**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, 2007** |
| ** **                                        |       | ** **                                                                                                        |
| **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 itscharter)

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

 

**525 Lincoln Avenue SE, St. Cloud, Minnesota 56304**

(Address of principal executive offices) (Zip Code)

**(320)252-1503**

(Registrant’s telephone number, Including area code)

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports)and (2) has been subject to such filing requirements for the past90 days.

Yes x  No o.

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

|  Large Accelerated  Filer o |   | Accelerated  Filer o |   | Non-accelerated  Filer  x. |
|---------------------------------------|--------|----------------------|--------|---------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o  No x.

Asof August 6, 2007, 100 shares of common stock, $.01 par value per share, wereoutstanding (all of which are owned by WII Holding, Inc.).

 

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**WIICOMPONENTS, INC.**

**FORM 10-Q**

**QuarterEnded June 30, 2007**

**Table ofContents**
| **Part I—Financial Information**                                                                                                           |   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Item 1.  Financial Statements                                                                                                                   |   |   |
| Condensed Consolidated  Balance Sheets as of June 30, 2007 and December 31, 2006 (unaudited)                                                    |   |   |
| Condensed  Consolidated Statements of Operations for the Three Months Ended June 30,  2007 and the Three Months Ended June 30, 2006 (unaudited) |   |   |
| Condensed  Consolidated Statements of Operations for the Six Months Ended June 30, 2007  and the Six Months Ended June 30, 2006 (unaudited)     |   |   |
| Condensed  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007  and the Six Months Ended June 30, 2006 (unaudited)     |   |   |
| Notes to Condensed Consolidated  Financial Statements (unaudited)                                                                               |   |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                                            |   |   |
| Item 3. Quantitative  and Qualitative Disclosures about Market Risk                                                                             |   |   |
| Item 4. Controls and  Procedures                                                                                                                |   |   |
|                                                                                                                                            |   |   |
| **Part II-Other Information**                                                                                                                   |   |   |
| Item 1. Legal Proceedings                                                                                                                       |   |   |
| Item 1A. Risk Factors                                                                                                                           |   |   |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                                                            |   |   |
| Item 3. Defaults  Upon Senior Securities                                                                                                        |   |   |
| Item 4. Submission  of Matters to a Vote of Security Holders                                                                                    |   |   |
| Item 5. Other Information                                                                                                                       |   |   |
| Item 6. Exhibits                                                                                                                                |   |   |
| Signatures                                                                                                                                      |   |   |

 

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCESHEETS**

**(UNAUDITED)**

**(In thousands)**
| ** **                                     | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                     |       |                    |       |                        |       |
| Current Assets:                                |       |                    |       |                        |       |
| Cash                                           |       | $                       | 11,429     |                        | $          | 8,048 |   |
| Accounts  receivable, net                      |       | 15,924                  |       | 11,322                      |       |
| Inventories                                    |       | 20,471                  |       | 21,500                      |       |
| Other current  assets                          |       | 5,535                   |       | 1,908                       |       |
| Total current  assets                          |       | 53,359                  |       | 42,778                      |       |
|                                           |       |                    |       |                        |       |
| Property, plant, and  equipment, net           |       | 60,691                  |       | 59,876                      |       |
| Goodwill                                       |       | 112,748                 |       | 108,748                     |       |
| Customer relationship                          |       | 12,410                  |       | 13,239                      |       |
| Noncompete agreements                          |       | 152                     |       | 384                         |       |
| Other assets                                   |       | 7,500                   |       | 5,289                       |       |
| TOTAL                                          |       | $                       | 246,860    |                        | $          | 230,314 |   |
| ** **                                     |       |                    |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY** |       |                    |       |                        |       |
| Current Liabilities:                           |       |                    |       |                        |       |
| Current  maturities of long-term debt          |       | $                       | 2,040      |                        | $          | 581 |   |
| Accounts payable                               |       | 5,515                   |       | 4,937                       |       |
| Accrued payroll                                |       | 4,615                   |       | 3,826                       |       |
| Other current  liabilities                     |       | 16,453                  |       | 12,101                      |       |
| Total current  liabilities                     |       | 28,623                  |       | 21,445                      |       |
|                                           |       |                    |       |                        |       |
| Long-term debt, net of  current maturities     |       | 128,132                 |       | 128,030                     |       |
| Deferred income tax  liability                 |       | 5,505                   |       | 2,560                       |       |
| Other noncurrent  liabilities                  |       | 2,419                   |       | 300                         |       |
|                                           |       |                    |       |                        |       |
| Stockholders’ Equity:                     |       |                    |       |                        |       |
| Common  stock—voting                      |       | —                  |       | 217                         |       |
| Common  stock—nonvoting                   |       | —                  |       | 9                           |       |
| Additional  paid-in capital                    |       | 71,140                  |       | 56,244                      |       |
| Retained  earnings                             |       | 11,041                  |       | 21,509                      |       |
| Total  stockholders’ equity               |       | 82,181                  |       | 77,979                      |       |
| TOTAL                                          |       | $                       | 246,860    |                        | $          | 230,314 |   |

 

See notes to condensed consolidated financialstatements (unaudited).

1

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(UNAUDITED)**

**(In thousands)**
| ** **                          | ** ** | **Three Months  Ended  June 30, 2007** | ** ** | **Three Months  Ended  June 30, 2006** | ** ** |
|-------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| NET SALES                           |       | $                                                     | 67,776     |                                                  | $          | 75,761 |   |
| COST OF SALES                       |       | 54,105                                                |       | 62,631                                                |       |
| Gross profit                        |       | 13,671                                                |       | 13,130                                                |       |
|                                |       |                                                  |       |                                                  |       |
| OPERATING  EXPENSES:                |       |                                                  |       |                                                  |       |
| General and administrative          |       | 3,342                                                 |       | 3,619                                                 |       |
| Selling and marketing               |       | 788                                                   |       | 853                                                   |       |
| Loss (gain) on sale of assets       |       | 37                                                    |       | (6                                                    | )          |
| Total operating expenses            |       | 4,167                                                 |       | 4,466                                                 |       |
|                                |       |                                                  |       |                                                  |       |
| OPERATING INCOME                    |       | 9,504                                                 |       | 8,664                                                 |       |
|                                |       |                                                  |       |                                                  |       |
| OTHER INCOME  (EXPENSE):            |       |                                                  |       |                                                  |       |
| Interest income                     |       | 96                                                    |       | 7                                                     |       |
| Interest expense                    |       | (3,832                                                | )          | (3,546                                                | )          |
| Total other expense                 |       | (3,736                                                | )          | (3,539                                                | )          |
|                                |       |                                                  |       |                                                  |       |
| INCOME BEFORE  INCOME TAX PROVISION |       | 5,768                                                 |       | 5,125                                                 |       |
| INCOME TAX  PROVISION               |       | 3,787                                                 |       | 2,069                                                 |       |
| NET INCOME                          |       | $                                                     | 1,981      |                                                  | $          | 3,056 |   |

 

See notes to condensed consolidated financialstatements (unaudited).

