hardwood cabinet door components, face frames anddrawer fronts, (2) fully assembled hardwood cabinet doors, (3) rigidthermofoil, or RTF, cabinet doors and components, (4) veneer raisedpanels, or VRPs, and (5) a variety of laminated and profile-wrappedcomponents.  We generate approximately93% of our sales from the kitchen and bath cabinet manufacturing industry.  Our customers, in turn, distribute theirproducts through various sales channels, including specialty kitchen and bathcabinet dealers, home center retailers and homebuilders.  We conduct all of our operations through ourWoodcraft, PrimeWood and Brentwood subsidiaries and we operate twelvemanufacturing facilities located in Minnesota, North Dakota, Oregon, Ohio,Kansas, Pennsylvania, North Carolina, West Virginia, and Kentucky that allow usto distribute our products nationwide.

 

In the past twelve years, we have consummated four strategicacquisitions that have enhanced our market position, product breadth andgeographic reach.  In June 1998, weacquired PrimeWood, a manufacturer of RTF, VRP and profile-wrapped engineeredwood products based in North Dakota.  In July 2002,we acquired Brentwood, a manufacturer of solid wood and RTF cabinet doorslocated in Oregon.  In April 2004,we acquired Grand Valley, a manufacturer of solid wood cabinet doors located inOhio.  In July 2005, we acquiredsubstantially all of the assets of Dimension Moldings, Inc. (DMI), an Ohiocorporation, which was in the business of manufacturing hardwood componentmoldings at a facility located in Middlefield, Ohio.  Following the acquisition, our Woodcraftsubsidiary manufactures hardwood component moldings at the Middlefieldfacility.

 

OnJanuary 9, 2007, WII Components, Inc. (the “Company”) was acquired byWII Holding, Inc. (“Parent”), a newly formed investment entity controlledby two investment funds managed by Olympus Partners.  For ease of reference, these funds aresometimes 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 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 newaccounting basis because of the significance of the publicly traded debtoutstanding, which hinders the Parent’s ability to control the form ofownership of the Company.

 

**Resultsof Operations**

 

Asdiscussed below, we continued to experience the slowdown in net sales for thethree months ended March 31, 2010 that began in the second half of2006.  While sales for the three monthsended March 31, 2010 are much lower than sales for the same period of 2006,2007 and 2008, they are modestly higher than sales for the three months ended March 31,2009.  We believe this is a short-termimpact due to the personal income tax incentives related to either acquiring anew or existing home in the first half of 2010. The kitchen and bath industry-wide slowdown had a negative impact on ourgross profit and operating income margin percentages due to fixed costsbecoming a higher percentage of sales.  In addition, we have continued to experience decreases in hardwood materialprices, which generally are passed on to our customers through lower sellingprices in accordance with indexing agreements that reset approximately everythree to nine months.  While the priceswe pay for hardwood materials continued to decline through April 2009,they then stabilized by mid year and began to increase in December 2009through March 2010.  The declines inour material costs through April 2009 resulted in lower selling prices inthe second half of 2009 and into the first quarter 2010 due to our indexingagreements with our customers.  Ourability to pass through these price changes to our customers is dependent onprevailing economic and competitive conditions.

 

***Three Months Ended March 31, 2010 Compared to the ThreeMonths Ended March 31, 2009***

 

The following tableincludes, for the three months ended March 31, 2010 and 2009, selectedoperating data derived from our condensed consolidated statements of earningsand presents this information as a percentage of net sales:

 

