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**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 the  quarterly period ended June 30, 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.

 

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 “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

 

LargeAccelerated 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 August 5, 2008, 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 June 30, 2008**

 

**Tableof Contents**

 
| **Part I—Financial  Information**                                                                        |   |
|--------------------------------------------------------------------------------------------------------------------|--------|
| Item  1. Financial Statements                                                                                      |   |
| Condensed  Consolidated Balance Sheets (unaudited) as of June 30, 2008 and  December 31, 2007            | 1      |
| Condensed  Consolidated Statements of Earnings (unaudited) for the Three Months Ended  June 30, 2008 and 2007 | 2      |
| Condensed  Consolidated Statements of Earnings (unaudited) for the Six Months Ended  June 30, 2008 and 2007   | 3      |
| Condensed  Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended  June 30, 2008 and 2007 | 4      |
| Notes  to Condensed Consolidated Financial Statements (unaudited)                                                  | 5      |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                | 10     |
| Item 3. Quantitative and Qualitative Disclosures about  Market Risk                                                | 15     |
| Item 4T. Controls and Procedures                                                                                   | 16     |
|                                                                                                               |   |
| **Part II-Other Information**                                                                                 |   |
| Item  1. Legal Proceedings                                                                                         | 17     |
| Item  1A. Risk Factors                                                                                             | 17     |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                               | 17     |
| Item 3. Defaults Upon Senior Securities                                                                            | 17     |
| Item 4. Submission of Matters to a Vote of Security  Holders                                                       | 17     |
| Item  5. Other Information                                                                                         | 17     |
| Item 6.  Exhibits                                                                                                  | 17     |
| Signatures                                                                                                         | 18     |

 

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**WIICOMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

**(Inthousands)**

 
| ** **                                    | ** ** | **June 30,  2008** | ** ** | **December 31,   2007** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| **ASSETS**                                    | ** ** | ** **              | ** ** | ** **                   | ** ** |
| Current Assets:                               |       |                    |       |                         |       |
| Cash                                          |       | $                       | 2,555      |                         | $          | 19,574 |   |
| Accounts receivable, net                      |       | 14,761                  |       | 13,669                       |       |
| Inventories                                   |       | 20,391                  |       | 20,825                       |       |
| Other current assets                          |       | 3,042                   |       | 2,480                        |       |
| Total current assets                          |       | 40,749                  |       | 56,548                       |       |
|                                          |       |                    |       |                         |       |
| Property, plant, and equipment, net           |       | 59,676                  |       | 60,647                       |       |
| Goodwill                                      |       | 112,748                 |       | 112,748                      |       |
| Customer relationship                         |       | 10,752                  |       | 11,581                       |       |
| Noncompete agreements                         |       | 82                      |       | 99                           |       |
| Other assets                                  |       | 5,604                   |       | 6,334                        |       |
| TOTAL                                         |       | $                       | 229,611    |                         | $          | 247,957 |   |
| ** **                                    | ** ** | ** **              | ** ** | ** **                   | ** ** |
| **LIABILITIES AND STOCKHOLDER’S EQUITY** | ** ** | ** **              | ** ** | ** **                   | ** ** |
| Current Liabilities:                          |       |                    |       |                         |       |
| Current maturities of long-term debt          |       | $                       | 1,135      |                         | $          | 1,284 |   |
| Accounts payable                              |       | 3,657                   |       | 3,302                        |       |
| Accrued payroll                               |       | 4,533                   |       | 4,185                        |       |
| Due to Parent                                 |       | 6,065                   |       | 4,058                        |       |
| Other current liabilities                     |       | 8,794                   |       | 16,686                       |       |
| Total current liabilities                     |       | 24,184                  |       | 29,515                       |       |
|                                          |       |                    |       |                         |       |
| Long-term debt, net of current maturities     |       | 111,570                 |       | 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                    |       | 71,266                  |       | 71,241                       |       |
| Retained earnings                             |       | 13,466                  |       | 14,628                       |       |
| Total stockholders’ equity               |       | 84,732                  |       | 85,869                       |       |
| TOTAL                                         |       | $                       | 229,611    |                         | $          | 247,957 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF EARNINGS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                               | ** ** | **Three Months  Ended  June 30, 2008** | ** ** | **Three Months  Ended  June 30,2007** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| NET SALES                                |       | $                                           | 56,104     |                                       | $          | 67,776 |   |
| COST OF SALES                            |       | 46,713                                      |       | 54,105                                     |       |
| Gross profit                             |       | 9,391                                       |       | 13,671                                     |       |
|                                     |       |                                        |       |                                       |       |
| OPERATING EXPENSES:                      |       |                                        |       |                                       |       |
| General and administrative               |       | 2,484                                       |       | 3,342                                      |       |
| Selling and marketing                    |       | 842                                         |       | 788                                        |       |
| Loss on sale of assets                   |       | —                                      |       | 37                                         |       |
| Total operating expenses                 |       | 3,326                                       |       | 4,167                                      |       |
|                                     |       |                                        |       |                                       |       |
| OPERATING INCOME                         |       | 6,065                                       |       | 9,504                                      |       |
|                                     |       |                                        |       |                                       |       |
| OTHER INCOME (EXPENSE):                  |       |                                        |       |                                       |       |
| Interest income                          |       | 8                                           |       | 96                                         |       |
| Interest expense                         |       | (3,289                                      | )          | (3,832                                     | )          |
| Other income                             |       | 2                                           |       | —                                     |       |
| Total other income (expense)             |       | (3,279                                      | )          | (3,736                                     | )          |
|                                     |       |                                        |       |                                       |       |
| INCOME BEFORE PROVISION FOR INCOME TAXES |       | 2,786                                       |       | 5,768                                      |       |
| INCOME TAX PROVISION                     |       | 1,153                                       |       | 3,787                                      |       |
| NET EARNINGS                             |       | $                                           | 1,633      |                                       | $          | 1,981 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF EARNINGS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                                          | ** ** | **Six Months  Ended  June 30, 2008** | ** ** | **Six Months  Ended  June 30,2007** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| NET SALES                                           |       | $                                         | 112,123    |                                     | $          | 128,782 |   |
| COST OF SALES                                       |       | 94,906                                    |       | 104,362                                  |       |
| Gross profit                                        |       | 17,217                                    |       | 24,420                                   |       |
|                                                |       |                                      |       |                                     |       |
| OPERATING EXPENSES:                                 |       |                                      |       |                                     |       |
| General and administrative                          |       | 5,243                                     |       | 15,675                                   |       |
| Selling and marketing                               |       | 1,682                                     |       | 1,652                                    |       |
| (Gain) loss on sale of assets                       |       | (1                                        | )          | 51                                       |       |
| Total operating expenses                            |       | 6,924                                     |       | 17,378                                   |       |
|                                                |       |                                      |       |                                     |       |
| OPERATING INCOME                                    |       | 10,293                                    |       | 7,042                                    |       |
|                                                |       |                                      |       |                                     |       |
| OTHER INCOME (EXPENSE):                             |       |                                      |       |                                     |       |
| Interest income                                     |       | 101                                       |       | 149                                      |       |
| Interest expense                                    |       | (6,597                                    | )          | (7,856                                   | )          |
| Gain on extinguishment of debt                      |       | 1,725                                     |       | —                                   |       |
| Other income (expense)                              |       | 5                                         |       | (2                                       | )          |
| Total other income (expense)                        |       | (4,766                                    | )          | (7,709                                   | )          |
|                                                |       |                                      |       |                                     |       |
| INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT) |       | 5,527                                     |       | (667                                     | )          |
| INCOME TAX PROVISION (BENEFIT)                      |       | 2,211                                     |       | (307                                     | )          |
| NET EARNINGS (LOSS)                                 |       | $                                         | 3,316      |                                     | $          | (360 | ) |