2

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(UNAUDITED)**

**(In thousands)**
| ** **                                           | ** ** | **Six Months  Ended  June 30, 2007** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| NET SALES                                            |       | $                                                   | 128,782    |                                                | $          | 152,102 |   |
| COST OF SALES                                        |       | 104,362                                             |       | 126,316                                             |       |
| Gross profit                                         |       | 24,420                                              |       | 25,786                                              |       |
|                                                 |       |                                                |       |                                                |       |
| OPERATING  EXPENSES:                                 |       |                                                |       |                                                |       |
| General and administrative                           |       | 15,675                                              |       | 7,574                                               |       |
| Selling and marketing                                |       | 1,652                                               |       | 1,659                                               |       |
| Loss (gain) on sale of assets                        |       | 51                                                  |       | (6                                                  | )          |
| Total operating expenses                             |       | 17,378                                              |       | 9,227                                               |       |
|                                                 |       |                                                |       |                                                |       |
| OPERATING INCOME                                     |       | 7,042                                               |       | 16,559                                              |       |
|                                                 |       |                                                |       |                                                |       |
| OTHER INCOME  (EXPENSE):                             |       |                                                |       |                                                |       |
| Interest income                                      |       | 149                                                 |       | 30                                                  |       |
| Interest expense                                     |       | (7,856                                              | )          | (6,968                                              | )          |
| Other expense                                        |       | (2                                                  | )          | (2                                                  | )          |
| Total other expense                                  |       | (7,709                                              | )          | (6,940                                              | )          |
|                                                 |       |                                                |       |                                                |       |
| (LOSS) INCOME  BEFORE INCOME TAX (BENEFIT) PROVISION |       | (667                                                | )          | 9,619                                               |       |
| INCOME TAX  (BENEFIT) PROVISION                      |       | (307                                                | )          | 3,897                                               |       |
| NET (LOSS) INCOME                                    |       | $                                                   | (360       | )                                                   | $          | 5,722 |   |

 

See notes to condensed consolidated financialstatements (unaudited).

3

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(UNAUDITED)**

**(In thousands)**
| ** **                                                                                | ** ** | **Six Months  Ended  June 30, 2007** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| OPERATING  ACTIVITIES:                                                                    |       |                                                |       |                                                |       |
| Net (loss) income                                                                         |       | $                                                   | (360       | )                                                   | $          | 5,722 |   |
|                                                                                      |       |                                                |       |                                                |       |
| Adjustments to  reconcile net (loss) income to net cash provided by operating activities: |       |                                                |       |                                                |       |
| Depreciation and amortization                                                             |       | 4,383                                               |       | 3,737                                               |       |
| Loss (gain) on sale of assets                                                             |       | 51                                                  |       | (6                                                  | )          |
| Amortization of debt issue costs                                                          |       | 1,405                                               |       | 538                                                 |       |
| Deferred income taxes                                                                     |       | (33                                                 | )          | —                                              |       |
| Stock compensation expense                                                                |       | 1,029                                               |       | 2,283                                               |       |
| Current portion of tax benefit due to Seller                                              |       | (4,106                                              | )          | —                                              |       |
|                                                                                      |       |                                                |       |                                                |       |
| Change in operating assets and liabilities:                                               |       |                                                |       |                                                |       |
| Accounts receivable                                                                       |       | (4,602                                              | )          | (3,775                                              | )          |
| Inventories                                                                               |       | 1,029                                               |       | (464                                                | )          |
| Other current assets                                                                      |       | 2,391                                               |       | 175                                                 |       |
| Accounts payable                                                                          |       | 658                                                 |       | 60                                                  |       |
| Accrued payroll and other current liabilities                                             |       | (485                                                | )          | (1,476                                              | )          |
| Other long-term liabilities                                                               |       | 115                                                 |       | —                                              |       |
| Net cash provided by operating activities                                                 |       | 1,475                                               |       | 6,794                                               |       |
|                                                                                      |       |                                                |       |                                                |       |
| INVESTING  ACTIVITIES:                                                                    |       |                                                |       |                                                |       |
| Purchases of property, plant, and equipment                                               |       | (4,301                                              | )          | (9,533                                              | )          |
| Proceeds from sale of assets                                                              |       | 34                                                  |       | 146                                                 |       |
| DMI earn-out payment                                                                      |       | (4,000                                              | )          | —                                              |       |
| Net cash used in investing activities                                                     |       | (8,267                                              | )          | (9,387                                              | )          |
|                                                                                      |       |                                                |       |                                                |       |
| FINANCING ACTIVITIES:                                                                     |       |                                                |       |                                                |       |
| Principal payments under long-term financing  agreements                                  |       | (8,590                                              | )          | (1,734                                              | )          |
| Recapitalization – equity contribution                                               |       | 21,747                                              |       | —                                              |       |
| Debt issuance costs                                                                       |       | (3,616                                              | )          | —                                              |       |
| Recapitalization – repurchase of stock options                                       |       | (7,880                                              | )          | —                                              |       |
| Distribution on behalf of Parent                                                          |       | (1,640                                              | )          | —                                              |       |
| Borrowings of long-term debt                                                              |       | 10,152                                              |       | 900                                                 |       |
| Net cash provided by (used in) financing activities                                       |       | 10,173                                              |       | (834                                                | )          |
|                                                                                      |       |                                                |       |                                                |       |
| NET INCREASE  (DECREASE) IN CASH                                                          |       | 3,381                                               |       | (3,427                                              | )          |
| CASH—Beginning  of period                                                            |       | 8,048                                               |       | 3,981                                               |       |
|                                                                                      |       |                                                |       |                                                |       |
| CASH—End of  period                                                                  |       | $                                                   | 11,429     |                                                | $          | 554 |   |
|                                                                                      |       |                                                |       |                                                |       |
| SUPPLEMENTAL  CASH FLOW INFORMATION:                                                      |       |                                                |       |                                                |       |
| Cash paid for interest                                                                    |       | $                                                   | 6,556      |                                                | $          | 6,374 |   |
|                                                                                      |       |                                                |       |                                                |       |
| Cash paid for income taxes—net                                                       |       | $                                                   | 351        |                                                | $          | 4,367 |   |
| 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        |                                                | $          | 363 |   |

 

See notes to condensed consolidated financial statements (unaudited).

4

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED**

**CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**1.  BASIS OFPRESENTATION**

***CompanyBackground-***  WII Components, Inc., a Delawarecorporation (the “Company”), was formed in April 2003 to acquire 100% of thecommon stock of Woodcraft Industries, Inc. and Subsidiaries in a leveragedacquisition.

OnJanuary 9, 2007, the Company was acquired by WII Holding, Inc. (“Parent”), anewly formed investment entity controlled by Olympus Growth Fund IV, L.P. (“Olympus”).  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 merger (the “Merger”) pursuant to an Amended and RestatedAgreement and Plan of Merger, dated as of January 5, 2007, by and among Parent,MergerCo, the Company, and Behrman Capital III L.P.  The aggregate purchase price paid by Parent for all of the shares ofcapital stock of the Company and options to purchase shares of capital stock ofthe Company in the Merger was approximately $295.5 million, less indebtednessand certain expenses, and subject to customary adjustments.  The aggregate purchase price and related feesand expenses were funded by new credit facilities and private offerings of debtand equity securities by Parent and the Company.  The Merger has been accounted for as arecapitalization in the Company’s financial statements, with no adjustments tothe historical basis of the Company’s assets and liabilities.  The Company did not push down the basisbecause of the significance of the publicly traded debt outstanding, whichhinders the Parent’s ability to control the form of ownership of the Company.

The Company prepared the accompanying unauditedcondensed consolidated financial statements following the requirements of theSecurities and Exchange Commission for interim reporting. As permitted underthose rules, 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 financialstatements be read in conjunction with the consolidated financial statementsand accompanying notes for the year ended December 31, 2006 included inits Form 10-K as filed with the Securities and Exchange Commission on March 28,2007. The condensed consolidated balance sheet as of December 31, 2006 hasbeen derived from the audited consolidated financial statements at that date,but does not include all the information and notes required by accountingprinciples generally accepted in the United States of America for completepresentation.