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| ** **                | ** ** | **Three Months  Ended  March 31, 2010** | ** ** | **Three Months  Ended  March 31, 2009** | ** ** |
|---------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                | ** ** | **(dollars in thousands)**                   | ** ** |
| Net  sales                |       | $                                            | 34,643     |                                         | $          | 32,805 |   |
| *% of net sales*          | * *   | *100.0*                                      | *%*        | *100.0*                                      | *%*        |
| Cost  of sales            |       | 29,862                                       |       | 28,338                                       |       |
| *% of net sales*          | * *   | *86.2*                                       | *%*        | *86.4*                                       | *%*        |
| Gross  profit             |       | 4,781                                        |       | 4,467                                        |       |
| *% of net sales*          | * *   | *13.8*                                       | *%*        | *13.6*                                       | *%*        |
| Operating  expenses       |       | 3,129                                        |       | 3,044                                        |       |
| *% of net sales*          | * *   | *9.0*                                        | *%*        | *9.3*                                        | *%*        |
| * *                  | * *   | * *                                     | * *   | * *                                     | * *   |
| Operating  income         |       | 1,652                                        |       | 1,423                                        |       |
| *% of net sales*          | * *   | *4.8*                                        | *%*        | *4.3*                                        | *%*        |
| Other  expenses (income): |       |                                         |       |                                         |       |
| Interest  expense         |       | 3,056                                        |       | 3,026                                        |       |
| *% of net sales*          | * *   | *8.8*                                        | *%*        | *9.2*                                        | *%*        |
| Other  income, net        |       | (2                                           | )          | (5                                           | )          |
| *% of net sales*          | * *   | *-0.0*                                       | *%*        | *-0.0*                                       | *%*        |
| Income  tax benefit       |       | (510                                         | )          | (593                                         | )          |
| *% of net sales*          | * *   | *-1.5*                                       | *%*        | *-1.8*                                       | *%*        |
| * *                  | * *   | * *                                     | * *   | * *                                     | * *   |
| Net  loss                 |       | (892                                         | )          | (1,005                                       | )          |
| *% of net sales*          | * *   | *-2.6*                                       | *%*        | *-3.1*                                       | *%*        |
|                           |            |                                              |            |                                              |            |  |  |

 

*Netsales.*  Net sales increased $1.8 million, or 5.5%,from $32.8 million for the three months ended March 31, 2009 to $34.6million for the three months ended March 31, 2010.  Sales in our hardwood and engineered woodproduct line increased $1.6 million and $0.2 million, respectively.  These increases are mainly attributable to anoverall modest increase in the market and certain successful promotions by afew of our customers.  These increaseswere partially offset with an approximately 4% decline in our overall sellingprices, mainly due to lower hardwood material costs.  We have indexing agreements with a majorityof our customers, whereby selling prices to customers are increased ordecreased as our material costs increase or decrease.

 

*Cost ofsales.*  Cost of sales increased $1.5 million, or5.3%, from $28.3 million for the three months ended March 31, 2009 to$29.8 million for the three months ended March 31, 2010.  This increase in cost of sales is primarilyattributable to higher material, labor and overhead costs as a result of highervolume of sales.

 

*Grossprofit.*  Gross profit increased $0.3 million, or 6.7%,from $4.5 million for the three months ended March 31, 2009 to $4.8million for the three months ended March 31, 2010.  As a percentage of net sales, our grossprofit increased 20 basis points from 13.6% for the three months ended March 31,2009 to 13.8% for the same period in 2010. This increase is related to (i) improved operating efficiencies in2010 and (ii) spreading fixed costs over higher sales volume.  This increase was partially offset with lowerselling prices in 2010 related to lower hardwood lumber costs during 2009.

 

*Operatingexpenses.*  Operating expenses increased$0.1 million, or 3.3%, from $3.0 million for the three months ended March 31,2009 to $3.1 million for the three months ended March 31, 2010.  The increase primarily consists of higherincentive compensation expense in 2010.

 

*Operatingincome.*  Operating income increased by $0.2 million,or 14.3%, from $1.4 million for the three months ended March 31, 2009 to$1.6 million for the three months ended March 31, 2010 as a result of thenet effect of the factors described above.

 

*Interestexpense.*  Interest expense was $3.0 million for each ofthe three month periods ended March 31, 2009 and March 31, 2010.

 

*Otherincome.*  Other income was $5,000 and $2,000 for thethree months ended March 31, 2009 and March 31, 2010,respectively.  This income mainlyrepresents interest received from our interest bearing accounts.

 

*Incometax benefit. *Income tax benefit decreased $0.1million, or 16.7%, from $0.6 million for the three months ended March 31,2009 to $0.5 million for the three months ended March 31, 2010 due todecreased net losses before income taxes in 2010.  The effective tax rate decreased from 37.1%in 2009 to 36.4% in 2010 due to permanent differences.

 

*Netloss.*  Net loss decreased $0.1 million, or 10.0%,from $1.0 million for the three months ended March 31, 2009 to $0.9million for the three months ended March 31, 2010 as a result of thefactors described above.