 

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)**

 
| ** **                                                                                  | ** ** | **Six Months  Ended  June 30, 2008** | ** ** | **Six Months  Ended  June 30, 2007** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| OPERATING ACTIVITIES:                                                                       |       |                                      |       |                                      |       |
| Net earnings (loss)                                                                         |       | $                                         | 3,316      |                                      | $          | (360 | ) |
|                                                                                        |       |                                      |       |                                      |       |
| Adjustments to reconcile net earnings (loss) to net cash provided by  operating activities: |       |                                      |       |                                      |       |
| Depreciation and amortization                                                               |       | 4,451                                     |       | 4,383                                     |       |
| (Gain) loss on sale of assets                                                               |       | (1                                        | )          | 51                                        |       |
| Amortization of debt issue costs                                                            |       | 760                                       |       | 1,405                                     |       |
| Gain on extinguishment of debt                                                              |       | (1,725                                    | )          | —                                    |       |
| Deferred income taxes                                                                       |       | —                                    |       | (33                                       | )          |
| Stock compensation expense                                                                  |       | 25                                        |       | 1,029                                     |       |
| Current portion of tax benefit due to Seller                                                |       | —                                    |       | (4,106                                    | )          |
|                                                                                        |       |                                      |       |                                      |       |
| Change in operating assets and liabilities:                                                 |       |                                      |       |                                      |       |
| Accounts receivable                                                                         |       | (1,092                                    | )          | (4,602                                    | )          |
| Inventories                                                                                 |       | 434                                       |       | 1,029                                     |       |
| Other current assets                                                                        |       | (562                                      | )          | 2,391                                     |       |
| Accounts payable                                                                            |       | 355                                       |       | 658                                       |       |
| Due to Parent                                                                               |       | 2,007                                     |       | —                                    |       |
| Accrued payroll and other current liabilities                                               |       | (7,545                                    | )          | (485                                      | )          |
| Other long-term liabilities                                                                 |       | —                                    |       | 115                                       |       |
| Net cash provided by operating activities                                                   |       | 423                                       |       | 1,475                                     |       |
|                                                                                        |       |                                      |       |                                      |       |
| INVESTING ACTIVITIES:                                                                       |       |                                      |       |                                      |       |
| Purchases of property, plant, and equipment                                                 |       | (2,638                                    | )          | (4,301                                    | )          |
| Proceeds from sale of assets                                                                |       | 4                                         |       | 34                                        |       |
| DMI earn-out payment                                                                        |       | —                                    |       | (4,000                                    | )          |
| Net cash used in investing activities                                                       |       | (2,634                                    | )          | (8,267                                    | )          |
|                                                                                        |       |                                      |       |                                      |       |
| FINANCING ACTIVITIES:                                                                       |       |                                      |       |                                      |       |
| Principal payments under long-term financing agreements                                     |       | (16,901                                   | )          | (8,590                                    | )          |
| Recapitalization – equity contribution                                                 |       | —                                    |       | 21,747                                    |       |
| Debt issuance costs                                                                         |       | (29                                       | )          | (3,616                                    | )          |
| Recapitalization – repurchase of stock options                                         |       | —                                    |       | (7,880                                    | )          |
| Expenses paid on behalf of Parent                                                           |       | —                                    |       | (1,640                                    | )          |
| Distribution to Parent                                                                      |       | (4,478                                    | )          | —                                    |       |
| Borrowings of long-term debt                                                                |       | 6,600                                     |       | 10,152                                    |       |
| Net cash (used in) provided by financing activities                                         |       | (14,808                                   | )          | 10,173                                    |       |
|                                                                                        |       |                                      |       |                                      |       |
| NET (DECREASE) INCREASE IN CASH                                                             |       | (17,019                                   | )          | 3,381                                     |       |
| CASH—Beginning of period                                                               |       | 19,574                                    |       | 8,048                                     |       |
|                                                                                        |       |                                      |       |                                      |       |
| CASH—End of period                                                                     |       | $                                         | 2,555      |                                      | $          | 11,429 |   |
|                                                                                        |       |                                      |       |                                      |       |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                                         |       |                                      |       |                                      |       |
| Cash paid for interest                                                                      |       | $                                         | 6,375      |                                      | $          | 6,556 |   |
|                                                                                        |       |                                      |       |                                      |       |
| Cash paid for income taxes—net                                                         |       | $                                         | 363        |                                      | $          | 351 |   |
| 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                                                    |       | $                                         | —     |                                      | $          | 339 |   |

 

See notes to condensed consolidated financialstatements (unaudited).