Inour opinion, the accompanying unaudited condensed consolidated financial statementsinclude all adjustments (consisting of normal recurring items) considerednecessary to present fairly, when read in conjunction with the consolidatedfinancial statements and accompanying notes for the period endedDecember 31, 2006 included in our 10-K as filed with the Securities andExchange Commission on March 28, 2007, our financial position, results ofoperations and cash flows for the periods presented.

The unaudited condensed consolidated financialstatements include the accounts of the Company and its wholly ownedsubsidiaries.  All intercompany accountsand transactions have been eliminated in the preparation of the consolidatedfinancial statements.

**2. SIGNIFICANT ACCOUNTING POLICIES**

***Inventories***—Inventories consisted of the following (in thousands):
| ** **      | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                       | 11,541     |                        | $          | 12,270 |   |
| Work in process |       | 4,408                   |       | 4,768                       |       |
| Finished goods  |       | 4,239                   |       | 5,037                       |       |
| LIFO adjustment |       | 283                     |       | (575                        | )          |
|            |       | $                       | 20,471     |                        | $          | 21,500 |   |

 

The majority of inventory is valued at the lower oflast-in, first-out (“LIFO”) cost or market. The remainder of the inventory isvalued under the first-in, first-out method (“FIFO”). As of June 30, 2007 andDecember 31, 2006, inventory on the LIFO method represented 65% and 61%,respectively, of consolidated inventories.

***Goodwill***—The Company accounts for goodwill inaccordance with Statement of Financial Accounting Standards (“SFAS”)No. 142, *Goodwill and Other IntangibleAssets*. In part, SFAS No. 142 states that companies are nolonger required to amortize goodwill but instead must evaluate goodwill forimpairment at least annually.  TheCompany has elected to perform its annual tests for goodwill impairment as ofDecember 31 of each year. Fair value is measured using a market multiplevaluation method.  The carrying amount ofgoodwill increased from $108.7 million at December 31, 2006 to $112.7 millionat June 30, 2007 due to an accelerated Dimension Moldings, Inc. earn-outpayment as a result of the change in control caused by the Merger.

***Customer Relationship—***Customer relationships relate to intangible assets recorded in the GrandValley and Dimension Moldings, Inc. acquisitions for relationships with asignificant customer. The original cost of these customer relationshipsis $16.6 million, and

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therelated accumulated amortization as of June 30, 2007 is $4.2 million.  The intangible assets are being amortized over the estimated life of 10years. Amortization for the six-month period ended June 30, 2007 was$829,000.  Expected annual amortizationis as follows for the years ending December 31 (in thousands):
| 2007      |   | $     | 1,658  |   |
|-----------|--------|-------|--------|--------|
| 2008      |   | 1,657 |   |
| 2009      |   | 1,658 |   |
| 2010      |   | 1,657 |   |
| 2011      |   | 1,658 |   |
| 2012-2015 |   | 4,951 |   |

 

***NoncompeteAgreement***—Noncompeteagreements primarily relate to agreements with the former owners of Brentwood,Grand Valley, and Dimension Moldings, Inc. The original cost of thesenoncompete agreements is $2.4 million, and the related accumulated amortizationas of June 30, 2007 is $2.2 million.  Noncompete rights are being amortized over theapplicable terms of the agreements (5 years, 7 years, and 5 yearsrespectively), and are expected to be fully amortized by July 2007,April 2011, and July 2010 respectively. Amortization for the six-monthperiod ended June 30, 2007 was $232,000. Expected annual amortization is as follows for the years endingDecember 31 (in thousands):
| 2007 |   | $  | 285    |   |
|------|--------|----|--------|--------|
| 2008 |   | 34 |   |
| 2009 |   | 34 |   |
| 2010 |   | 26 |   |
| 2011 |   | 5  |   |

 

***UncertainTax Positions*-** The Company adopted the provisions ofFinancial Accounting Standards Board (“FASB”) Interpretation No. 48 *Accounting for Uncertainty in Income Taxes-an interpretation of FASBStatement No. 109* (“FIN 48”), on January 1, 2007.  FIN 48 clarifies the accounting foruncertainty in income taxes by defining criteria that a tax position on anindividual matter must meet before that position is recognized in the financialstatements.  Additionally, FIN 48provides guidance for measurement, derecognition, classification, interest andpenalties, accounting for interim periods, disclosures and transition.

As a result of theimplementation of FIN 48, the Company recognized a $1.4 million decrease in theliability for uncertain tax positions which, as required, was accounted for asan increase to the January 1, 2007 balance of retained earnings.  In addition, the following informationrequired by FIN 48 is provided:

·                                                    Unrecognizedtax benefits were approximately $113,000 and $115,000 as of January 1, 2007 andJune 30, 2007, respectively.  If theseunrecognized tax benefits were recognized approximately $115,000 would impactthe effective tax rate.  While it isexpected that the amount of unrecognized tax benefits will change in the next12 months, we do not expect the change to have a significant impact on theresults of operations or the financial position of the Company.

·                                                    TheCompany recognizes interest expense and penalties related to the aboveunrecognized tax benefit within income tax expense.  The Company had accrued interest andpenalties of approximately $22,000 and $24,000 as of January 1, 2007 and June30, 2007, respectively.

·                                                    TheCompany is currently open to an audit under the statute of limitations by theInternal Revenue Service for the years ending December 31, 2003 through2006.  The Company files in numerousstate jurisdictions with varying statutes of limitation.  The Company’s unrecognized state tax benefitsare related to state returns open from 2002 through 2006 depending on eachstate’s statute of limitations.

***Stock Options*****—**In April 2003, the 2003 Stock Option andGrant Plan (“2003 Plan”) was approved by the stockholders of the Company. The2003 Plan allowed the granting of both incentive stock options and nonqualifiedstock options. Under the terms of the 2003 Plan, a maximum of 2,500,000 sharesof stock, subject to adjustment, were made available for awards to officers,employees, directors, consultants, and other key persons of the Company. Awardsincluded, but were not limited to, stock options, restricted stock,unrestricted stock awards, and substitute performance awards.  Option awards were generally granted with anexercise price equal to the calculated fair market value of the company’sstock.  Options generally vested overfour years and had 10-year contractual terms. On May 31, 2006, the 2003 Plan was amended by the Board to provide forthe issuance of an additional 500,000 options for a total of 3,000,000options.  The stockholders approved theamendment on June 8, 2006.  As a resultof the Merger, the 2003 Plan was terminated on January 9, 2007.  In addition, all of the options, which wereoutstanding at the time of the Merger were deemed to be fully vested and thenterminated on January 9, 2007.

***New AccountingPronouncements***—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

6

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disclosuresabout fair value measurements. This Statement applies under other accountingpronouncements that require or permit fair value measurements, the FASB havingpreviously concluded in those accounting pronouncements that fair value is therelevant measurement attribute. Accordingly, this Statement does not requireany new fair value measurements. SFAS No. 157 is effective for fiscal yearsbeginning after December 15, 2007. We plan to adopt SFAS No. 157 beginning inthe first quarter of fiscal 2008. We are currently evaluating the impact, ifany, the adoption of SFAS No. 157 will have on our operating income or netearnings.

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities — Including an Amendment of FASB Statement No. 115*(SFAS No. 159), which becomes effective for fiscal periods beginning afterNovember 15, 2007, the Company’s fiscal year 2008. Under SFASNo. 159, companies may elect to measure specified financial instrumentsand warranty and insurance contracts at fair value on a contract-by-contractbasis, with changes in fair value recognized in earnings each reporting period.The Company has not determined the impact, if any, the adoption of thisstatement will have on its financial condition or results of operations.