 

**Liquidityand Capital Resources**

 

Our primary cash needs are for working capital,capital expenditures and debt service. We have historically financed these cash requirements through internallygenerated cash flow and funds borrowed under our prior and existing seniorsecured credit facilities.

 

Inconjunction with the Transaction on January 9, 2007, the Company entered intothe senior credit facility (as amended from 

 

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timeto time, the “Senior Credit Facility”), which provided for (i) a seniorsecured first lien term loan facility in the initial aggregate principal amountof $150.0 million (the “First Lien Term Facility”) and (ii) a seniorsecured first lien revolving credit facility in an aggregate principal amountup to $25.0 million, subject to certain conditions, (the “Revolving Facility”and, together with the First Lien Term Facility, the “First Lien Facilities”)of which $10.0 million is available through a subfacility in the form ofletters of credit.  As of March 30,2009, the Company repaid all amounts outstanding under the First Lien TermFacility and no additional borrowings were available thereunder.  As of March 31, 2010, the maximum amountof borrowings available to the Company under the Revolving Facility was $12.5million, of which no borrowings were outstanding as of this date.  Borrowings under the Revolving Facility bearinterest at a fluctuating rate equal to either the base rate plus 4.75% perannum or LIBOR plus 5.75% per annum (effective rate of 8.00% at March 31,2010).  The Company must comply withcertain financial covenants under the Senior Credit Facility, includingmaintenance of an interest coverage ratio and a total leverage ratio.  The Company was in compliance with suchcovenants as of March 31, 2010.

 

On March 26, 2010,the Company entered into an amendment to its Senior Credit Facility, which among other things: (i) extended thedate by which the Company must amend the indenture governing the Senior Notesto eliminate certain of the restrictive covenants contained therein (includingcovenants related to the incurrence of indebtedness and liens) or redeem theSenior Notes to March 31, 2011; (ii) increased the maximum totalleverage ratio the Company may have at the end of each quarterly period from March 31,2010 through December 31, 2010; (iii) added an asset-based borrowingbase as a condition to borrowing under the Senior Credit Facility; (iv) extendedthe Company’s ability to continue to pay cash dividends to enable Parent tomake cash interest payments on the Parent Notes to March 31, 2011; and (v) decreasedthe minimum interest coverage ratio the Company is required to maintain at theend of each quarterly period from March 31, 2010 through December 31,2010.

 

Indebtedness for borrowed money incurredunder our 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. The Senior Credit Facility is scheduled to mature in January 2013.

 

As of March 31,2010, the weighted average interest rate for the Company’s outstanding debt was10.1%.

 

Our Senior CreditFacility and the indenture for the Senior Notes impose certain restrictions onour ability to incur indebtedness, pay dividends, make investments, grantliens, sell our assets and engage in certain other activities.  Thesubsidiary guarantors are generally not restricted in their ability to dividendor otherwise distribute funds to the Company except for restrictions imposedunder applicable state corporate law.  The Company is limited in itsability to pay dividends or otherwise make other distributions to Parent underthe Senior Credit Facility and the indenture governing the Senior Notes. Specifically, as amended, the Senior Credit Facility prohibits theCompany from making any distributions to Parent except for limited purposes,including, but not limited to: (i) prior to March 31, 2011, theCompany may pay cash dividends and distributions to Parent to enable Parent tomake cash interest payments on the Parent Notes, provided that (x) aftergiving pro forma effect to such dividend or distribution, the consolidatedfirst lien leverage ratio does not exceed 1.0 to 1.0, and (y) the amountof such dividends and distributions shall not exceed $3,225,000 in any calendarquarter, (ii) customary and reasonable out-of-pocket expenses, legal andaccounting fees and expenses and overhead of Parent incurred in the ordinarycourse of business to the extent attributable to the business of the Companyand its subsidiaries and in the aggregate not to exceed $500,000 in any fiscalyear, and (iii) the Company may pay management fees of Parent not toexceed $750,000 in any fiscal year, as well as any previously accrued butunpaid management fees for any previous fiscal years without regard to this$750,000 limitation, so long as the amount accrued in any such previous fiscalyear did not exceed $750,000, in each case, so long as no default has occurred. The indenture provides that the Company can generally pay dividends andmake other distributions to Parent in an amount not to exceed (i) 50% ofthe Company’s consolidated net income for the period beginning April 1,2004 and ending as of the end of the last fiscal quarter before the proposedpayment, plus (ii) 100% of the net cash proceeds received by the Companyfrom the issuance and sale of capital stock, plus (iii) the net return ofcertain investments, provided that certain conditions are satisfied, includingthat the Company has a consolidated interest coverage ratio of greater than 2.0to 1.0.  For the period ended March 31,2010, the Company’s consolidated interest coverage ratio was less than 2.0 to1.0.