 

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED**

**CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.  BASIS OF PRESENTATION**

 

***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 newaccounting basis because of the significance of the publicly traded debt outstanding,which hinders the Parent’s ability to control the form of ownership of theCompany.

 

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, 2007 included in its Form 10-K as filed with theSecurities and Exchange Commission on March 28, 2008.  The condensed consolidated balance sheet asof 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 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, 2007 included in our Form 10-K asfiled with the Securities and Exchange Commission on March 28, 2008, 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**

 

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

 
| ** **      | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                       | 11,251     |                        | $          | 11,021 |   |
| Work in process |       | 4,448                   |       | 5,187                       |       |
| Finished goods  |       | 3,561                   |       | 4,198                       |       |
| LIFO adjustment |       | 1,131                   |       | 419                         |       |
|            |       | $                       | 20,391     |                        | $          | 20,825 |   |

 

The majority of inventoryis valued at the lower of last-in, first-out (“LIFO”) cost or market.  The remainder of the inventory is valuedunder the first-in, first-out method (“FIFO”). As of June 30, 2008 and December 31, 2007, inventory on theLIFO method represented 67% and 65%, respectively, of consolidated inventories.

 

***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.  Fair value is measuredusing a market multiple valuation method. The carrying amount of goodwill was $112.7 million at December 31,2007 and June 30, 2008.

 

***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 June 30, 2008 is $5.8 million.  The intangible assets are being amortizedover the estimated life of 10 

 

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years.  Amortization was $829,000 for the six-monthperiods ended June 30, 2008 and 2007. Expected annual amortization is as follows 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 to agreementswith the former owners of Brentwood, Grand Valley, and Dimension Moldings, Inc.  The original cost of these noncompeteagreements was $2.4 million, and the related accumulated amortization as of June 30,2008 is $2.3 million.  Noncompete rightsare being 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 $17,000and $232,000 for the six-month periods ended June 30, 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.

 

In December 2007, The FASB issued SFAS No. 141 (R),Business Combinations or SFAS 141(R). SFAS 141(R) establishes principles and requirements for how anacquirer recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, any non-controlling interest in theacquirer and the goodwill acquired.  SFAS141(R) also establishes disclosure requirements to enable the evaluationof the nature and financial effects of the business combination.  SFAS No. 141(R) is effective forfiscal years beginning after December 15, 2008.  The Company does not expect the adoption ofSFAS No. 141(R) to have any significant impact on the Company’saccounting treatment for business combinations on a prospective basis beginningin the period it is adopted.

 

The Companyadopted SFAS 157 & SFAS 159 on January 1, 2008.  The Companydid not elect the fair value of accounting option for any eligible assets;therefore, the adoption of these standards had no impact on our financialstatements.

 

InFebruary 2008, the FASB issued FSP SFAS 157-2, Effective Date of FASB StatementNo. 157 (“FSP SFAS 157-2”).  FSP157-2 delays the effective date of SFAS 157 for non-financial assets andnon-financial liabilities, except those that are recognized or disclosed atfair value in the financial statements on a recurring basis (at leastannually).  The Company will adopt SFAS 157 for non-financial assets andnon-financial liabilities on December 31, 2008, and does not anticipatethis adoption to have a material impact on our financial statements.

 

In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities-an amendmentof FASB Statement No. 133” SFAS No. 161 which will require increaseddisclosure about: (i) an entity’s strategies and objectives for usingderivative instruments, (ii) the location and amounts of derivativeinstruments in an entity’s financial statements, (iii) how derivativeinstruments and related hedged items are accounted for under SFAS No 133, “Accountingfor Derivative Instruments and Hedging Activities,” and (iv) howderivative instruments and related hedged items affect its financial position,financial performance, and cash flows. Certain disclosures will also be required with respect to derivativefeatures that are credit-risk related. SFAS No. 161 is effective for the Company beginning January 1,2009 on a prospective basis.  The Companydoes not expect this standard to have a material impact on our consolidatedresults of operations or financial condition.

 

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**3.RECAPITALIZATION AND OTHER ACQUISITIONS**

 

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 new senior creditfacility (the “New Senior Credit Facility”), with Credit Suisse, Cayman IslandsBranch, which provided for (i) a senior secured first lien term loanfacility in an aggregate principal amount of $150.0 million (the “First LienTerm Facility”) and (ii) a senior secured first lien revolving creditfacility in an aggregate principal amount up to $25.0 million, subject tocertain conditions (the “Revolving Facility” and, together with the First LienTerm Facility, the “First Lien Facilities”), of which $10.0 million isavailable through a subfacility in the form of letters of credit.

 

In conjunction with theTransaction, the Parent entered into Note Purchase Agreements with OCMMezzanine Fund II, L.P. and Olympus Growth Fund IV, L.P.  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.  TheCompany is, however, subject to a number of restrictive covenants under theNote Purchase Agreements.  The Companywas in compliance with the restrictive covenants at June 30, 2008.  In addition, the Company is limited in itsability to pay dividends or otherwise make distributions to Parent under theNew Senior Credit Facility and the indenture governing the 10% Senior Notes due2012 (the “Senior Notes”).  The ParentNotes are not reflected in the Company’s consolidated balance sheet due to thesignificance of the public debt holders’ influence on the Company’s ability tocontrol the form of ownership.  Effectiveas of June 13, 2007, the Parent issued an additional $20.0 million ofParent Notes to Olympus Growth Fund IV, L.P., and repurchased $20.0 million ofParent Notes from OCM Mezzanine Fund II, L.P. During the six month period ended June 30, 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, 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 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 thisagreement, there was $6.2 million paid during the three-month period ended March 31,2008.  As of June 30, 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 million in the three months endedMarch 31, 2007 related to the Transaction. These expenses comprised $1.0 million of compensation expense related toaccelerated vesting of stock options, $0.2 million of employer related payrolltaxes for the accelerated vesting of stock options, $1.3 million of transactionincentive expenses, $7.0 million of 