**3. ACQUISITIONS**

On July 28, 2005, the Company acquired substantiallyall of the assets of a moldings manufacturing company operating under the nameof Dimension Moldings, Inc.  The Companypaid a cash purchase price at closing of $9.3 million.  In addition, the Company was required to payup to an aggregate of $7.0 million if certain earnings targets are met at theend of each calendar year from 2005 to 2010, which may be accelerated uponcertain events.  The Company paid $2.0million of the earn-out consideration in the first quarter 2006.  As a result of the change in control caused by the Merger, the remaining$5.0 million potential earn-out obligation was accelerated and paid on January9, 2007, which included the $1.0 million accrued on June 30, 2006.  As a result of the additional earn-outconsideration paid, the total purchase price, including earn-out oracceleration obligations, resulted in goodwill of $5.1 million due to thepurchase price in excess of the net assets acquired.  The acquired assets of DimensionMoldings, Inc. are now operated and owned by Woodcraft Industries, Inc., theCompany’s subsidiary.

On January 9, 2007, the Company was acquired byParent, a newly formed investment entity controlled by Olympus, in theMerger.  The aggregate purchase pricepaid by Parent for all of the shares of capital stock of the Company andoptions to purchase shares of capital stock of the Company in the Merger wasapproximately $295.5 million, less indebtedness and certain expenses, andsubject to customary adjustments.  Theaggregate purchase price and related fees and expenses were funded by new creditfacilities and private offerings of debt and equity securities by Parent andthe Company.  The Merger has beenaccounted for as a recapitalization in the Company’s financial statements, withno adjustments to the historical basis of the Company’s assets and liabilities.

In conjunction with the Merger, the Company enteredinto a new senior credit facility (the “New Senior Credit Facility”), withCredit Suisse, Cayman Islands Branch, which provided for (i) a senior securedfirst lien term loan facility in an aggregate principal amount of $150.0million (the “First Lien Term Facility”) and (ii) a senior secured first lienrevolving credit facility in an aggregate principal amount up to $25.0 million,subject to certain conditions, (the “Revolving Facility” and, together with theFirst Lien Term Facility, the “First Lien Facilities”) of which $10.0 millionis available through a subfacility in the form of letters of credit.  Subject to certain conditions, the First LienTerm Facility may be increased by up to $30.0 million during the life of the FirstLien Term Facility at the request of the Company with the consent from thoselenders that agree to participate in such increase.  Subject to the foregoing, effective as ofApril 30, 2007, no additional borrowings are available under the First Lien TermFacility beyond the $9.8 million which was outstanding at March 31, 2007.  As of June 30, 2007, the maximum amount ofborrowings available to the Company under the Revolving Facility was $12.5million.  As of June 30, 2007 borrowingsof $9.4 million were outstanding under the First Lien Term Facility, andnothing was outstanding under the Revolving Facility.  The outstanding principal of suchindebtedness bears interest at a fluctuating rate equal to either the base rateplus an applicable margin per annum or LIBOR plus an applicable margin.  The New Senior Credit Facility is scheduledto mature January 2013.

In conjunctionwith the Merger, 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 pay-in-kind noteswith no required principal amortization. The Note Purchase Agreement with Olympus Growth Fund IV, L.P. consistedof $43.0 million junior pay-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, Parent is able at its option to payinterest on the Parent Notes through the issuance of additional notes. TheCompany is not liable for, and has not otherwise guaranteed, any of theobligations of Parent with respect to the Parent Notes.  The Company is, however, subject to a numberof restrictive covenants under the Note Purchase Agreements. In addition, theCompany is limited in its ability to pay dividends or otherwise makedistributions to Parent under the New Senior Credit Facility and the indenturegoverning the $120.0 million of 10% Senior Notes due 2012 (the “10% SeniorNotes due 2012”).  The Parent Notes arenot 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 of ParentNotes to Olympus Growth Fund IV, L.P. , and purchased $20.0 million of ParentNotes from OCM Mezzanine Fund II, L.P.

In conjunctionwith the Merger, Parent issued equity securities of approximately $86.2 million(including rollover equity

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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, of 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 per share equal tothe sum of its liquidation value per share ($1,000) plus all accumulated andunpaid dividends thereon and (ii) a number of shares of Parent’s common equitysecurities as determined in accordance with the redemption procedures containedin Parent’s certificate of incorporation. If Parent does not have funds legally available for any particularredemption, Parent is obligated to use those funds that are legally availablefor the redemption of such securities to redeem the maximum possible number ofpreferred equity securities which would otherwise be redeemed in connectionwith such redemption.  Thereafter, whenadditional funds of Parent are legally available for redemption of suchsecurities, Parent is obligated to redeem the balance of such securities.  Parent is prohibited from redeeming anypreferred equity securities if any such redemption is prohibited under anycredit facility or indenture to which Parent or any of its subsidiaries is aparty or is otherwise bound.  The Companyis not liable for, and has not otherwise guaranteed, any of these obligationsof Parent with respect to the equity securities issued by Parent.  These equity securities are not reflected inthe Company’s consolidated balance sheet due to the significance of the publicdebt holders’ influence on the Company’s ability to control the form ofownership.

On December 11, 2006, Parentand MergerCo, in anticipation of theconsummation of the Merger, entered into an employment agreement with Mr. JohnFitzpatrick, as Chief Executive Officer of MergerCo (the “New FitzpatrickEmployment Agreement”).  Pursuant to theNew Fitzpatrick Employment Agreement, upon consummation of the Merger, the NewFitzpatrick Employment Agreement superceded and preempted Mr. Fitzpatrick’sprior employment agreement with the Company. On January 9, 2007, by operationof law upon consummation of the Merger, the New Fitzpatrick EmploymentAgreement was assigned by MergerCo to the Company.  Under the New Fitzpatrick EmploymentAgreement, in the event (i) Mr. Fitzpatrick resigns for retirement purposesfrom the employment of the Company and its subsidiaries after December 31, 2009(or such earlier date as the Company’s board of directors and Mr. Fitzpatrickmutually agree upon) and (ii) Mr. Fitzpatrick provided at least twelve months’prior written notice to the Company and Parent of such resignation, then Mr.Fitzpatrick may elect to have Parent repurchase up to 50% of the common equitysecurities and 50% of the preferred equity securities acquired by Mr.Fitzpatrick on January 9, 2007 in connection with the Merger at theirrespective fair market values.  Any suchrepurchase by Parent shall be subject to applicable restrictions contained inthe Delaware General Corporation Law and in Parent’s and its subsidiaries’ debtfinancing agreements with unaffiliated third parties.  If any such restrictions prohibit any suchrepurchase which Parent is otherwise required to make, the repurchaseobligation is suspended until such time as Parent may make such repurchaseunder such restrictions.

The Companyrecorded expenses of $9.9 million in the six months ended June 30, 2007 relatedto the Merger.  These expenses comprised$1.0 million of compensation expense related to accelerated vesting of stockoptions, $0.2 million of employer related payroll taxes for the acceleratedvesting of stock options, $1.3 million of transaction incentive expenses, $7.0million of transaction costs and $0.4 million of deferred financing costsrelated to refinanced indebtedness.  Inaddition to these amounts, the Company capitalized $4.0 million of transactioncosts into goodwill related to the accelerated earn-out, and $3.6 million ofdeferred financing 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.

