**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

----

**FORM 10-Q**

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

**For the quarterly period ended September 30, 2006**

**or**

**o**                                 TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934

**Commission file number:**

**333-115490**

----

**WII COMPONENTS, 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.

As of November 10, 2006, 21,762,081 shares of votingcommon stock, $.01 par value per share, were outstanding and 854,261 shares ofnon-voting common stock, $.01 par value per share, were outstanding (all ofwhich are privately owned and not traded on a public market).

 

----

**WIICOMPONENTS, INC.**

**FORM 10-Q**

**QuarterEnded September 30, 2006**

**Table ofContents**
| **Part I—Financial Information**                                                                                                                     | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Item 1.  Financial Statements                                                                                                                             |       |
| Condensed Consolidated Balance Sheets  as of September 30, 2006 and December 31, 2005 (unaudited)                                                         | 1          |
| Condensed Consolidated Statements of  Operations for the Three Months Ended September 30, 2006 and the Three Months  Ended September 30, 2005 (unaudited) | 2          |
| Condensed Consolidated Statements of  Operations for the Nine Months Ended September 30, 2006 and the Nine Months  Ended September 30, 2005 (unaudited)   | 3          |
| Condensed Consolidated Statements of  Cash Flows for the Nine Months Ended September 30, 2006 and the Nine Months  Ended September 30, 2005 (unaudited)   | 4          |
| Notes to Condensed Consolidated Financial  Statements (unaudited)                                                                                         | 5          |
| Item 2. Management’s Discussion and Analysis  of Financial Condition and Results of Operations                                                       | 9          |
| Item 3. Quantitative and  Qualitative Disclosures about Market Risk                                                                                       | 13         |
| Item 4. Controls and Procedures                                                                                                                           | 14         |
|                                                                                                                                                      |       |
| **Part II-Other  Information**                                                                                                                            | ** ** |
| Item 1. Legal Proceedings                                                                                                                                 | 15         |
| Item 1A. Risk Factors                                                                                                                                     | 15         |
| Item 2. Unregistered Sales  of Equity Securities and Use of Proceeds                                                                                      | 15         |
| Item 3. Defaults Upon Senior  Securities                                                                                                                  | 15         |
| Item 4. Submission of  Matters to a Vote of Security Holders                                                                                              | 15         |
| Item 5. Other Information                                                                                                                                 | 15         |
| Item 6. Exhibits                                                                                                                                          | 15         |
| Signatures                                                                                                                                                | 16         |

 

----

**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCESHEETS**

**(UNAUDITED)**

**(In thousands)**
| ** **                                     | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                     | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current Assets:                                |       |                         |       |                        |       |
| Cash                                           |       | $                            | 215        |                        | $          | 3,981 |   |
| Accounts  receivable, net                      |       | 16,045                       |       | 14,682                      |       |
| Inventories                                    |       | 22,747                       |       | 20,770                      |       |
| Other current  assets                          |       | 1,915                        |       | 2,492                       |       |
| Total current  assets                          |       | 40,922                       |       | 41,925                      |       |
|                                           |       |                         |       |                        |       |
| Property, plant, and  equipment, net           |       | 58,674                       |       | 49,921                      |       |
| Goodwill                                       |       | 108,748                      |       | 107,748                     |       |
| Customer relationship                          |       | 13,653                       |       | 14,896                      |       |
| Noncompete agreements                          |       | 500                          |       | 849                         |       |
| Other assets                                   |       | 5,447                        |       | 6,255                       |       |
| TOTAL                                          |       | $                            | 227,944    |                        | $          | 221,594 |   |
| ** **                                     | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY** | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current Liabilities:                           |       |                         |       |                        |       |
| Current  maturities of long-term debt          |       | $                            | 622        |                        | $          | 1,262 |   |
| Accounts payable                               |       | 7,190                        |       | 6,993                       |       |
| Accrued payroll                                |       | 3,270                        |       | 3,674                       |       |
| Other current  liabilities                     |       | 8,902                        |       | 13,027                      |       |
| Total current  liabilities                     |       | 19,984                       |       | 24,956                      |       |
|                                           |       |                         |       |                        |       |
| Long-term debt, net of  current maturities     |       | 127,500                      |       | 127,500                     |       |
| Other noncurrent  liabilities                  |       | 4,907                        |       | 5,219                       |       |
|                                           |       |                         |       |                        |       |
| Stockholders’ Equity:                     |       |                         |       |                        |       |
| Common stock—voting                       |       | 217                          |       | 217                         |       |
| Common  stock—nonvoting                   |       | 9                            |       | 9                           |       |
| Additional  paid-in capital                    |       | 55,288                       |       | 51,927                      |       |
| Retained  earnings                             |       | 20,039                       |       | 11,766                      |       |
| Total  stockholders’ equity               |       | 75,553                       |       | 63,919                      |       |
| TOTAL                                          |       | $                            | 227,944    |                        | $          | 221,594 |   |

 

See notes to condensed consolidated financialstatements (unaudited).

1

----

**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(UNAUDITED)**

**(In thousands)**
| ** **                                | ** ** | **Three Months  Ended  September 30, 2006** | ** ** | **Three Months  Ended  September 30, 2005** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| NET SALES                                 |       | $                                                          | 69,852     |                                                       | $          | 68,067 |   |
| COST OF SALES                             |       | 57,894                                                     |       | 57,372                                                     |       |
| Gross profit                              |       | 11,958                                                     |       | 10,695                                                     |       |
|                                      |       |                                                       |       |                                                       |       |
| OPERATING  EXPENSES:                      |       |                                                       |       |                                                       |       |
| General and administrative                |       | 3,748                                                      |       | 2,832                                                      |       |
| Selling and marketing                     |       | 838                                                        |       | 817                                                        |       |
| Gain on sale of assets                    |       | (123                                                       | )          | (1                                                         | )          |
| Total operating expenses                  |       | 4,463                                                      |       | 3,648                                                      |       |
|                                      |       |                                                       |       |                                                       |       |
| OPERATING INCOME                          |       | 7,495                                                      |       | 7,047                                                      |       |
|                                      |       |                                                       |       |                                                       |       |
| OTHER EXPENSE:                            |       |                                                       |       |                                                       |       |
| Interest income                           |       | 10                                                         |       | 7                                                          |       |
| Interest expense                          |       | (3,551                                                     | )          | (3,454                                                     | )          |
| Other income                              |       | 2                                                          |       | 0                                                          |       |
| Total other expense                       |       | (3,539                                                     | )          | (3,447                                                     | )          |
|                                      |       |                                                       |       |                                                       |       |
| INCOME BEFORE  PROVISION FOR INCOME TAXES |       | 3,956                                                      |       | 3,600                                                      |       |
| INCOME TAX  PROVISION                     |       | 1,405                                                      |       | 1,400                                                      |       |
| NET INCOME                                |       | $                                                          | 2,551      |                                                       | $          | 2,200 |   |

 

See notes to condensed consolidated financialstatements (unaudited).