 

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transaction costsand $0.4 million of deferred financing costs related to refinancedindebtedness.  In addition to theseamounts, 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 acquired substantially all of theassets of a moldings manufacturing company operating under the name ofDMI.  The Company paid a cash purchaseprice at closing of $9.3 million, of which one-half was funded by the saleof shares of the Company’s voting common stock to the Company’s formerstockholders, and the remainder with operating cash and a draw down on theCompany’s senior secured credit facility. In addition, the Company was required to pay up to an aggregate of $7.0million if certain earnings targets are met at the end of each calendar yearfrom 2005 to 2010, which may be accelerated upon certain events.  The Company paid $2.0 million of the earn-outconsideration in the first quarter 2006. As a result of the change in control caused by the Transaction, theremaining $5.0 million potential earn-out obligation was accelerated and paidon January 9, 2007.  As a result ofthe additional earn-out consideration paid, the total purchase price, includingearn-out or acceleration obligations, resulted in goodwill of $5.1 million dueto the purchase 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 hasoutstanding 10% Senior Notes due in 2012. During the three months ended March 31, 2008, the Company purchasedand canceled approximately $11.5 million in principal amount of the SeniorNotes for payment of $9.8 million resulting in a gain on extinguishment of debtof approximately $1.7 million.  TheCompany used available cash and borrowings under its Revolving Facility forpayment thereof.

 

Inconjunction with the Transaction on January 9, 2007, the Company enteredinto the New Senior Credit Facility with Credit Suisse, Cayman Islands Branch,which provided for (i) the First Lien Term Facility in an aggregateprincipal amount of $150.0 million and (ii) the Revolving Facility in anaggregate principal amount up to $25.0 million, subject to certain conditions,of which $10.0 million is available through a subfacility in the form ofletters of credit.  Subject to certainconditions, the First Lien Term 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 June 30, 2008, themaximum amount of borrowings available to the Company under the RevolvingFacility was $12.5 million.  As of June 30,2008, borrowings of $4.0 million were outstanding under the First Lien TermFacility and nothing was outstanding under the Revolving Facility.  As of June 30, 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 (effectiverate of 6.55% at June 30, 2008).  Wemust comply with certain financial covenants under our New Senior CreditFacility, including maintenance of an interest coverage ratio, a seniorleverage ratio and a total leverage ratio.  We were in compliance with such covenants asof June 30, 2008.  The New Senior Credit Facility iscollateralized by substantially all assets of the Company and is scheduled tomature in January 2013.

 

Our New 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.  Indebtedness for borrowed money incurredunder our New Senior Credit Facility is secured by substantially all of ourassets, including our real and personal property, inventory, accountsreceivable, intellectual property and other intangibles.

 

**5.RELATED-PARTY TRANSACTIONS**

 

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

 

Parent has a managementservices agreement with Olympus Advisory Partners, an affiliate of the Parent’slargest stockholder.  Parent is obligatedto pay a transaction fee to the affiliate for services provided for eachfinancing, refinancing, acquisition, or similar nonrecurring transaction.  The affiliate will be paid $0.6 millionannually by Parent for ongoing services provided to the Parent and Company.  The Company paid a total of $300,000 and $250,000to the Parent for these services during the six-month periods ended June 30,2008 and 2007, respectively; and the Company paid a total of $150,000 to theParent for these services during each of the three-month periods ended June 30,2008 and 2007.

 

The Company and itsParent file a consolidated federal income tax return, and federal income taxesare allocated to the Company based upon the respective taxable earnings orloss.  The Company records income taxliabilities as an amount due to Parent.  As of June 30, 2008 and December 31, 2007, the Companyincluded a total of $6.1 million and $4.1 million, respectively as an amountdue 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.  

 

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The Company has two primary product categories: hardwood products andengineered wood products.  Hardwoodproducts produce a comprehensive line of hardwood doors and components.  Engineered wood products includes rigid thermofoildoors and components, veneer raised panels, and wrapped profiles.

 

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

 
| ** **               | ** ** | **Six Months Ended   June 30,** | ** ** | **ThreeMonths Ended   June 30,** | ** ** |
|--------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|
| ** **               | ** ** | **2008**                             | ** ** | **2007**                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Hardwood products        |       | $                                    | 92,088     |                                  | $          | 107,348 |   | $ | 45,595 |   | $ | 57,095 |   |
| Engineered wood products |       | 20,035                               |       | 21,434                                |       | 10,509 |   | 10,681 |   |
| Total                    |       | $                                    | 112,123    |                                  | $          | 128,782 |   | $ | 56,104 |   | $ | 67,776 |   |

 

Substantially all sales are made 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, the terms “we,” “us” or “our” refer to WII Components, Inc.and its consolidated subsidiaries 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 and 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 foradditional manufacturing 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

 

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·                  increases in the cost oflabor.

 

**Overview**

 

We believe that we are one of theleading manufacturers of hardwood doors, hardwood components and engineeredwood products for the kitchen and bath cabinet market in the UnitedStates.  Our products include (1) hardwoodcabinet door components, face frames and drawer fronts, (2) fullyassembled hardwood cabinet doors, (3) rigid thermofoil, or RTF, cabinetdoors and components, (4) veneer raised panels, or VRPs, and (5) avariety of laminated and profile-wrapped components.  We generate approximately 94% of our salesfrom 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 thirteenmanufacturing facilities located in Minnesota, North Dakota, Oregon, Ohio,Kansas, Pennsylvania, Utah, North Carolina, Washington and Kentucky that allowus to distribute our products nationwide.