 

On March 30, 2009,Parent amended and obtained a waiver to the Note Purchase Agreements related tothe Parent Notes to waive the total leverage ratio that Parent and itsSubsidiaries (including the Company) were required to maintain as of December 31,2008 and to adjust the total leverage ratio that Parent and its Subsidiaries(including the Company) are required to maintain as of the end of eachquarterly period through December 31, 2009 to reflect current economicconditions.

 

On March 26, 2010,Parent also amended the Parent Notes to, among other things, adjust the totalleverage ratio that Parent and its Subsidiaries (including the Company) arerequired to maintain as of the end of each quarterly period through December 31,2010.  The Parent was in compliancewith all covenants as of March 31, 2010.

 

As of March 31, 2010 and December 31, 2009,we had no capital lease obligations.

 

Each of the Company’ssubsidiaries, which are all 100% owned subsidiaries of the Company, have fullyand unconditionally guaranteed the Senior Notes on a joint and severalbasis.  The Company has no assets oroperations independent of its subsidiaries. As a result, the Company has not presented separate financial statementsof the subsidiary guarantors.

 

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As of March 31, 2010, we had $3.1 million of cashavailable for any corporate purposes, compared to $13.1 million as of December 31,2009.

 

*Cashflow from operating activities.*  Cash used inoperating activities was $9.7 million for the three months ended March 31,2010, while cash used in operating activities for the three months ended March 31,2009 was $7.5 million.  The $2.2 millionincrease in cash used in operating activities for the three month period ended March 31,2010 versus the three month period ended March 31, 2009 was primarily dueto: (i) an increase in cash used for accounts payable for 2010 versus 2009of $2.3 million, and (ii) an increase in cash used for accounts receivablein 2010 versus 2009 of $4.3 million. Days of receivables outstanding increased by approximately nineteen daysas of March 31, 2010 versus March 31, 2009 mainly due to certaincustomer payment terms being modified over the past year.  These were offset partially by (i) adecrease in cash used for inventory for 2010 versus 2009 of approximately $2.5million, and (ii) a decrease in cash used for other current assets,accrued payroll and other current liabilities for 2010 versus 2009 ofapproximately $2.3 million.

 

*Cashflow from investing activities.*  Net cash usedin investing activities was $0.2 million for the three months ended March 31,2010 and 2009.  Capital expenditures inthe three months ended March 31, 2010 and March 31, 2009 were $0.2million.

 

*Cashflow from financing activities.*  Net cash usedin financing activities for the three months ended March 31, 2010 totaled$0.1 million primarily due to debt issue costs and amount Due to Parent.  Net cash used in financingactivities for the three months ended March 31, 2009 totaled $3.8 millionprimarily due to principalpayments on the Senior Credit Facility.

 

For the three monthperiods ended March 31, 2010 and March 31, 2009, our two largestcustomers accounted for approximately 57% and 55% of our net sales,respectively.  As of March 31, 2010and December 31, 2009, our two largest customers accounted forapproximately 75% and 73%, respectively, of our consolidated accountsreceivables balance.  The permanent lossof, or a significant decrease in the level of purchases by, one or more of ourmajor customers could have a material adverse effect on our results ofoperations and future cash flows.

 

We cannot provideassurances that our business will generate sufficient cash flow fromoperations, that anticipated net sales growth and operating improvements willbe realized or that future borrowings will be available under our Senior CreditFacility in an amount sufficient to enable us to service our indebtedness,including the Senior Notes, or to fund our other liquidity needs.  In addition, we cannot provide assurancesthat we will be able to refinance any of our indebtedness, including our SeniorCredit Facility and the Senior Notes, on commercially reasonable terms, if atall.