2

----

**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(UNAUDITED)**

**(In thousands)**
| ** **                                | ** ** | **Nine Months  Ended  September 30, 2006** | ** ** | **Nine Months  Ended  September 30, 2005** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| NET SALES                                 |       | $                                                         | 221,955    |                                                      | $          | 192,181 |   |
| COST OF SALES                             |       | 184,211                                                   |       | 161,413                                                   |       |
| Gross profit                              |       | 37,744                                                    |       | 30,768                                                    |       |
|                                      |       |                                                      |       |                                                      |       |
| OPERATING  EXPENSES:                      |       |                                                      |       |                                                      |       |
| General and administrative                |       | 11,323                                                    |       | 8,349                                                     |       |
| Selling and marketing                     |       | 2,497                                                     |       | 2,433                                                     |       |
| (Gain) loss on sale of assets             |       | (129                                                      | )          | 18                                                        |       |
| Total operating expenses                  |       | 13,691                                                    |       | 10,800                                                    |       |
|                                      |       |                                                      |       |                                                      |       |
| OPERATING INCOME                          |       | 24,053                                                    |       | 19,968                                                    |       |
|                                      |       |                                                      |       |                                                      |       |
| OTHER EXPENSE:                            |       |                                                      |       |                                                      |       |
| Interest income                           |       | 40                                                        |       | 14                                                        |       |
| Interest expense                          |       | (10,519                                                   | )          | (10,014                                                   | )          |
| Other income                              |       | 0                                                         |       | 6                                                         |       |
| Total other expense                       |       | (10,479                                                   | )          | (9,994                                                    | )          |
|                                      |       |                                                      |       |                                                      |       |
| INCOME BEFORE  PROVISION FOR INCOME TAXES |       | 13,574                                                    |       | 9,974                                                     |       |
| INCOME TAX  PROVISION                     |       | 5,301                                                     |       | 3,790                                                     |       |
| NET INCOME                                |       | $                                                         | 8,273      |                                                      | $          | 6,184 |   |

 

See notes to condensed consolidated financialstatements (unaudited).

3

----

**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(UNAUDITED)**

**(In thousands)**
| ** **                                                                             | ** ** | **Nine Months  Ended  September 30, 2006** | ** ** | **Nine Months  Ended  September 30, 2005** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| OPERATING  ACTIVITIES:                                                                 |       |                                                      |       |                                                      |       |
| Net income                                                                             |       | $                                                         | 8,273      |                                                      | $          | 6,184 |   |
|                                                                                   |       |                                                      |       |                                                      |       |
| Adjustments to  reconcile net income to net cash provided by operating activities:     |       |                                                      |       |                                                      |       |
| Depreciation and amortization                                                          |       | 5,784                                                     |       | 4,884                                                     |       |
| (Gain) loss on sale of assets                                                          |       | (129                                                      | )          | 18                                                        |       |
| Amortization of debt issue costs                                                       |       | 807                                                       |       | 785                                                       |       |
| Stock compensation expense                                                             |       | 3,338                                                     |       | 1,261                                                     |       |
|                                                                                   |       |                                                      |       |                                                      |       |
| Change in  operating assets and liabilities:                                           |       |                                                      |       |                                                      |       |
| Accounts receivable                                                                    |       | (1,196                                                    | )          | (5,076                                                    | )          |
| Inventories                                                                            |       | (1,977                                                    | )          | (1,834                                                    | )          |
| Other current assets                                                                   |       | 578                                                       |       | 1,221                                                     |       |
| Accounts payable                                                                       |       | 349                                                       |       | 1,078                                                     |       |
| Accrued payroll and other current liabilities                                          |       | (5,529                                                    | )          | (1,750                                                    | )          |
| Net cash provided by operating activities                                              |       | 10,298                                                    |       | 6,771                                                     |       |
|                                                                                   |       |                                                      |       |                                                      |       |
| INVESTING  ACTIVITIES:                                                                 |       |                                                      |       |                                                      |       |
| Purchases of property, plant, and equipment                                            |       | (13,337                                                   | )          | (5,968                                                    | )          |
| Proceeds from sale of assets                                                           |       | 202                                                       |       | 193                                                       |       |
| Dimension Moldings, Inc. acquisition                                                   |       | 0                                                         |       | (9,289                                                    | )          |
| Net cash used in investing activities                                                  |       | (13,135                                                   | )          | (15,064                                                   | )          |
|                                                                                   |       |                                                      |       |                                                      |       |
| FINANCING  ACTIVITIES:                                                                 |       |                                                      |       |                                                      |       |
| Principal payments under long-term financing  agreements                               |       | (1,852                                                    | )          | (16,496                                                   | )          |
| Borrowings of long-term debt                                                           |       | 900                                                       |       | 23,500                                                    |       |
| Issuance of common stock                                                               |       | 23                                                        |       | 4,747                                                     |       |
| Debt issue costs                                                                       |       | 0                                                         |       | (395                                                      | )          |
| Net cash (used) provided in financing activities                                       |       | (929                                                      | )          | 11,356                                                    |       |
|                                                                                   |       |                                                      |       |                                                      |       |
| NET (DECREASE)  INCREASE IN CASH                                                       |       | (3,766                                                    | )          | 3,063                                                     |       |
| CASH—Beginning  of period                                                         |       | 3,981                                                     |       | 2                                                         |       |
|                                                                                   |       |                                                      |       |                                                      |       |
| CASH—End of  period                                                               |       | $                                                         | 215        |                                                      | $          | 3,065 |   |
|                                                                                   |       |                                                      |       |                                                      |       |
| SUPPLEMENTAL CASH  FLOW INFORMATION:                                                   |       |                                                      |       |                                                      |       |
| Cash paid for interest                                                                 |       | $                                                         | 12,600     |                                                      | $          | 12,312 |   |
|                                                                                   |       |                                                      |       |                                                      |       |
| Cash paid for income taxes—net                                                    |       | $                                                         | 6,360      |                                                      | $          | 2,293 |   |
| NONCASH  ACTIVITY:                                                                     |       |                                                      |       |                                                      |       |
| Note receivable received in connection with the sale  of property, plant and equipment |       | $                                                         | 167        |                                                      | $          | — |   |
| DMI earnout-contingent consideration                                                   |       | $                                                         | 1,000      |                                                      | $          | — |   |
| Capital  expenditures in accounts payable                                              |       | $                                                         | 500        |                                                      | $          | — |   |