  **4. RELATED-PARTY TRANSACTIONS**

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

Parenthas a management services agreement with an affiliate of the Parent’s largeststockholder, Olympus Partners.  Parent isobligated to pay a transaction fee to the affiliate for services provided foreach financing, refinancing, acquisition, or similar nonrecurringtransaction.  Parent paid approximately$3.0 million to this affiliate for services related to the Merger, of which,$0.7 million was recorded as deferred financing fees on the Company’s financialstatements, while the remaining $2.3 million was recorded on the Parent’sfinancial statements.  In addition, theaffiliate will be paid $0.6 million annually by Parent for ongoing servicesprovided to the Parent and Company.

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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 itsconsolidated subsidiaries and their respective predecessors.

**FORWARD-LOOKINGSTATEMENTS**

Certain statements in this report are “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 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 youthat forward-looking statements involve unknown risks, uncertainties and otherfactors that may cause our actual results and performance to differ materiallyfrom any future results or performance expressed or implied by theseforward-looking statements.  Please alsosee our discussion of risk factors contained in Item 1A. Part II of this Reporton Form 10-Q.

Without limiting the generality of the precedingstatement, all statements in this report providing estimates and projectionsconcerning or relating to the following matters are forward-looking statements:

·                  financial results andconditions;

·                  margins, costs andexpenditures;

·                  cash flows and growthrates;

·                  demand for our products;

·                  industry trends;

·                  new product and customerinitiatives;

·                  our current plans forcapital expenditures;

·                  manufacturing and othercost-saving initiatives; and

·                  our liquidity and capitalresources.

In addition, we, through our senior management, fromtime to time make forward-looking public statements concerning our expectedfuture operations and performance and other developments. Such forward-lookingstatements are necessarily estimates reflecting our judgment based upon currentinformation and involve a number of risks and uncertainties. There can be noassurance that other factors will not affect the accuracy of theseforward-looking statements or that our actual results will not differmaterially from the results anticipated in such forward-looking statements.Although we believe that these forward-looking statements are based onreasonable assumptions, you should be aware that many factors could affect ouractual financial results or results of operations and could cause actualresults to differ materially from those expressed in the forward-lookingstatements. Those factors include, among other things:

·                  our high degree of leverageand significant debt service obligations;

·                  our ability to integrateacquired businesses;

·                  our need for additionalmanufacturing capacity;

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

·                  changes in interest ratesand general economic conditions;

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

·                  changes in the price of rawmaterials;

·                  interruptions in deliveriesof raw materials or finished goods;

·                  the highly competitivenature of our industry; and

·                  increases in the cost oflabor.

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**Overview**

We believe that we areone of the leading manufacturers of hardwood doors, hardwood components andengineered wood products for the kitchen and bath cabinet market in the UnitedStates. Our products include (1) hardwood cabinet door components, faceframes and drawer fronts, (2) fully assembled hardwood cabinet doors,(3) rigid thermofoil, or RTF, cabinet doors and components,(4) veneer raised panels, or VRPs, and (5) a variety of laminated andprofile-wrapped components. We generate approximately 94% of our sales from thekitchen and bath cabinet manufacturing industry. Our customers, in turn,distribute their products through various sales channels, including specialtykitchen and bath cabinet dealers, home center retailers and homebuilders. We conductall of our operations through our Woodcraft, PrimeWood and Brentwoodsubsidiaries and we operate eleven manufacturing facilities located inMinnesota, North Dakota, Oregon, Ohio, Kansas, Pennsylvania, Utah and Kentuckythat allow us to distribute our products nationwide.

In the past nine years,we have consummated four strategic acquisitions that have enhanced our marketposition, product breadth and geographic reach. 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, amanufacturer of solid wood and RTF cabinet doors located in Oregon. InApril 2004, we acquired Grand Valley, a manufacturer of solid wood cabinetdoors located in Ohio.  On December 31,2006, Grand Valley was merged with and into Woodcraft.  In July 2005, we acquired substantially allof the assets of Dimension Moldings, Inc. (DMI), an Ohio corporation, which wasin 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 for sale to one of our major customers.

 TheMerger was completed on January 9, 2007. The aggregate purchase price paid by Parent for all of the shares ofcapital stock of the Company and options to purchase shares of capital stock ofthe Company in the Merger was approximately $295.5 million, less indebtednessand certain expenses, and subject to customary adjustments.  The Merger 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 basis becauseof the significance of the publicly traded debt outstanding, which hinders theParent’s ability to control the form of ownership of the Company.

**Results of Operations**

***Three Months Ended June 30, 2007Compared to the Three Months Ended June 30, 2006***

The following table outlines, for the three monthsended June 30, 2007 and for the three months ended June 30, 2006, selectedoperating data derived from our condensed consolidated statements of operationsand presents this information as a percentage of net sales:
| ** **                | ** ** | **WII Components, Inc.**                        | ** ** |
|---------------------------|------------|-----------------------------------------------------------|------------|
| ** **                | ** ** | **Three Months Ended  June 30, 2007** | ** ** | **Three Months Ended  June 30, 2006** | ** ** |
| ** **                | ** ** | **(dollars in thousands)**                      | ** ** |
| Net sales                 |       | $                                                         | 67,776     |   | $ | 75,761 |   |
| *% of  net sales*         | * *   | *100.0*                                                   | *%*        | *100.0* | *%* |
| Cost of sales             |       | 54,105                                                    |       | 62,631 |   |
| *% of  net sales*         | * *   | *79.8*                                                    | *%*        | *82.7* | *%* |
| * *                  | * *   | * *                                                  | * *   | * * | * * |
| Gross profit              |       | 13,671                                                    |       | 13,130 |   |
| *% of  net sales*         | * *   | *20.2*                                                    | *%*        | *17.3* | *%* |
| Operating  expenses       |       | 4,167                                                     |       | 4,466 |   |
| *% of  net sales*         | * *   | *6.1*                                                     | *%*        | *5.9* | *%* |
| * *                  | * *   | * *                                                  | * *   | * * | * * |
| Operating income          |       | 9,504                                                     |       | 8,664 |   |
| *% of  net sales*         | * *   | *14.0*                                                    | *%*        | *11.4* | *%* |
| Other expenses  (income): |       |                                                      |       |   |   |
| Interest expense          |       | 3,832                                                     |       | 3,546 |   |
| *% of  net sales*         | * *   | *5.7*                                                     | *%*        | *4.7* | *%* |
| Other income,  net        |       | (96                                                       | )          | (7 | ) |
| *% of  net sales*         | * *   | *-0.1*                                                    | *%*        | *-0.0* | *%* |
| Income tax  provision     |       | 3,787                                                     |       | 2,069 |   |
| *% of  net sales*         | * *   | *5.6*                                                     | *%*        | *2.7* | *%* |
| * *                  | * *   | * *                                                  | * *   | * * | * * |
| Net income                |       | 1,981                                                     |       | 3,056 |   |
| *% of net sales*          | * *   | *2.9*                                                     | *%*        | *4.0* | *%* |
|                           |            |                                                           |            |  |  |  |  |

 

*Net sales.*  Net sales decreased$8.0 million, or 10.6%, from $75.8 million for the three months endedJune 30, 2006 to $67.8 million for the three months ended June 30, 2007.  Sales in our hardwood and engineered woodproduct line decreased $5.5 million and $2.5 

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million, respectively.  Thesedecreases are attributable to a combination of (i) an overall slowdown in themarket that began in the third quarter 2006, (ii) lower selling prices inconjunction with lower material costs, and (iii) to a lesser extent, areduction due to the loss of market share on a hardwood door program in 2007.

*Cost of sales.*  Costof sales decreased $8.5 million, or 13.6%, from $62.6 million for thethree months ended June 30, 2006 to $54.1 million for the three monthsended June 30, 2007.  This decrease incost of sales is primarily attributable to lower material, labor and overheadcosts as a result of lower volume of sales, but other factors include;(i) improved operational performance related to yield and laborproductivities, (ii) lower stock compensation expense, and (iii) lower hardwoodmaterial costs. These were partially offset by increased multi-density fiberboard and particle board costs related to our engineered wood products line.