 

We derive a significantportion of our revenue as a result of demand for our products created by thebuilding of new homes, and repair and remodeling of existing homes.  During the second half of 2006, the homebuilding, and repair and remodeling industry experienced a slowdown as a resultof general economic conditions.  Thisslowdown worsened into 2009 and then stabilized into the first quarter 2010,and has had a negative impact on our results of operations for the three monthsended March 31, 2010.  If thisslowdown were to continue or worsen over an extended period of time, it couldhave a material adverse effect on our business, financial condition or resultsof operations which may include impairment charges of goodwill and otherlong-term assets.

 

Recently, the financialmarkets experienced a period of unprecedented turmoil, including thebankruptcy, restructuring or sale of certain financial institutions and theintervention of the U.S. federal government. While the ultimate outcome of these events cannot be predicted, they mayhave a material adverse effect on our liquidity and financial condition if ourability to borrow money from our existing lenders under our Senior CreditFacility to finance our operations were to be impaired.  The crisis in the financial markets may alsohave a material adverse impact on the availability and cost of credit in thefuture.  Our ability to pay our debt orrefinance our obligations under our Senior Credit Facility or our Senior Noteswill depend on our future performance, which will be affected by, among otherthings, prevailing economic conditions. The recent financial crisis may also have an adverse effect on the U.S.,which would have a negative impact on demand for our products.  In addition, tightening of credit markets mayhave an adverse impact on our customers’ ability to finance the purchase of ourproducts or our suppliers’ ability to provide us with raw materials, either ofwhich could adversely affect our business and results of operations.

 

We intend to continue tomanage the business in this slower economy and its effect on our industry bydiligently reviewing our costs of doing business on a routine basis,controlling working capital in a slower business climate, and minimizing ourcapital expenditure needs.

 

We anticipate, but cannotprovide assurance, that the funds generated by operations and funds availableunder the Senior Credit Facility will be sufficient to meet working capitalrequirements and to finance capital expenditures for the foreseeable future,including the next twelve months.  Weintend to incur additional capital expenditures in the ordinary course of doingbusiness.

 

**Inflation**

 

In general, our cost ofsales is subject to inflationary pressures on labor costs, prices of the rawmaterials we use and various 

 

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overhead costs.  We generally have been able over time tooffset the effects of inflation and price fluctuations through a combination ofsales price increases and operational efficiencies.  We currently believe that raw material costpressure has increased beginning in the fourth quarter 2009 and continuing intothe first quarter 2010.  We continue toattempt to pass along these costs to our customers, but such efforts typicallylag three to nine months behind material cost changes and we can not guaranteea full offset.  Our ability to passthrough these price changes to our customers is dependent on prevailingeconomic and competitive conditions.

 

**Seasonality**

 

Our sales historicallyhave been moderately seasonal, reflecting the temporary slow down in consumerpurchasing activity during the winter holiday season and the summer months.

 

### **CriticalAccounting Policies**

 

In our Annual Report on Form 10-Kfor the year ended December 31, 2009, we identified the criticalaccounting policies, which affect our more significant estimates andassumptions used in preparing our consolidated financial statements.  The basis for developing the estimates and assumptionswithin our critical accounting policies is based on historical information andknown current trends and factors.  Theestimates and assumptions are evaluated on an ongoing basis and actual resultshave been within the Company’s expectations. We have not changed these policies from those previously disclosed inour annual report.

 

TheCompany performed its goodwill impairment (ASC 350, “Intangibles-Goodwill andOther”) analysis as of December 31, 2009. To establish fair market value, items considered were:  (1) comparable public company tradingmultiples, (2) other comparable transaction multiples and (3) theWoodcraft transaction multiple resulting from a competitive auctionprocess.  Based on the fair market valuemethodology and the assumptions above, as compared to the Company’s December 31,2009 net worth and interest-bearing indebtedness, it was concluded that therewas a goodwill impairment of $13.6 million, which was recorded during thefourth quarter of 2009.  The Companydetermined there were no events that would require an ASC 350 analysis to becompleted as of March 31, 2010.

 

**NewAccounting Standards**

 

See Note 2 of the Condensed Consolidated FinancialStatements for information pertaining to recently adopted accounting standardsor accounting standards to be adopted in the future.