 

See notes to condensed consolidated financial statements (unaudited).

4

----

**WII COMPONENTS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED**

**CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**1.  BASIS OFPRESENTATION**

The Company prepared the accompanying unauditedcondensed consolidated financial statements following the requirements of the Securitiesand Exchange Commission for interim reporting. As permitted under those rules,certain notes or other financial information normally required by accountingprinciples generally accepted in the United States of America have beencondensed 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, 2005 included inits Form 10-K as filed with the Securities and Exchange Commission on March 23,2006. The condensed consolidated balance sheet as of December 31, 2005 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 financialstatements include all adjustments (consisting of normal recurring items)considered necessary to present fairly, when read in conjunction with theconsolidated financial statements and accompanying notes for the period endedDecember 31, 2005 included in our 10-K as filed with the Securities andExchange Commission on March 23, 2006, 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. On July 28, 2005 the Company completed the acquisition ofsubstantially all of the assets of Dimension Moldings, Inc.  (Note 3). All intercompany accounts andtransactions have been eliminated in the preparation of the consolidatedfinancial statements.

***Reclassifications-*** Certain prior year amounts, includingadjustments to the income statement classification of stock-based compensationin connection with the adoption of SFAS 123(R), have been reclassified toconform to the current fiscal year presentation.  These reclassifications have no impact on theCompany’s net income.

**2. SIGNIFICANT ACCOUNTING POLICIES**

***Inventories***—Inventories consisted of the following (inthousands):
| ** **      | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                            | 13,201     |                        | $          | 11,369 |   |
| Work in process |       | 5,410                        |       | 5,954                       |       |
| Finished goods  |       | 5,047                        |       | 4,360                       |       |
| LIFO adjustment |       | (911                         | )          | (913                        | )          |
|            |       | $                            | 22,747     |                        | $          | 20,770 |   |

 

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 September 30, 2006and December 31, 2005, inventory on the LIFO method represented 63% and59%, respectively, of consolidated inventories.

***Goodwill***—In 2002, the Company adopted and accounts forgoodwill in accordance 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 $107.7 million at December 31, 2005 to $108.7 millionat September 30, 2006.  As described inFootnote 3, the assets of Dimension Moldings, Inc. earnings targetassociated with the acquired business is projected to be met in 2006 resultingin an earnout payment to be paid in 2007. The Company therefore had accrued $1.0 million contingent considerationat June 30, 2006, the maximum earnout payment for the year, which was allocatedto goodwill.

***Customer Relationship—***Customer relationships relates to an intangible asset recorded throughthe purchase price allocation of the Grand Valley acquisition in 2004 and theacquisition of the assets of Dimension Moldings, Inc. for relationships with asignificant customer. The original cost of these customer relationshipsis $16.6 million, and the related accumulated amortization as of September 30,2006 is $2.9 million.  The intangible assets are being amortized overthe estimated life of 10 years. Amortization for the nine-month period endedSeptember 30, 2006 was $1,243,000. Expected annual amortization is as follows for the years ending December31 (in thousands):
| 2006      |   | $     | 1,657  |   |
|-----------|--------|-------|--------|--------|
| 2007      |   | 1,657 |   |
| 2008      |   | 1,657 |   |
| 2009      |   | 1,657 |   |
| 2010      |   | 1,657 |   |
| 2011-2015 |   | 6,611 |   |

 

5

----

***NoncompeteAgreement***—Noncompeteagreements primarily relate to agreements with the former owners of Brentwood(acquired in 2002), Grand Valley, and Dimension Moldings, Inc. Theoriginal cost of these noncompete agreements is $2.3 million, and the relatedaccumulated amortization as of September 30, 2006 is $1.8 million.  Noncompeterights are being amortized over the applicable terms of the agreements(5 years, 7 years, and 5 years respectively), and are expected to befully amortized by July 2007, April 2011, and July 2010 respectively.Amortization for the nine-month period ended September 30, 2006 was $348,000.  Expected annual amortization is as followsfor the years ending December 31 (in thousands):
| 2006 |   | $   | 465    |   |
|------|--------|-----|--------|--------|
| 2007 |   | 285 |   |
| 2008 |   | 34  |   |
| 2009 |   | 34  |   |
| 2010 |   | 26  |   |
| 2011 |   | 5   |   |

 

***Stock Options*****—**In April 2003, the 2003 Stock Option andGrant Plan (“2003 Plan”) was approved by the stockholders of the Company. The2003 Plan allows 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. Awards mayinclude, but are not limited to, stock options, restricted stock, unrestrictedstock awards, and substitute performance awards.  Option awards are generally granted with an exerciseprice equal to the calculated fair market value of the company’s stock.  Options generally vest over four years andhave 10-year contractual terms.  On May31, 2006, the 2003 Plan was amended by the Board to provide for the issuance ofan additional 500,000 options for a total of 3,000,000 options.  The stockholders approved the amendment onJune 8, 2006.