 

In the past ten years, we have consummated four strategic acquisitionsthat have enhanced our market position, product breadth and geographicreach.  In June 1998, we acquiredPrimeWood, a manufacturer of RTF, VRP and profile-wrapped engineered woodproducts 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), whichwas in the business of manufacturing hardwood component moldings at a facilitylocated in Middlefield, Ohio.  Followingthe acquisition, our Woodcraft subsidiary manufactures hardwood componentmoldings at the Middlefield facility.

 

OnJanuary 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.”  Theacquisition was consummated through a merger of WII Merger Corporation (“MergerCo”),a wholly owned subsidiary of Parent, with and into the Company with the Companybeing the 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 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**

 

***Three Months Ended June 30, 2008 Compared to the ThreeMonths Ended June 30, 2007***

 

The following tableincludes, for the three months ended June 30, 2008 and 2007, selectedoperating data derived from our condensed consolidated statements of earningsand presents this information as a percentage of net sales:

 
| ** **               | ** ** | **WII Components, Inc.**                | ** ** |
|--------------------------|------------|----------------------------------------------|------------|
| ** **               | ** ** | **Three Months   Ended  June 30, 2008** | ** ** | **Three Months   Ended  June 30, 2007** | ** ** |
| ** **               | ** ** | **(dollars in thousands)**                   | ** ** |
| Net sales                |       | $                                            | 56,104     |   | $ | 67,776 |   |
| *% of net sales*         | * *   | *100.0*                                      | *%*        | *100.0* | *%* |
| Cost of sales            |       | 46,713                                       |       | 54,105 |   |
| *% of net sales*         | * *   | *83.3*                                       | *%*        | *79.8* | *%* |
| * *                 | * *   | * *                                     | * *   | * * | * * |
| Gross profit             |       | 9,391                                        |       | 13,671 |   |
| *% of net sales*         | * *   | *16.7*                                       | *%*        | *20.2* | *%* |
| Operating expenses       |       | 3,326                                        |       | 4,167 |   |
| *% of net sales*         | * *   | *5.9*                                        | *%*        | *6.1* | *%* |
| * *                 | * *   | * *                                     | * *   | * * | * * |
| Operating income         |       | 6,065                                        |       | 9,504 |   |
| *% of net sales*         | * *   | *10.8*                                       | *%*        | *14.0* | *%* |
| Other expenses (income): |       |                                         |       |   |   |
| Interest expense         |       | 3,289                                        |       | 3,832 |   |
| *% of net sales*         | * *   | *5.8*                                        | *%*        | *5.7* | *%* |
| Other income, net        |       | (10                                          | )          | (96 | ) |
| *% of net sales*         | * *   | *-0.0*                                       | *%*        | *-0.1* | *%* |
| Income tax provision     |       | 1,153                                        |       | 3,787 |   |
| *% of net sales*         | * *   | *2.1*                                        | *%*        | *5.6* | *%* |
| * *                 | * *   | * *                                     | * *   | * * | * * |
| Net earnings             |       | 1,633                                        |       | 1,981 |   |
| *% of net sales*         | * *   | *2.9*                                        | *%*        | *2.9* | *%* |
|                          |            |                                              |            |  |  |  |  |

 

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*Netsales.*  Net sales decreased $11.7 million, or17.3%, from $67.8 million for the three months ended June 30, 2007 to$56.1 million for the three months ended June 30, 2008.  Sales in our hardwood and engineered woodproduct line decreased $11.5 million and $0.2 million, respectively.  These decreases are attributable to acombination of (i) an overall slowdown in the market that began in thesecond half of 2006, and (ii) lower selling prices mainly due to lowermaterial costs.

 

*Cost ofsales.*  Cost of sales decreased $7.4 million, or13.7%, from $54.1 million for the three months ended June 30, 2007 to$46.7 million for the three months ended June 30, 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) favorable LIFO cost ofmaterial adjustment in 2008 versus 2007 and (ii) lower hardwood materialcosts. These were partially offset by (i) increased multi-density fiberboard and particle board costs related to our engineered wood products line, (ii) higher labor costs due to lowerefficiencies in conjunction with lower sales volume, and (iii) higheroverhead costs due to added production facilities with lower sales volume in2008.

 

*Grossprofit.*  Gross profit decreased $4.3 million, or31.4%, from $13.7 million for the three months ended June 30, 2007 to$9.4 million for the same period in 2008. As a percentage of net sales, our gross profit decreased 350 basispoints from 20.2% for the three months ended June 30, 2007 to 16.7% forthe same period in 2008.  This decreaseis related to (i) higher labor costs due to lower efficiencies inconjunction with lower sales volume (ii) higher overhead costs due toadded production facilities with lower sales volume, (iii) increasedmulti-density fiber board and particle board costs related to our engineeredwood products line, and(iv) lower selling prices in 2008 mainly due to material cost decreasesthat have occurred over the past year.  This decease was partially offset by (i) favorable LIFO cost ofmaterial adjustment in 2008 versus 2007 and (ii) lower hardwood materialcosts.

 

*Operating expenses.* Operating expenses decreased $0.9 million, or 21.4%, from$4.2 million for the three months ended June 30, 2007 to$3.3 million for the same period in 2008. The decrease consists of (i) $0.4 million of lower incentiveexpense, (ii) $0.4 million of fees related to efforts to refinance aportion of the outstanding debt in 2007, and (iii) $0.1 million of loweramortization expense in 2008.

 

*Operatingincome.*  Operating income decreased by$3.4 million, or 35.8%, from $9.5 million for the three months ended June 30,2007 to $6.1 million for the three months ended June 30, 2008 as aresult of the net effect of the factors described above.

 

*Interestexpense.*  Interest expense decreased $0.5 million,or 13.2%, from $3.8 million for the three months ended June 30, 2007to $3.3 million for the three months ended June 30, 2008.  This decrease relates to (i) $0.2million in lower amortized deferred financing fees in 2008, and (ii) lowerinterest expense in 2008 due to lower debt balances for the Senior Notes andthe First Lien Term Facility.