*Gross profit.*  Gross profit increased$0.5 million, or 3.8%, from $13.2 million for the three months endedJune 30, 2006 to $13.7 million for the same period in 2007. As apercentage of net sales, our gross profit increased 290 basis points from 17.3%for the three months ended June 30, 2006 to 20.2% for the same period in2007.  This increase reflects(i) improved operational performance, (ii) lower stock compensationexpense, and (iii) lower hardwood material costs.  This increase was partially offset with boardcost increases related to our engineered wood product line.

*Operating expenses.*  Operating expenses decreased$0.3 million, or 6.7%, from $4.5 million for the three months endedJune 30, 2006 to $4.2 million for the same period in 2007.  The decrease consists of (i) lower salariesdue to eliminated positions and (ii) lower stock compensation expense.  These decreases were partially offset byhigher professional fees.

*Operating income.* Operating income increased by $0.8 million, or 9.2%, from$8.7 million for the three months ended June 30, 2006 to $9.5 millionfor the three months ended June 30, 2007 as a result of the net effect of thefactors described above.

*Interest expense.* Interest expense increased $0.3 million, or 8.6%, from$3.5 million for the three months ended June 30, 2006 to $3.8 millionfor the three months ended June 30, 2007. This increase relates to (i)increased expense of deferred financing fees in connection with the Merger, and(ii) a higher average debt balance due to the additional debt assumed inconjunction with the Merger.

*Other income.*  Other income was $7,000 and$96,000 for the three months ended June 30, 2006 and June 30, 2007,respectively.  This income is frominterest received from our interest bearing accounts.

*Income tax provision.*  Incometax expense increased $1.7 million, or 81.0%, from an income tax expense of$2.1 million for the three months ended June 30, 2006 to an income tax expenseof $3.8 million for the three months ended June 30, 2007 as a result of higherearnings. The effective tax rate increased from 40.4% in 2006 to 65.7% in 2007due to permanent differences associated with the Merger.

*Net income.*  Net income decreased$1.1 million, or 35.5%, from net income of $3.1 million for the threemonths ended June 30, 2006 to $2.0 million for the three months ended June30, 2007 as a result of the factors described above.

**Results of Operations**

***Six Months Ended June 30, 2007Compared to the Six Months Ended June 30, 2006***

The following table outlines, for the six monthsended June 30, 2007 and for the six months ended June 30, 2006, selectedoperating data derived from our condensed consolidated statements of operationsand presents this information as a percentage of net sales:
| ** **                      | ** ** | **WII Components, Inc.**                      | ** ** |
|---------------------------------|------------|---------------------------------------------------------|------------|
| ** **                      | ** ** | **Six Months Ended  June 30, 2007** | ** ** | **Six Months Ended  June 30, 2006** | ** ** |
| ** **                      | ** ** | **(dollars in thousands)**                    | ** ** |
| Net sales                       |       | $                                                       | 128,782    |   | $ | 152,102 |   |
| *% of  net sales*               | * *   | *100.0*                                                 | *%*        | *100.0* | *%* |
| Cost of sales                   |       | 104,362                                                 |       | 126,316 |   |
| *% of  net sales*               | * *   | *81.0*                                                  | *%*        | *83.0* | *%* |
| * *                        | * *   | * *                                                | * *   | * * | * * |
| Gross profit                    |       | 24,420                                                  |       | 25,786 |   |
| *% of  net sales*               | * *   | *19.0*                                                  | *%*        | *17.0* | *%* |
| Operating  expenses             |       | 17,378                                                  |       | 9,227 |   |
| *% of  net sales*               | * *   | *13.5*                                                  | *%*        | *6.1* | *%* |
| * *                        | * *   | * *                                                | * *   | * * | * * |
| Operating income                |       | 7,042                                                   |       | 16,559 |   |
| *% of  net sales*               | * *   | *5.5*                                                   | *%*        | *10.9* | *%* |
| Other expenses  (income):       |       |                                                    |       |   |   |
| Interest expense                |       | 7,856                                                   |       | 6,968 |   |
| *% of  net sales*               | * *   | *6.1*                                                   | *%*        | *4.6* | *%* |
| Other income,  net              |       | (147                                                    | )          | (28 | ) |
| *% of  net sales*               | * *   | *-0.1*                                                  | *%*        | *0.0* | *%* |
| Income tax  (benefit) provision |       | (307                                                    | )          | 3,897 |   |
| *% of  net sales*               | * *   | *-0.2*                                                  | *%*        | *2.5* | *%* |
| * *                        | * *   | * *                                                | * *   | * * | * * |
| Net (loss)  income              |       | (360                                                    | )          | 5,722 |   |
| *% of net sales*                | * *   | *-0.3*                                                  | *%*        | *3.8* | *%* |
|                                 |            |                                                         |            |  |  |  |  |

 

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*Net sales.*  Net sales decreased$23.3 million, or 15.3%, from $152.1 million for the six months endedJune 30, 2006 to $128.8 million for the six months ended June 30,2007.  Sales in our hardwood andengineered wood product line decreased $17.5 million and $5.8 million,respectively.  These decreases areattributable to a combination of (i) an overall slowdown in the market thatbegan in the third quarter 2006, (ii) a greater effect due to the seasonalityin the first quarter 2007 as our customers were not operating above theircapacities as they were in 2006, (iii) lower selling prices in conjunction withlower material costs, and (iv) to a lesser extent, a reduction due to the lossof market share on a hardwood door program in 2007.

*Cost of sales.*  Costof sales decreased $21.9 million, or 17.3%, from $126.3 million forthe six months ended June 30, 2006 to $104.4 million for the six monthsended June 30, 2007.  This decrease incost of sales is primarily attributable to lower material, labor and overheadcosts as a result of lower volume of sales, but other factors include;(i) improved operational performance related to yield and laborproductivities, (ii) lower stock compensation expense, and (iii) lower hardwoodmaterial costs. These were partially offset by (i) increased multi-densityfiber board and particle board costs related to our engineered wood productsline and (ii) transaction incentives incurred in connection with the Merger.

*Gross profit.*  Gross profit decreased$1.4 million, or 5.4%, from $25.8 million for the six months endedJune 30, 2006 to $24.4 million for the same period in 2007. As apercentage of net sales, our gross profit increased 200 basis points from 17.0%for the six months ended June 30, 2006 to 19.0% for the same period in2007.  This increase reflects(i) improved operational performance, (ii) lower stock compensation expense,and (iii) lower hardwood material costs. This increase was partially offset with (i) board cost increases relatedto our engineered wood product line and (ii) transaction incentive costsincurred in connection with the Merger.

*Operating expenses.*  Operating expenses increased$8.2 million, or 89.1%, from $9.2 million for the six months endedJune 30, 2006 to $17.4 million for the same period in 2007.  The increase consists of approximately (i)$7.2 million of transaction expenses related to the Merger, (ii) $0.5 millionrelated to efforts to refinance a portion of the outstanding debt, and (iii)$1.0 million in transaction incentives incurred in connection with theMerger.   These were partially offsetwith (i) lower salaries due to eliminated positions, (ii) lower stockcompensation expense, and (iii) lower incentive expenses.

*Operating income.* Operating income decreased by $9.6 million, or 57.8%, from$16.6 million for the six months ended June 30, 2006 to $7.0 millionfor the six months ended June 30, 2007 as a result of the net effect of thefactors described above.