Effective January 1, 2006 the Company adopted Statement of FinancialAccounting Standards No. 123(R), *Share Based Payment*(SFAS No. 123(R)), which requires all share-based payments, including grants ofstock options, to be recognized in the statement of operations as an operatingexpense, based on their fair values over the requisite service period. TheCompany utilized the prospective transition method as permitted by SFAS 123(R).Under this transition method, SFAS No. 123(R) is applied prospectively to allnew awards issued as well as awards modified, repurchased, or cancelled afterthe effective date.  The Company shallcontinue to account for the 1,517,000 options outstanding at the effective dateof SFAS 123(R) using the accounting principles originally applied to thoseoptions.  The Company recorded $1,055,000and $3,338,000 for the three months ended and nine months ended September 30,2006, respectively, of related stock-based compensation expense. The totalincome tax benefit for share-based compensation arrangements was $375,000 and$1,305,000 for the three months ended and nine months ended September 30, 2006,respectively.  In accordance with theprospective transition method of SFAS 123(R), results for prior periods havenot been restated.

As of September 30, 2006, $1,403,000 of unrecognized compensation costsrelated to non-vested awards is expected to be recognized over a weightedaverage period of approximately seven months. In addition, $315,000 of unrecognized compensation costs related tonon-vested awards is expected to be recognized over a weighted average periodof approximately two years nine months.

On May 31, 2006 the Company issued 160,000 incentivestock options under the 2003 Plan to a key employee.  The options fully vest at the earlier of asale event or June 30, 2009, and have an exercise price per share of $5.54 atthe date of issuance.  The options’exercise price increases by $0.83 on July 1, 2007, and each anniversary datethereafter until termination of the options. The Company used a bi-nominal option pricing model to determine theaverage fair value of these options due to this adjusting exercise price.  The fair value of these options wascalculated to be $1.02 per share.  Theactivity for these options is immaterial and is therefore not statedseparately, but included in the tables below with the other option activity.

The Company uses the Black-Scholes option pricing model to determine theweighted average fair value of the non-adjusting exercise price options, and abi-nominal option pricing model for the adjusting exercise price options asdescribed above. The weighted average fair value of options granted during thenine months ended September 30, 2006 was $1.43. The fair value of options atthe date of grant and the weighted-average assumptions utilized to determinesuch values are indicated in the following table:
|                           | ** ** | **Nine Months Ended  September 30, 2006** | ** ** |
|---------------------------|------------|---------------------------------------------------------------|------------|
| Risk-free  interest rate  |       | 4.94                                                          | %          |
| Expected  volatility      |       | 28.0                                                          | %          |
| Expected life  (in years) |       | 6.5                                                           |       |
| Dividend yield            |       | —                                                        |       |

 

The risk-free interest rate is based on a treasury instrument whose termis consistent with the expected life of our stock options.  The expected volatility is based on theaverage historical volatility of the stock of similar companies with publiclytraded shares.  The Company estimated theexpected life of the stock options and stock option forfeitures based onhistorical experience.

Option transactions during the nine months endedSeptember 30, 2006 are summarized as follows:

6

----

 
|                                   | ** ** | **Options** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining Contractual  Term (Yrs.)** | ** ** |
|-----------------------------------|------------|-------------|------------|------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| Outstanding,  beginning of period |       | 2,351,000   |       | $                                              | 2.62       |                                                                    |       |   |
| Granted                           |       | 250,000     |       | 5.51                                           |       |                                                                    |       |
| Exercised                         |       | 10,750      |       | 2.12                                           |       |                                                                    |       |
| Canceled                          |       | (71,750     | )          | 4.26                                           |       |                                                                    |       |
| Outstanding, end  of period       |       | 2,518,500   |       | $                                              | 2.86       |                                                                    | 7.3        |   |
| Exercisable, end of  period       |       | 1,439,625   |       | $                                              | 2.27       |                                                                    | 6.8        |   |

 

***New AccountingPronouncements***—InNovember 2004, the Financial Accounting Standards Board (FASB) issued SFAS No.151, *Inventory Costs*.  This Statement requires that abnormal amountsof idle facility expense, freight, handling costs, and spoilage be recognizedas current period charges.  The Statementalso requires that fixed production overhead be allocated to conversion costsbased on the normal capacity of the production facilities.  SFAS No. 151 was effective for inventorycosts incurred by the Company beginning January 1, 2006.  The adoption of this Statement did not have amaterial impact on the Company’s consolidated financial position, results ofoperations, or cash flows.

In July 2006, theFASB issued FASB Interpretation No. (FIN) 48, *Accountingfor Uncertainty in Income Taxes, an interpretation of FASB Statement 109,*which clarifies the accounting for uncertainty in income taxes recognized inaccordance with FASB Statement No. 109, *Accountingfor Income Taxes.*FIN 48 is a comprehensive model for how a companyshould recognize, measure, present, and disclose in its financial statementsuncertain tax positions that the company has taken or expects to take in a taxreturn. If an income tax position exceeds a more likely than not (greater than50%) probability of success upon tax audit, the company will recognize anincome tax benefit in its financial statements. Additionally, companies arerequired to accrue interest and related penalties, if applicable, on all taxexposures consistent with jurisdictional tax laws. This interpretation is effectiveon January 1, 2007 for WII Components, Inc. and the Company is currently in theprocess of evaluating the impact of this interpretation on its financialcondition or results of operations.

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*. SFAS No. 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue measurements. This 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.

**3. ACQUISITIONS**

OnJuly 28, 2005, the Company acquired substantially all of the assets of amoldings manufacturing company operating under the name of Dimension Moldings,Inc.  The Company paid a cash purchaseprice at closing of $9.3 million.  Inaddition, the Company will be required to pay up to an aggregate of $7.0million if certain earnings targets are met at the end of each calendar yearfrom 2005 to 2010, which may be accelerated upon certain events.  In thefirst quarter 2006, the Company paid $2.0 million to the sellers of DimensionMoldings as a result of the acquired business meeting the earnings target setfor 2005.  Based on year-to-dateresults the earnings targets are projected to be met for 2006.  The Company therefore accrued $1.0 millioncontingent consideration at June 30, 2006, the maximum earn out payment for theyear, which was allocated to goodwill.  Slightly less than half of the purchase pricepaid at closing was funded with borrowings under the senior secured revolvingcredit facility and the remainder was funded from the proceeds of an equitycontribution from existing stockholders. The acquired assets of DimensionMoldings, Inc. are now operated and owned by Woodcraft Industries, Inc., theCompany’s subsidiary.