 

*Otherincome.*  Other income was $96,000 and $10,000 for thethree months ended June 30, 2007 and June 30, 2008, respectively.  This income mainly represents interestreceived from our interest bearing accounts.

 

*Incometax expense.*  Income tax expense decreased $2.6 million,from an income tax expense of $3.8 million for the three months ended June 30,2007 to $1.2 million for the three months ended June 30, 2008 due todecreased earnings in 2008.  Theeffective tax rate decreased from 65.7% in 2007 to 41.4% in 2008 due to theimpact of permanent differences associated with the Transaction in 2007.

 

*Netearnings.*  Net earnings decreased $0.4 million, or20.0%, from a net income of $2.0 million for the three months ended June 30,2007 to $1.6 million for the three months ended June 30, 2008 as a resultof the factors described above.

 

**Results of Operations**

 

***Six Months Ended June 30, 2008Compared to the Six Months Ended June 30, 2007***

 

Thefollowing table includes, for the six months ended June 30, 2008 and forthe six months ended June 30, 2007, selected operating data derived fromour condensed consolidated statements of operations and presents thisinformation as a percentage of net sales:

 

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| ** **                     | ** ** | **WII Components, Inc.**            | ** ** |
|--------------------------------|------------|------------------------------------------|------------|
| ** **                     | ** ** | **Six Months Ended  June 30, 2008** | ** ** | **Six Months Ended  June 30, 2007** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**               | ** ** |
| Net sales                      |       | $                                        | 112,123    |   | $ | 128,782 |   |
| *% of net sales*               | * *   | *100.0*                                  | *%*        | *100.0* | *%* |
| Cost of sales                  |       | 94,906                                   |       | 104,362 |   |
| *% of net sales*               | * *   | *84.6*                                   | *%*        | *81.0* | *%* |
| * *                       | * *   | * *                                 | * *   | * * | * * |
| Gross profit                   |       | 17,217                                   |       | 24,420 |   |
| *% of net sales*               | * *   | *15.4*                                   | *%*        | *19.0* | *%* |
| Operating expenses             |       | 6,924                                    |       | 17,378 |   |
| *% of net sales*               | * *   | *6.2*                                    | *%*        | *13.5* | *%* |
| * *                       | * *   | * *                                 | * *   | * * | * * |
| Operating income               |       | 10,293                                   |       | 7,042 |   |
| *% of net sales*               | * *   | *9.2*                                    | *%*        | *5.5* | *%* |
| Other expenses (income):       |       |                                     |       |   |   |
| Interest expense               |       | 6,597                                    |       | 7,856 |   |
| *% of net sales*               | * *   | *5.9*                                    | *%*        | *6.1* | *%* |
| Other income, net              |       | (1,831                                   | )          | (147 | ) |
| *% of net sales*               | * *   | *-1.7*                                   | *%*        | *-0.1* | *%* |
| Income tax provision (benefit) |       | 2,211                                    |       | (307 | ) |
| *% of net sales*               | * *   | *2.0*                                    | *%*        | *-0.2* | *%* |
| * *                       | * *   | * *                                 | * *   | * * | * * |
| Net earnings (loss)            |       | 3,316                                    |       | (360 | ) |
| *% of net sales*               | * *   | *3.0*                                    | *%*        | *-0.3* | *%* |
|                                |            |                                          |            |  |  |  |  |

 

*Net sales.*  Net sales decreased $16.7 million, or13.0%, from $128.8 million for the six months ended June 30, 2007 to$112.1 million for the six months ended June 30, 2008.  Sales in our hardwood and engineered woodproduct line decreased $15.3 million and $1.4 million, respectively.  These decreases are attributable to a combination of (i) anoverall slowdown in the market that began in the second half of 2006, and (ii) lowerselling prices mainly due to lower material costs.

 

*Cost of sales.*  Cost of sales decreased $9.5 million, or9.1%, from $104.4 million for the six months ended June 30, 2007 to$94.9 million for the six months ended June 30, 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) increased multi-density fiber board and particleboard costs related to our engineered wood products line, (ii) higher labor costs due to lowerefficiencies in conjunction with lower sales volume, (iii) unfavorableLIFO cost of material adjustment in 2008 versus 2007, and (iv) higheroverhead costs due to added production facilities with lower sales volume in2008.

 

*Gross profit.*  Gross profit decreased $7.2 million, or29.5%, from $24.4 million for the six months ended June 30, 2007 to$17.2 million for the same period in 2008. As a percentage of net sales, our gross profit decreased 360 basispoints from 19.0% for the six months ended June 30, 2007 to 15.4% for thesame period in 2008.  This decrease is related to (i) higherlabor costs due to lower efficiencies in conjunction with lower sales volume (ii) higheroverhead costs due to added production facilities with lower sales volume, (iii) increasedmulti-density fiber board and particle board costs related to our engineeredwood products line, (iv) unfavorable LIFO cost of material adjustment in 2008versus 2007, and (v) lower selling prices in 2008 mainly due to materialcost decreases that have occurred over the past year.   This decrease was partially offset by (i) lowerstock compensation expense in 2008, and (ii) lower hardwood materialcosts.

 

*Operatingexpenses.*  Operatingexpenses decreased $10.5 million, or 60.3%, from $17.4 million forthe six months ended June 30, 2007 to $6.9 million for the sameperiod in 2008.  The decrease consists ofapproximately; (i) $7.2million of transaction expenses in 2007 related to the Transaction, (ii) $0.5million 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, (iv) $1.0 million related to lower stockcompensation expense and lower salaries due to eliminated positions in 2008, (v) $0.3million in lower professional fees, and (vi) $0.4 million lower incentiveexpense.

 

*Operating income.*  Operating income increased by$3.3 million, or 47.1%, from $7.0 million for the six months ended June 30,2007 to $10.3 million for the six months ended June 30, 2008 as aresult of the net effect of the factors described above.