*Interest expense.* Interest expense increased $0.9 million, or 12.9%, from$7.0 million for the six months ended June 30, 2006 to $7.9 millionfor the six months ended June 30, 2007. This increase relates to (i) increasedexpense of deferred financing fees in connection with the Merger, and (ii) ahigher average debt balance due to the additional debt assumed in conjunctionwith the Merger.

*Other income.*  Other income was $28,000 and $147,000for the six months ended June 30, 2006 and June 30, 2007, respectively.  This income is from interest received fromour interest bearing accounts.

*Income tax provision.*  Incometax expense decreased $4.2 million, or 107.7%, from an income tax expense of$3.9 for the six months ended June 30, 2006 to an income tax benefit of $0.3million for the six months ended June 30, 2007 as a result of lower earnings.The effective tax rate increased from 40.5% in 2006 to 46.0% in 2007 due topermanent differences associated with the Merger.

*Net income.*  Net income decreased$6.1 million, or 107.0%, from net income of $5.7 million for the sixmonths ended June 30, 2006 to a net loss of $0.4 million for the sixmonths ended June 30, 2007 as a result of the factors described above.

**Liquidity and Capital Resources**

Ourprimary cash needs are working capital, capital expenditures and debt service.We have historically financed these cash requirements through internallygenerated cash flow and funds borrowed under our existing senior secured creditfacilities.

*Refinancing*. On February 18, 2004,we issued the 10% Senior Notes due 2012, and paid the entire outstandingbalance of our old senior secured credit facility and terminated the relatedcredit agreement.  Our existing seniorcredit facility (which is referred to herein as the “2005 Senior CreditFacility”) was amended and restated in September 2005, providing for revolvingcredit of up to $40.0 million subject to a borrowing base, a $7.5 millionnonamortizing term loan, and a $7.5 million nonamortizing capital expenditureloan to be drawn upon through June 30, 2006. As of June 30, 2006, the nonamortizing capital expenditure loan hadexpired.  The outstanding principal boreinterest at a fluctuating rate equal to either the base rate plus 2 3¤4% per annum or LIBOR plus 3.0% per annum.  The 2005 Senior Credit Facility wasterminated, and all outstanding borrowings thereunder repaid, on January 9,2007 in connection with the Merger.

In conjunction with the Merger on January 9, 2007,the Company entered into a new senior credit facility (the “New Senior 

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Credit Facility”), with Credit Suisse, Cayman Islands Branch, whichprovided for (i) a senior secured first lien term loan facility in an aggregateprincipal amount of $150.0 million (the “First Lien Term Facility”) and (ii) asenior secured first lien revolving credit facility in an aggregate principalamount up to $25.0 million, subject to certain conditions, (the “RevolvingFacility” and, together with the First Lien Term Facility, the “First LienFacilities”) of which $10.0 million is available through a subfacility in theform of letters of credit.  Subject tocertain conditions, the First Lien Term Facility may be increased by up to$30.0 million during the life of the First Lien Term Facility at the request ofthe Company with the consent from those lenders that agree to participate insuch increase.  Subject to the foregoing,effective as of April 30, 2007, no additional borrowings are available underthe First Lien Term Facility beyond the $9.8 million outstanding at March 31,2007.  As of June 30, 2007, the maximumamount of borrowings available to the Company under the Revolving Facility was$12.5 million.  As of June 30, 2007borrowings of $9.4 million were outstanding under the First Lien Term Facility,and nothing was outstanding under the Revolving Facility.  The outstanding principal of suchindebtedness bears interest at a fluctuating rate equal to either the base rateplus 1.75% per annum or LIBOR plus 2.75% per annum.  We mustcomply with 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, 2007.  TheNew Senior Credit Facility is scheduled to mature January 2013.

In conjunction with theMerger, the Parent entered into Note Purchase Agreements with OCM MezzanineFund II, L.P. and Olympus Growth Fund IV, L.P. The Note Purchase Agreement with OCM Mezzanine Fund II, L.P. consistedof $43.0 million senior pay-in-kind notes with no required principalamortization.  The Note PurchaseAgreement with Olympus Growth Fund IV, L.P. consisted of $43.0 million juniorpay-in-kind notes with no required principal amortization.  These notes (the “Parent Notes”) arescheduled to mature in April 2012. During the term of the Parent Notes, Parent is able at its option to payinterest on the Parent Notes through the issuance of additional notes. TheCompany is not liable for, and has not otherwise guaranteed, any of theobligations of Parent with respect to the Parent Notes.  The Company is, however, subject to a numberof restrictive covenants under the Note Purchase Agreements. In addition, theCompany is limited in its ability to pay dividends or otherwise makedistributions to Parent under the New Senior Credit Facility and the indenturegoverning the $120.0 million of 10% Senior Notes due 2012 (the “10% SeniorNotes due 2012”).  The Parent Notes arenot 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 of ParentNotes to Olympus Growth Fund IV, L.P., and purchased $20.0 million of ParentNotes from OCM Mezzanine Fund II, L.P.

The 2005 acquisition ofsubstantially all of the assets of Dimension Moldings, Inc, and associated feesand expenses at closing were funded one-half by the sale of shares of theCompany’s voting common stock to the Company’s former stockholders, and theremainder with operating cash and a draw down on the Company’s senior securedcredit facility.  In the first quarter2006, we paid an accelerated earn-out payment in the amount of $2.0 million tothe owners of Dimension Moldings, Inc. as a result of the operations of theseassets meeting agreed upon earnings targets. As a resultof the change in control caused by the Merger on January 9, 2007, the remaining$5.0 million potential earnout obligation, which included $1.0 million accruedat June 30, 2006, was accelerated and paid.

OurNew Senior Credit Facility, the indenture governing the 10% Senior Notes due2012, and Parent Notes impose certain restrictions on our ability to incurindebtedness, pay dividends, make investments, grant liens, sell our assets andengage in certain other activities.  Weare not liable for, and did not otherwise guarantee, any of the obligations ofParent with respect to the Parent Notes. We are limited in our ability to pay dividends or otherwise make otherdistributions to Parent under the New Senior Credit Facility and the indenturegoverning the 10% Senior Notes due 2012. Indebtedness for borrowed money incurredunder our First Lien Term Facility under our New Senior Credit Facility issecured by substantially all of our assets, including our real and personalproperty, inventory, accounts receivable, intellectual property and otherintangibles.

Asof June 30, 2007, we had $0.9 million of capital lease obligations, of which$0.5 million was current and as of December 31, 2006, we had $1.1 million ofcapital lease obligations, of which $0.6 million was current.

As of June 30, 2007, we had $11.4 million of cash andcash equivalents available for any corporate purposes, compared to $0.6 millionas of June 30, 2006.

*Cash flow from operatingactivities.*  Cash provided by operating activitiesfor the six months ended June 30, 2007 was $1.5 million, while cash provided byoperating activities for the six months ended June 30, 2006 was $6.8million.  The increased use of cash foroperating activities is mainly attributable to (i) lower net income and (ii)increased days of inventory on hand.

*Cash flow from investing activities.*  Netcash used in investing activities was $8.3 million for the six months endedJune 30, 2007 and $9.4 million for the six months ended June 30, 2006. Capitalexpenditures in the six months ended June 30, 2007 were $4.3 million comparedto $9.5 million for the six months ended June 30, 2006.  The decrease in capital expenditures in 2007is primarily due to (i) the expansion of our St. Cloud door plant in 2006, and(ii) the acquisition of equipment for our roughmill facility in Greenville,Pennsylvania, most of which was paid in 2006. Net cash used in investing activities for the six months ended June 30,2007 includes $4.0 million due to an accelerated Dimension Moldings, Inc.earn-out payment in conjunction with the Merger.