The acquisition of the assets of Dimension Moldings,Inc. was accounted for using the purchase method of accounting. Accordingly,the assets acquired and the liabilities assumed by the Company were recorded atfair value as of the date of the acquisition, including assigning value tocertain intangible assets acquired (a customer relationship for $8.7 millionand a noncompete for $0.1 million). Based on the purchase price allocation, the Company determined the fairvalue of the net assets acquired exceeded the $9.3 million closing purchaseprice by approximately $2.0 million.  Asa result, the Company recorded a current liability for $2.0 million as ofDecember 31, 2005, which was paid in the first quarter 2006.  Any additional contingentconsideration paid in excess of the original purchase price allocation will berecorded as goodwill. The components of the purchase price allocation are asfollows (in thousands):
| Current assets                  |   | $      | 1,504  |   |
|---------------------------------|--------|--------|--------|--------|
| Property, plant,  and equipment |   | 1,271  |   |
| Goodwill                        |   | 147    |   |
| Customer relationship           |   | 8,704  |   |
| Noncompete  agreement           |   | 100    |   |
| Assets acquired                 |   | 11,726 |   |
| Liabilities  assumed            |   | (437   | )      |
| Net assets  acquired            |   | 11,289 |   |
| Contingent  consideration       |   | (2,000 | )      |
| Closing purchase price          |   | $      | 9,289  |   |

 

7

----

**4. RELATED-PARTY TRANSACTIONS**

TheCompany has a management services agreement with an affiliate of its primaryinvestor whereby the Company pays a transaction fee to the affiliate forservices provided for each financing, refinancing, acquisition, or similarnonrecurring transaction.  The Companyreceived services from this affiliate related to the acquisition of the assetsof Dimension Moldings, Inc. for which it incurred costs totaling $313,000,which is included in the purchase price allocation.

The Company entered into noncompete agreements onApril 30, 2004 with the former owners of Grand Valley, and on July 28,2005 with the owners of Dimension Moldings, Inc. (Notes 2 and 3).

8

----

 

**Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

**FORWARD-LOOKINGSTATEMENTS**

Certain statements in this report are “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Act of1995. 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.

9

----

**Overview**

Weare one of the leading manufacturers of outsourced hardwood cabinet doors andcomponents and engineered wood products for the kitchen and bath industry inthe United States. Our products include (1) hardwood cabinet doorcomponents, face frames, moldings and drawer fronts, (2) fully assembledhardwood cabinet doors, (3) rigid thermofoil, or RTF, cabinet doors andcomponents, (4) veneer raised panels, or VRPs, and (5) a variety oflaminated and profile-wrapped components. We generate approximately 95% of oursales from the kitchen and bath cabinet manufacturing industry. Our customers,in turn, distribute their products through various sales channels, includingspecialty kitchen and bath cabinet dealers, home center retailers andhomebuilders. We conduct all of our operations through our Woodcraft,PrimeWood, Grand Valley and Brentwood subsidiaries and we operate tenmanufacturing facilities located in Minnesota, North Dakota, Ohio, Oregon,Pennsylvania, Kansas, and Kentucky that allow us to distribute our productsnationwide.

Weconsummated four strategic acquisitions that have substantially enhanced ourmarket position, product breadth and geographic reach. In June 1998, weacquired our PrimeWood subsidiary, or PrimeWood, a manufacturer of RTF, VRP andprofile-wrapped engineered wood products based in North Dakota. InJuly 2002, we acquired our Brentwood subsidiary, or Brentwood, amanufacturer of solid wood and RTF cabinet doors located in Oregon. InApril 2004, we acquired our Grand Valley subsidiary, or Grand Valley, amanufacturer of cabinet doors located in Ohio. In July 2005, we acquiredDimension Moldings, Inc. (DMI), a manufacturer of hardwood component moldingslocated in Ohio.

In September 2005, we amended and restated theexisting senior secured credit facility by expanding the revolving line ofcredit capacity to $40.0 million, advancing a $7.5 million nonamortizing termloan, and allowing the flexibility to advance up to $7.5 million through June30, 2006 on a nonamortizing capital expenditure loan.  As of September 30, 2006, we had not borrowedany funds under the nonamortizing capital expenditure loan.  We have the option, without penalty, toprepay the term loan throughout the loan commitment period.

**Results of Operations**

***Three Months Ended September 30, 2006Compared to the Three Months Ended September 30, 2005***

The following table outlines, for the three monthsended September 30, 2006 and for the three months ended September 30, 2005,selected operating data derived from our condensed consolidated statements ofoperations and presents this information as a percentage of net sales:
| ** **                | ** ** | **WII Components, Inc.**                             | ** ** |
|---------------------------|------------|----------------------------------------------------------------|------------|
| ** **                | ** ** | **Three Months Ended  September 30, 2006** | ** ** | **Three Months Ended  September 30, 2005** | ** ** |
| ** **                | ** ** | **(dollars in thousands)**                           | ** ** |
| Net sales                 |       | $                                                              | 69,852     |   | $ | 68,067 |   |
| *% of  net sales*         | * *   | *100.0*                                                        | *%*        | *100.0* | *%* |
| Cost of sales             |       | 57,894                                                         |       | 57,372 |   |
| *% of  net sales*         | * *   | *82.9*                                                         | *%*        | *84.3* | *%* |
| * *                  | * *   | * *                                                       | * *   | * * | * * |
| Gross profit              |       | 11,958                                                         |       | 10,695 |   |
| *% of  net sales*         | * *   | *17.1*                                                         | *%*        | *15.7* | *%* |
| Operating  expenses       |       | 4,463                                                          |       | 3,648 |   |
| *% of  net sales*         | * *   | *6.4*                                                          | *%*        | *5.4* | *%* |
| * *                  | * *   | * *                                                       | * *   | * * | * * |
| Operating income          |       | 7,495                                                          |       | 7,047 |   |
| *% of  net sales*         | * *   | *10.7*                                                         | *%*        | *10.3* | *%* |
| Other expenses  (income): |       |                                                           |       |   |   |
| Interest expense          |       | 3,551                                                          |       | 3,454 |   |
| *% of  net sales*         | * *   | *5.1*                                                          | *%*        | *5.1* | *%* |
| Other income,  net        |       | (12                                                            | )          | (7 | ) |
| *% of  net sales*         | * *   | *0.0*                                                          | *%*        | *0.0* | *%* |
| Income tax  provision     |       | 1,405                                                          |       | 1,400 |   |
| *% of  net sales*         | * *   | *2.0*                                                          | *%*        | *2.0* | *%* |
| * *                  | * *   | * *                                                       | * *   | * * | * * |
| Net income                |       | 2,551                                                          |       | 2,200 |   |
| *% of net sales*          | * *   | *3.7*                                                          | *%*        | *3.2* | *%* |
|                           |            |                                                                |            |  |  |  |  |