 

*Interest expense.*  Interest expense decreased $1.3 million,or 16.5%, from $7.9 million for the six months ended June 30, 2007 to$6.6 million for the six months ended June 30, 2008.  This decrease relates to (i) $0.3 million inlower deferred financing fees in 2008, and (ii) lower interest expense in2008 due to lower debt balances for the Senior Notes and the First Lien TermFacility.

 

*Other income.*  Other income increased $1.7 million, from$0.1 million for the six months ended June 30, 2007 to $1.8 million forthe six months ended June 30, 2008. 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 $2.5 millionfrom an income tax benefit of $0.3 for the six months ended June 30, 2007to an income tax provision of $2.2 million for the six months ended June 30,2008 as a result of higher earnings.  Theeffective tax 

 

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ratedecreased from 46.0% in 2007 to 40.0% in 2008 due to permanent differencesassociated with the Transaction.

 

*Net earnings.*  Net earnings increased $3.7 million froma net loss of $0.4 million for the six months ended June 30, 2007 toa net earnings of $3.3 million for the six months ended June 30, 2008 as aresult of the factors described above.

 

**Liquidityand Capital Resources**

 

Our primary cash needs are working capital, capitalexpenditures and debt service.  We havehistorically financed these cash requirements through internally generated cashflow and funds borrowed under our existing senior secured credit facilities.

 

The Company hasoutstanding 10% Senior Notes due in 2012. During the three months ended March 31, 2008, the Company purchasedand canceled approximately $11.5 million in principal amount of the SeniorNotes for payment of $9.8 million resulting in a gain on extinguishment of debtof approximately $1.7 million.  TheCompany used available cash and borrowings under its Revolving Facility forpayment thereof.

 

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 other than the Senior Notes and itsinvestments in such guarantor subsidiaries. As a result, the Company has not presented separate financial statementsof the subsidiary guarantors.

 

Inconjunction with the Transaction on January 9, 2007, the Company enteredinto the New Senior Credit Facility with Credit Suisse, Cayman Islands Branch,which provided for (i) the First Lien Term Facility in an aggregateprincipal amount of $150.0 million and (ii) the Revolving Facility in anaggregate principal amount up to $25.0 million, subject to certain conditions,of which $10.0 million is available through a subfacility in the form ofletters of credit.  Subject to certainconditions, the First Lien Term Facility may be increased by up to $30.0million during the life of the First Lien Term Facility at the request of theCompany with the consent from those lenders who 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 June 30, 2008, themaximum amount of borrowings available to the Company under the RevolvingFacility was $12.5 million.  As of June 30,2008, borrowings of $4.0 million were outstanding under the First Lien TermFacility and nothing was outstanding under the Revolving Facility.  As of June 30, 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 6.55%at June 30, 2008).  We must complywith certain financial covenants under our New Senior Credit Facility,including maintenance of an interest coverage ratio, a senior leverage ratioand a total leverage ratio.  We were incompliance with such covenants as of June 30, 2008.  Indebtedness for borrowedmoney incurred under our New Senior Credit Facility is secured by substantiallyall 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 June 30, 2008,the weighted average interest rate for the Company’s outstanding debt was 9.9%.

 

Our New 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.

 

As of June 30, 2008 and December 31, 2007,we had capital lease obligations of $0.4 million and $0.5 million,respectively, all of which was classified as current.

 

As of June 30, 2008, we had $2.6 million of cashand cash equivalents available for any corporate purposes, compared to $19.6million as of December 31, 2007. Cash and cash equivalents as of December 31, 2007 includedapproximately $6.2 million related to income tax refunds due to previousstockholders of the Company, which is included in Other Current Liabilities onthe Balance Sheet as of December 31, 2007 and paid during in the threemonths ended March 31, 2008.

 

*Cashflow from operating activities.*  Cash providedby operating activities was $0.4 million for the six months ended June 30,2008, while cash provided by operating activities for the six months ended June 30,2007 was $1.5 million.  The decrease incash provided by operating activities is mainly attributable to the payment of$6.2 million for income tax refunds that were due to previous stockholders ofthe Company related to deductible transaction costs.  This was partially offset with higher netincome and amount Due to Parent.

 

*Cashflow from investing activities.*  Net cash usedin investing activities was $2.6 million for the six months ended June 30,2008 and $8.3 million for the six months ended June 30, 2007.  Capital expenditures in the six months ended June 30,2008 were $2.6 million compared to $4.3 million for the six months ended June 30,2007.  The decrease in capitalexpenditures in 2008 is primarily due to lower capital expenditures needed forcapacity requirements.  Net cash used ininvesting activities for the six months ended June 30, 2007 includes $4.0million due to an accelerated Dimension Moldings, Inc. earn-out payment inconjunction with the Transaction.

 

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*Cashflow from financing activities.*  Net cash usedby financing activities for the six months ended June 30, 2008 totaled$14.8 million primarily due to (i) the purchase and cancellation ofapproximately $11.5 million in principal amount of the Senior Notes at a net ofdiscount cost of $9.8 million, (ii) capital lease payments of $0.1million, (iii) principal payments on the New Senior Credit Facility of$0.4 million, and (iv) a distribution on behalf of the Parent forprincipal and interest on a portion of the Parent Notes of $4.5 million.  Net cash provided byfinancing activities for the six months ended June 30, 2007 totaled $10.2million primarily due to (i) capital contributions of $21.7 million thatfunded debt issuance costs of $3.6 million and stock option payments of $7.9million, (ii) borrowings of long-term debt under the New Senior CreditFacility of $10.2 million that funded the payoff of the 2005 Senior CreditFacility of $7.5 million, (iii) capital lease payments of $0.2 million, (iv) principalpayments on the New Senior Credit Facility of $0.8 million, and (v) adistribution on behalf of the Parent for costs in conjunction with theTransaction of $1.6 million.