*Cash flow from financingactivities.*  Net cash provided by financing activities forthe six months ended June 30, 2007 totaled $10.2 

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million 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 Credit Facilityof $10.2 million that funded the payoff of the 2005 Senior Credit Facility 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 the Mergeror ongoing operations of $1.6 million. Net cash used in financing activities for the six months ended June 30,2006 totaled $0.8 million, primarily attributable to capital lease payments.

We anticipate that the funds generated by operationsand funds available under the New Senior Credit Facility will be sufficient tomeet working capital requirements and to finance capital expenditures for theforeseeable future, including the next twelve months. We cannot provideassurances that our business will generate sufficient cash flow fromoperations, that anticipated net sales growth and operating improvements willbe realized or that future borrowings will be available under our New SeniorCredit Facility in an amount sufficient to enable us to service ourindebtedness, including the 10% Senior Notes due 2012, or to fund our otherliquidity needs. In addition, we cannot provide assurances that we will be ableto refinance any of our indebtedness, including our New Senior Credit Facilityand the 10% Senior Notes due 2012, on commercially reasonable terms, if atall.  We intend to incuradditional capital expenditures in the ordinary course of business.

**Inflation**

Our cost of sales is subject to inflationarypressures on labor costs, prices of the raw materials we use and variousoverhead costs. We generally have been able over time to offset the effects ofinflation and price fluctuations through a combination of sales price increasesand operational efficiencies.

**Seasonality**

Our sales historically have been moderately seasonal,reflecting the temporary slow down in consumer purchasing activity during thewinter holiday season and the summer months.

### **Critical Accounting Policies**

In our Annual Report on Form 10-K for the year endedDecember 31, 2006, we identified the critical accounting policies, which affectour more significant estimates and assumptions used in preparing ourconsolidated financial statements.  Wehave not changed these policies from those previously disclosed in our annualreport.

**New Accounting Standards**

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

### **Item 3. Quantitative and Qualitative Disclosures aboutMarket Risk**

We are subject to various market risks such asfluctuating lumber prices, interest rates, and market conditions.

*Commodity price risk.* Hardwood lumber accounts for the largest portion of our material costs.Our profitability is therefore affected by the prices of lumber which mayfluctuate based on a number of factors beyond our control, including, amongothers, changes in supply and demand, general economic conditions, labor costs,competition and, in some cases, government regulation. Though we are notdependent on any single supplier for our raw materials, we have no long-termsupply contracts and thus, are subject to changes in the prices charged by oursuppliers. The prices for the primary hardwood species we use in the productionof our hardwood doors and components are subject to some volatility.

*Interest rate risk.*  We areexposed to market risk relating to changes in interest rates in respect of aportion of our long-term debt and a portion of our capital leases. As of June 30, 2007, we had $9.4 millionoutstanding under the First Lien Term Facility, which bears interest atvariable rates.  In addition, as of that date, we hadapproximately $0.6 million of capital leases that bear interest atvariable rates. We believe that a one percent (1%) increase in the interestrates currently in effect would not have a material adverse effect on ourfinancial condition or results of operations.

*Market Conditions. *The Company derives a significant portion of its revenue as a result ofthe demand for its products created by the building of new homes, and repairand remodeling of existing homes.  Duringthe second half of 2006, the home building, repair and remodeling industryexperienced a slowdown as a result of general economic conditions.  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.

### **Item 4. Controls and Procedures**

(a)            Evaluation of disclosure controls andprocedures.

As required by Rule 13a-15 under the SecuritiesExchange Act of 1934, we carried out an evaluation under the supervision andwith 

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the participation of our management, including our Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of our disclosurecontrols and procedures as of June 30, 2007. In designing and evaluating ourdisclosure controls and procedures, we and our management recognize that anycontrols and procedures, no matter how well designed and operated, can provideonly reasonable assurance of achieving the desired control objectives, and ourmanagement necessarily was required to apply its judgment in evaluating andimplementing possible controls and procedures. Based upon that evaluation, ourChief Executive Officer and Chief Financial Officer have concluded that theybelieve that, as of June 30, 2007, our disclosure controls and procedures werereasonably effective to ensure that information required to be disclosed by usin the reports we file or submit under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in the Securitiesand Exchange Commission’s rules and forms. The Chief Executive Officerand Chief Financial Officer have also concluded that controls and proceduresare designed to ensure that information required to be disclosed is accumulatedand communicated to our management, including our principal executive andprincipal financial officers as appropriate to allow timely decisions regardingrequired disclosure.  We will continue to review and document ourdisclosure controls and procedures on an ongoing basis, and may from time to timemake changes aimed at enhancing their effectiveness and to ensure that oursystems evolve with our business.

(b)           Changes in internal controls over financialreporting.

None.

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**PART II—OTHER INFORMATION**

**Item 1. Legal Proceedings**

No pending material legal proceedings.

**Item 1A. Risk Factors**

The Company has included inits Annual Report on Form 10-K for the year ended December 31, 2006, adescription of certain risks and uncertainties that could affect the Company’sbusiness, future performance or financial condition (the “Risk Factors”).  The Risk Factors are hereby incorporated inPart II, Item IA of this Form 10-Q. Investors should consider the Risk Factors prior to making an investmentdecision with respect to the Company’s securities.

In addition, the followingRisk Factor should be considered prior to making an investment decision withrespect to the Company’s securities:

***If the current slowdown inthe home building, repair and remodeling industry continues for an extendedperiod of time, it could have a material adverse effect on the Company’sbusiness, financial condition or results of operations. ***The Company derives a significant portion of its revenue as a result ofthe demand for its products created by the building of new homes, and repairand remodeling of existing homes.  Duringthe third quarter of 2006, the home building, repair and remodeling industryexperienced a slowdown as a result of general economic conditions.  This slowdown has continued into 2007, andhas had a negative impact on our results of operations for the six months endedJune 30, 2007.  If this slowdown were tocontinue or worsen over an extended period of time, it could have a materialadverse effect on the Company’s business, financial condition or results ofoperations.

**Item 2. Unregistered Sales of EquitySecurities and Use of Proceeds**

None.

**Item 3. Defaults Upon SeniorSecurities**

None.

**Item 4. Submission of Matters to aVote of Security Holders**

None.

**Item 5. Other Information**

### None.

### **Item 6. Exhibits**

| 31.1  |   | Certification of Vice President, Treasurer and  Secretary of WII Components, Inc., pursuant to Rules 13a-14(a) and  15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2  |   | Certification of Chief Executive Officer of WII  Components, Inc., pursuant to Rules 13a-14(a) and 15d-14(a), as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                  |
| 32.1* |   | Certification of Vice President, 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 shall not be deemed “filed” for purposes ofSection 18 of the Securities Exchange Act of 1934, or otherwise subject tothe liability of that section, nor shall it be deemed to be incorporated byreference into any filing under the Securities Act of 1933 or the SecuritiesExchange Act of 1934.

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                         | WII COMPONENTS, INC. |
|-------------------------|----------------------|
|                    |                 |   |
| Dated: August  10, 2007 | By:                  |   |
|                    |                 | /s/ John Fitzpatrick |
|                    |                 | John Fitzpatrick |
|                    |                 | President and Chief Executive Officer |
|                    |                 | (Principal Executive Officer) |
| Dated: August  10, 2007 |                 |   |
|                    |                 | /s/ Dale B. Herbst |
|                    |                 | Dale B. Herbst |
|                    |                 | Chief Financial Officer, Treasurer and Secretary |
|                    |                 | (Principal Financial and Accounting Officer) |

 

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