 

*Net sales.*  Net sales increased$1.8 million, or 2.6%, from $68.1 million for the three months endedSeptember 30, 2005 to $69.9 million for the three months ended September30, 2006.  Sales in our hardwood productline increased $4.2 million attributable to a combination of(i) increases in volume due to modest industry growth, which has sloweddown since the second quarter, (ii) increases in volume due to slight marketshare gain, and (iii) modest price adjustments made in response to priorincreases in raw material costs. This increase was offset by a $2.4 milliondecrease in sales related to our engineered wood products line, attributable tosoftness in the overall engineered wood products industry and decreases inmarket share.

10

----

 

*Cost of sales.*  Costof sales increased $0.5 million, or .9%, from $57.4 million for thethree months ended September 30, 2005 to $57.9 million for the threemonths ended September 30, 2006. This increase in cost of sales is primarilyattributable to higher material, labor and overhead costs as a result of highervolume of sales, but other factors include; (i) board cost increasesrelated to our engineered wood product line, (ii) start-up costs in ourPennsylvania facility, and (iii) increased stock compensation expense. Thesecosts were partially offset by (i) improved operational performance, primarilyat our Ohio and Oregon door making facilities, and (ii) to a lesser extent,leveraging our fixed costs over a larger sales base.

*Gross profit.*  Gross profit increased$1.3 million, or 12.1%, from $10.7 million for the three months endedSeptember 30, 2005 to $12.0 million for the same period in 2006. As apercentage of net sales, our gross profit increased 140 basis points from 15.7%for the three months ended September 30, 2005 to 17.1% for the same period in2006. This increase reflects (i) improved operational performance,primarily  at our Ohio and Oregon doormaking facilities, (ii) lower raw material costs in our hardwood productline, and (iii) leveraging our fixed costs over a larger sales base.  This increase was partially offset with boardcost increases related to our engineered wood product line and startup costs inour Pennsylvania facility.

*Operating expenses.*  Operating expenses increased$0.9 million, or 25.0%, from $3.6 million for the three months endedSeptember 30, 2005 to $4.5 million for the same period in 2006. Theincrease partially consists of (i) $0.6 million additional stockcompensation expense in 2006, and (ii) $0.2 million of additional professionalfees.

*Operating income.* Operating income increased by $0.4 million, or 5.6%, from$7.1 million for the three months ended September 30, 2005 to$7.5 million for the three months ended September 30, 2006 as a result ofthe net effect of the factors described above.

*Interest expense.* Interest expense increased $0.1 million, or 2.9%, from$3.5 million for the three months ended September 30, 2005 to$3.6 million for the three months ended September 30, 2006. This increaserelates to a higher average debt balance due to increased capital expendituresand the acquisition of the assets of Dimension Moldings, Inc. in July 2005.

*Other income.*  Other income was $12,000 and$7,000 for the three months ended September 30, 2006 and September 30, 2005,respectively.  This income is frominterest paid by our customers on past due balances.

*Income tax provision.*  Incometax expense increased $5,000, or 0.4% from an income tax expense of $1,400,000for the three months ended September 30, 2005 to an income tax expense of$1,405,000 for the three months ended September 30, 2006 as a result of higherearnings. The effective tax rate decreased 340 basis points from 38.9% in 2005to 35.5% in 2006 due to related true-ups of federal and state income taxliabilities upon completion of prior year tax returns.

*Net income.*  Net income increased$0.4 million, or 18.2%, from a net income of $2.2 million for thethree months ended September 30, 2005 to a net income of $2.6 million forthe three months ended September 30, 2006 as a result of the factors describedabove.

***Nine Months Ended September 30, 2006Compared to the Nine Months Ended September 30, 2005***

The following table outlines, for the nine monthsended September 30, 2006 and for the nine months ended September 30, 2005,selected operating data derived from our consolidated statements of operationsand presents this information as a percentage of net sales:
| ** **                | ** ** | **Nine Months Ended  September 30, 2006** | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|---------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                | ** ** | **(dollars in thousands)**                          | ** ** |
| Net sales                 |       | $                                                             | 221,955    |                                                          | $          | 192,181 |   |
| *% of  net sales*         | * *   | *100.0*                                                       | *%*        | *100.0*                                                       | *%*        |
| Cost of sales             |       | 184,211                                                       |       | 161,413                                                       |       |
| *% of  net sales*         | * *   | *83.0*                                                        | *%*        | *84.0*                                                        | *%*        |
| * *                  | * *   | * *                                                      | * *   | * *                                                      | * *   |
| Gross profit              |       | 37,744                                                        |       | 30,768                                                        |       |
| *% of  net sales*         | * *   | *17.0*                                                        | *%*        | *16.0*                                                        | *%*        |
| Operating  expenses       |       | 13,691                                                        |       | 10,800                                                        |       |
| *% of  net sales*         | * *   | *6.2*                                                         | *%*        | *5.6*                                                         | *%*        |
| * *                  | * *   | * *                                                      | * *   | * *                                                      | * *   |
| Operating income          |       | 24,053                                                        |       | 19,968                                                        |       |
| *% of  net sales*         | * *   | *10.8*                                                        | *%*        | *10.4*                                                        | *%*        |
| Other expenses  (income): |       |                                                          |       |                                                          |       |
| Interest expense          |       | 10,519                                                        |       | 10,014                                                        |       |
| *% of  net sales*         | * *   | *4.7*                                                         | *%*        | *5.2*                                                         | *%*        |
| Other income,  net        |       | (40                                                           | )          | (20                                                           | )          |
| *% of  net sales*         | * *   | *0.0*                                                         | *%*        | *0.0*                                                         | *%*        |
| Income tax  provision     |       | 5,301                                                         |       | 3,790                                                         |       |
| *% of  net sales*         | * *   | *2.4*                                                         | *%*        | *2.0*                                                         | *%*        |
| * *                  | * *   | * *                                                      | * *   | * *                                                      | * *   |
| Net income                |       | 8,273                                                         |       | 6,184                                                         |       |
| *% of net sales*          | * *   | *3.7*                                                         | *%*        | *3.2*                                                         | *%*        |
|                           |            |                                                               |            |                                                               |            |  |  |