 

We anticipate that thefunds generated by operations and funds available under the New Senior CreditFacility will be sufficient to meet working capital requirements and to financecapital expenditures for the foreseeable future, including the next twelvemonths.  We cannot provide assurancesthat our business will generate sufficient cash flow from operations, thatanticipated net sales growth and operating improvements will be realized orthat future borrowings will be available under our New Senior Credit Facilityin an amount sufficient to enable us to service our indebtedness, including theSenior 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 NewSenior Credit Facility and the Senior Notes, on commercially reasonable terms,if at all.  We intend to incur additionalcapital expenditures in the ordinary course of business.

 

**Inflation**

 

Our cost of sales issubject to inflationary pressures on labor costs, prices of the raw materialswe use and various overhead costs.  Wegenerally have been able over time to offset the effects of inflation and pricefluctuations through a combination of sales price increases and operationalefficiencies.

 

**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, 2007, we identified the criticalaccounting policies, which affect our more significant estimates andassumptions used in preparing our consolidated financial statements.  We have not changed these policies from thosepreviously disclosed in our annual report.

 

**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, interest rates, and marketconditions.

 

*Commodityprice risk.*  Hardwood lumber accounts for the largestportion of our material costs.  Ourprofitability is therefore affected by the prices of lumber which may fluctuatebased on a number of factors beyond our control, including, among others,changes in supply and demand, general economic conditions, labor costs, competitionand, in some cases, government regulation. Though we are not dependent on anysingle supplier for our raw materials, we have no long-term supply contractsand 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.

 

*Interestrate risk.*  We are exposed to market risk relating tochanges in interest rates in respect of a portion of our long-term debt and aportion of our capital leases.  As of June 30,2008, we had $4.0 million outstanding under the First Lien Term Facility, whichbears interest at variable rates.  Inaddition, as of that date, we had approximately $0.3 million of capital leasesthat bear interest at variable rates.  Webelieve that a one percent (1%) increase in the interest rates currently ineffect would not have a material adverse effect on our financial condition orresults of operations.

 

*Marketconditions. *The Company derives a significant portionof its revenue as a result of the demand for its products created by thebuilding of new homes, and repair and remodeling of existing homes.  During the second half of 2006, the homebuilding, repair and remodeling industry experienced a slowdown as a result ofgeneral economic conditions.  Thisslowdown has continued into 2008, and has had a negative impact on our resultsof operations for the six months ended June 30, 2008.  If this slowdown were 

 

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to continue or worsenover an extended period of time, it could have a material adverse effect on theCompany’s business, financial condition or results of operations.

 

### **Item 4T.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 June 30,2008.  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 executive and principal financials offiers, or persons performingsimilar functions, as appropriate to allow timely decisions regarding requireddisclosure.  Our disclosure controls andprocedures are designed to provide us with a reasonably level of assurance ofachieving their objectives as outlined above. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that they believe that, as of June 30,2008, our disclosure controls and procedures were not effective at a reasonablelevel of assurance.  In reaching thisconclusion, the Chief Executive Officer and Chief Financial Officer noted thatwe failed to include in our Annual Report on Form 10-K for the year endedDecember 31, 2007 a report by management on the Company’s internal control overfinancial reporting and the certifications contained in Exhibits 31.1 and 31.2to that Annual Report and our Quarterly Report on Form 10-Q for the quarterlyperiod ended March 31, 2008 did not include the required certificationsrelating to the Company’s internal controls over financial reporting asrequired by applicable SEC regulations. We became aware of these reportingdeficiencies subsequent to June 30, 2008 and are in the process of amendingsuch reports to correct these omissions. We have included the requiredcertifications in Exhibits 31.1 and 31.2 to this Quarterly Report. We arecurrently reviewing our disclosure controls and procedures to correct thedeficiency that lead to this inadvertent omission and expect to implementchanges in the near term.

 

(b)           Changes in internal controls overfinancial reporting.

 

There were no changes inour internal controls over financial reporting during our second fiscal quarterthat have materially affected, or are reasonably likely to materially affect,our internal controls over financial reporting.

 

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**PART II—OTHER INFORMATION**

 

**Item1. Legal Proceedings**

 

No pending material legalproceedings.

 

**Item1A. Risk Factors**

 

TheCompany has included in its Annual Report on Form 10-K for the year ended December 31,2007, 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 IA of this Form 10-Q.  Investors should consider the Risk Factorsprior to making an investment decision with respect to the Company’ssecurities.

 

Inaddition, the following Risk Factor should be considered prior to making aninvestment decision with respect to the Company’s securities:

 

***If the current slowdown in the home building, repair and remodelingindustry continues for an extended period of time, it could have a materialadverse effect on the Company’s business, financial condition or results of operations. ***The Company derives a significant portion of itsrevenue as a result of the demand for its products created by the building ofnew homes, and repair and remodeling of existing homes.  During the second half of 2006, the homebuilding, repair and remodeling industry experienced a slowdown as a result ofgeneral economic conditions.  Thisslowdown has continued into 2008, and has had a negative impact on our resultsof operations for the six months ended June 30, 2008.  If this slowdown were to continue or worsenover an extended period of time, it could have a material adverse effect on theCompany’s business, financial condition or results of operations.

 

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

 

None.

 

**Item3. Defaults Upon Senior Securities**

 

None.

 

**Item4. Submission of Matters to a Vote of Security Holders**

 

None.

 

**Item5. Other Information**

 

### **None.**

### ** **

### **Item6. 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: August 14,  2008 | By:                  |   |
|                         |                 | /s/ John Fitzpatrick |
|                         |                 | John Fitzpatrick |
|                         |                 | President and Chief  Executive Officer |
|                         |                 | (Principal Executive  Officer) |
| Dated: August 14,  2008 |                 |   |
|                         |                 | /s/ Dale B. Herbst |
|                         |                 | Dale B. Herbst |
|                         |                 | Chief Financial  Officer, Treasurer and Secretary |
|                         |                 | (Principal Financial  and Accounting Officer) |

 

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