 

### **Item3. Quantitative and Qualitative Disclosures About Market Risk**

 

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

 

*Commodity price risk.* Hardwood lumber accounts for the largest portion of our materialcosts.  Our profitability is thereforeaffected by the prices of lumber which may fluctuate based on a number offactors beyond our control, including, among others, changes in supply anddemand, general economic conditions, labor costs, competition and, in somecases, government regulation. Though we are not dependent on any singlesupplier for our raw materials, we have no long-term supply contracts and thus,are subject to changes in the prices charged by our suppliers.  The prices for the primary hardwood specieswe use in the production of our hardwood doors and components are subject tosome volatility.  We generally passthrough cost increases to our customers, but such efforts typically lag threeto nine months behind material cost changes and we can not guarantee a fulloffset.  Our ability to pass throughthese price changes to our customers is dependent on prevailing economic andcompetitive conditions.

 

*Interestrate risk.*  We are exposed to market risk relating tochanges in interest rates in respect to our Revolving Facility.  As of March 31, 2010, we had nooutstanding indebtedness which bears interest at a variable rate.  We believe that a one percent (1%) increasein the interest rates currently in effect would not have a material adverseeffect on our financial condition or results of operations.

 

### **Item4T. Controls and Procedures**

 

(a)           Evaluation of disclosure controls andprocedures.

 

As required by Rule 13a-15under the Securities Exchange Act of 1934 (the “Exchange Act”), we carried outan evaluation under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer,of the effectiveness of our disclosure controls and procedures as of March 31,2010.  For purposes of the foregoing, theterm disclosure controls and procedures means controls and other procedures ofan issuer that are designed to ensure that information required to be disclosedby the issuer in the reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed byan issuer in the reports that it files or submits under the Exchange Act isaccumulated and communicated to the issuer’s management, including itsprincipal 

 

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executive and principalfinancial officers, or persons performing similar functions, as appropriate toallow timely decisions regarding required disclosure.  Our disclosure controls and procedures aredesigned to provide us with a reasonable level of assurance of achieving theirobjectives as outlined above.  Based uponthat evaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that they believe that, as of March 31, 2010, our disclosurecontrols and procedures were effective at a reasonable level of assurance.

 

(b)           Changes in internal controls overfinancial reporting.

 

There were no changes inour internal controls over financial reporting during our first fiscal quarterof 2010 that have materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

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**PART II—OTHER INFORMATION**

 

**Item1. Legal Proceedings**

 

No pending material legalproceedings.

 

**Item1A. Risk Factors**

 

The Company has includedin its Annual Report on Form 10-K for the year ended December 31,2009, a description of certain risks and uncertainties that could affect theCompany’s business, future performance or financial condition (the “RiskFactors”).  The Risk Factors are herebyincorporated in Part II, Item 1A of this Form 10-Q.  Investors should consider the Risk Factorsprior to making an investment decision with respect to the Company’ssecurities.

 

**Item2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

None.

 

**Item3. Defaults Upon Senior Securities**

 

None.

 

**Item4. Reserved**

 

**Item5. Other Information**

 

None.

 

**Item 6.Exhibits**

 
| 31.1  | Certification of  Vice President, Treasurer and Secretary of WII Components, Inc.,  pursuant to Rule 15d-14(a), as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002         |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2  | Certification of  Chief Executive Officer of WII Components, Inc., pursuant to  Rule 15d-14(a), as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                         |
| 32.1* | Certification of  Vice President, Treasurer and 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 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                 |

 

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*This certification shallnot be deemed “filed” for purposes of Section 18 of the SecuritiesExchange Act of 1934, or otherwise subject to the liability of that section,nor shall it be deemed to be incorporated by reference into any filing underthe Securities Act of 1933 or the Securities Exchange Act of 1934.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                      | WII COMPONENTS, INC. |
|---------------------------|----------------------|
|                      |                 |   |
| Dated: May 13,  2010 | By:                  |   |
|                      |                 | /s/ John Fitzpatrick |
|                      |                 | John Fitzpatrick |
|                      |                 | President and Chief  Executive Officer |
|                      |                 | (Principal Executive  Officer) |
| Dated: May 13,  2010 |                 |   |
|                      |                 | /s/ Dale B. Herbst |
|                      |                 | Dale B. Herbst |
|                      |                 | Chief Financial Officer,  Treasurer and Secretary |
|                      |                 | (Principal Financial  and Accounting Officer) |

 

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