 

11

----

*Net sales.*  Net sales increased$29.7 million, or 15.5%, from $192.2 million for the nine monthsended September 30, 2005 to $221.9 million for the nine months endedSeptember 30, 2006.  Sales in ourhardwood product line increased $34.2 million attributable to acombination of (i) increases in volume due to overall industry growth andmarket share gain, (ii) the inclusion of the results of the business acquiredin the purchase of the assets of Dimension Moldings, Inc. in July 2005, and(iii) to a lesser extent, price adjustments made in response to priorincreases in raw material costs. This increase was offset by a $4.5 milliondecrease in sales related to our engineered wood products line, attributable tosoftness in the engineered wood products industry and decreases in marketshare.

*Cost of sales.*  Costof sales increased $22.8 million, or 14.1%, from $161.4 million forthe nine months ended September 30, 2005 to $184.2 million for the ninemonths ended September 30, 2006. This increase in cost of sales is primarilyattributable to higher material, labor and overhead costs as a result of highervolume of sales, but other factors include; (i) the acquisition of theassets of Dimension Moldings, Inc. in July 2005, (ii) start-up costs inour Pennsylvania facility, (iii) board cost increases related to our engineeredwood product line, and (iv) stock compensation expense. These costs werepartially offset by (i) improved operational performance, primarily at our Ohioand Oregon door making facilities, and (ii) leveraging our fixed costs over alarger sales base.

*Gross profit.*  Gross profit increased$6.9 million, or 22.4%, from $30.8 million for the nine months endedSeptember 30, 2005 to $37.7 million for the same period in 2006 as aresult of the factors described above. As a percentage of net sales, our grossprofit increased 100 basis points from 16.0% for the nine months endedSeptember 30, 2005 to 17.0% for the same period in 2006. This increase reflects(i) improved operational performance, primarily  at our Ohio and Oregon door makingfacilities, (ii) lower raw material costs in our hardwood product line,and (iii) leveraging our fixed costs over a larger sales base.  This increase was partially offset with boardcost increases related to our engineered wood product line and startup costs inour Pennsylvania facility.

*Operating expenses.*  Operating expenses increased$2.9 million, or 26.9%, from $10.8 million for the nine months endedSeptember 30, 2005 to $13.7 million for the same period in 2006. Theincrease partially consists of (i) $1.5 million of additional stockcompensation expense in 2006, (ii) $0.6 million due to the inclusion of sevenfull months of operations of our Middlefield facility, which includes $0.5million of amortization for a customer relationship intangible asset, and (iii)$0.7 million of additional professional fees, bad debt, information systems andemployee incentive expenses.

*Operating income.* Operating income increased by $4.0 million, or 20.0%, from$20.0 million for the nine months ended September 30, 2005 to$24.0 million for the nine months ended September 30, 2006 as a result ofthe net effect of the factors described above.

*Interest expense.* Interest expense increased $0.5 million, or 5.0%, from$10.0 million for the nine months ended September 30, 2005 to$10.5 million for the nine months ended September 30, 2006.  This increase relates to a higher averagedebt balance due to increased capital expenditures and the acquisition of theassets of Dimension Moldings, Inc. in July 2005.

*Other income.*  Other income increased from$20,000 for the nine months ended September 30, 2005 to $40,000 of other incomefor the nine months ended September 30, 2006. This increase relates to the interest received related to short terminvestments in certificate of deposits and interest paid by our customers onpast due balances.

*Income tax provision.*  Incometax expense increased $1.5 million, or 39.5% from $3.8 million forthe nine months ended September 30, 2005 to $5.3 million for the ninemonths ended September 30, 2006 as a result of higher earnings, and a highereffective tax rate. The effective tax rate increased 110 basis points from38.0% in 2005 to 39.1% in 2006 due to additional state taxes as a result ofacquisitions.

*Net income.*  Net income increased$2.1 million, or 33.9%, from $6.2 million for the nine months endedSeptember 30, 2005 to $8.3 million for the nine months ended September 30,2006 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 internally generatedcash flow and funds borrowed under our existing senior secured creditfacilities.

*Refinancing*. On February 18, 2004, weissued $120.0 million of 10% senior notes due in 2012, and paid the entireoutstanding balance of our old senior secured credit facility and terminatedthe related credit agreement.  Ourexisting $55.0 million credit facility, which was amended and restated inSeptember 2005, provides for revolving credit of up to $40.0 millionsubject to a borrowing base, $7.5 million nonamortizing term loan, and $7.5million nonamortizing capital expenditure loan to be drawn upon through June30, 2006.  As of June 30, 2006 thenonamortizing capital expenditure loan had expired.  Theoutstanding principal bears interest at a fluctuating rate equal to either thebase rate plus 2 3¤4% per annum or LIBOR plus3.0% per annum. As of September 30, 2006, the borrowing base allowed for fullavailability of the $40.0 million revolving credit.  Wehad no amount outstanding under our revolving credit as of September 30, 2006or December 31, 2005.  As ofSeptember 30, 2006 and December 31, 2005, we had $7.5 million outstanding underthe nonamortizing term loan.  We must comply withcertain financial covenants under our credit facility including maintenance ofa minimum fixed charge coverage ratio, a maximum total leverage ratio and anEBITDA minimum. As of September 30, 2006 and December 31, 2005, we were incompliance with these covenants.  As ofSeptember 30, 2006, we had $1.5million of capital lease obligations, of which $0.6 million was current and asof December 31, 2005 we had $2.5 million of capital lease obligations, ofwhich $1.3 million was current.

12

----

The acquisition of substantially all of the assets of DMI, andassociated fees and expenses at closing were funded slightly more than one-halfby the sale of shares of the Company’s voting common stock to existingstockholders, and the remainder with operating cash and a draw down on theCompany’s senior secured credit facility. In the first quarter of 2006, we paid an earn-out payment in theamount of $2.0 million to the DMI sellers as a result of the operations of theDMI assets meeting agreed upon earnings targets.

Our existing senior secured revolving creditfacility and the indenture for the senior notes impose certain restrictions onus, including restrictions on our ability to incur indebtedness, pay dividends,make investments, grant liens, sell our assets and engage in certain otheractivities. Indebtedness under our existing senior secured revolving creditfacility is secured by substantially all of our assets, including our real andpersonal property, inventory, accounts receivable, intellectual property andother intangibles.

*Cash flow from operatingactivities.*  As ofSeptember 30, 2006, we had $215,000 of cash and cash equivalents available forworking capital purposes, compared to $3.1 million as of September 30, 2005.  Cash provided by operating activities for thenine months ended September 30, 2006 and 2005 was $10.3 million and $6.8million, respectively.  The increase isprimarily driven by the increased net income and increased noncash stockcompensation expense for the nine months ended September 30, 2006, offsetpartially by the change in operating assets and liabilities.

*Cash flow from investingactivities.*  Net cash used in investing activities was$13.1 million for the nine months ended September 30, 2006 and $15.1million for the nine months ended September 30, 2005. Capitalexpenditures for the nine months ended September 30, 2006 were $13.3 millioncompared to $6.0 million for the nine months ended September 30,2005.  The increase is primarily due toexpenditures in 2006 for (i) the expansion of our St. Cloud door plant and (ii)the equipment for the roughmill facility in Greenville, Pennsylvania.

*Cash flow from financingactivities.*  Net cash used in financing activities for thenine months ended September 30, 2006 totaled $0.9 million primarily due topayments on capital leases.  Net cashprovided in financing activities for the nine months ended September 30, 2005totaled $11.4 million, primarily attributable to cash inflows from the new $7.5million term loan funded under the new financing agreement and $4.7 million forstock issued for the Dimension Moldings, Inc. acquisition.

We anticipate that the funds generated by operationsand funds available under the senior secured credit facility will be sufficientto meet working capital requirements and to finance capital expenditures overthe next twelve months. We cannot provide assurances that our business willgenerate sufficient cash flow from operations, that anticipated net salesgrowth and operating improvements will be realized or that future borrowingswill be available under our senior secured credit facility in an amount sufficientto enable us to service our indebtedness, including the notes, or to fund ourother liquidity needs. In addition, we cannot provide assurances that we willbe able to refinance any of our indebtedness, including our senior securedcredit facility and the notes, on commercially reasonable terms, if atall.  We are currently approachingour full manufacturing capacity.  Weintend to incur capital expenditures in order to continue to fulfill increasedmanufacturing demands, including without limitation, the current expansions atour roughmill facility in Pennsylvania and our St. Cloud door facility forwhich we have expended approximately $14.2 million as of September 30, 2006. Wecurrently believe that an additional amount between $1.8 million and $3.8 millionwill be required to complete these expansions. These expansion costs include the acquisition of our Pennsylvaniaroughmill facility.

**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, 2005, 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 about MarketRisk**

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

13

----

*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 September 30, 2006, we had $7.5 millionoutstanding under the nonamortizing term loan issued under our senior securedcredit facility, which bears interest at variable rates.  Inaddition, as of that date, we had approximately $0.8 million of capitalleases that bear interest at variable rates. We believe that a one percent (1%)increase in the interest rates currently in effect would not have a materialadverse effect on our financial condition or results of operations.

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

(a)           Evaluation of disclosure controls and procedures.

As required by Rule 13a-15 under the SecuritiesExchange Act of 1934, we carried out an evaluation under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, of the effectiveness of our disclosure controlsand procedures as of September 30, 2006. 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 September 30, 2006, our disclosure controls and procedureswere reasonably effective to ensure that information required to be disclosedby us in the reports we file or submit under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in theSecurities and Exchange Commission’s rules and forms. We will continue toreview and document our disclosure controls and procedures on an ongoing basis,and may from time to time make changes aimed at enhancing their effectivenessand to ensure that our systems evolve with our business.

(b)           Changes in internal controls over financial reporting.

None.

14

----

 

**PART II—OTHER INFORMATION**

**Item 1. Legal Proceedings**

None.

**Item 1A. Risk Factors**

The Company has included inits Annual Report on Form 10-K for the year ended December 31, 2005, 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 ofgrowth in the home building, repair and remodeling industry continues for anextended period 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 growth in the home building, repair andremodeling industry experienced a slowdown as a result of general economicconditions.  If continued over anextended period of time, it could have a material adverse effect on the Company’sbusiness, financial condition or results of operations.

**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 andSecretary of WII Components, Inc., pursuant to Rules 13a-14(a) and15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of2002

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

32.1*                    Certification of Vice President, Treasurer andSecretary of WII Components, Inc., pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002

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

----

*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.

15

----

 

**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signed onits behalf by the undersigned thereunto duly authorized.
|                           | WII COMPONENTS, INC. |
|---------------------------|----------------------|
|                      |                 |
| Dated: November  13, 2006 | By:                  |
|                      |                 | /s/ John Fitzpatrick |
|                      |                 | John Fitzpatrick |
|                      |                 | Chief Executive Officer |
|                      |                 | (Principal Executive Officer) |
| Dated: November  13, 2006 |                 |   |
|                      |                 | /s/ Dale B. Herbst |
|                      |                 | Dale B. Herbst |
|                      |                 | Vice President, Treasurer and Secretary |
|                      |                 | (Principal Financial and Accounting Officer) |

 

16

----