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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM 10-Q**

 

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

 

**For the quarterly period ended June 30, 2010**

 

**or**

 

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

 

**Commission file number:**

**333-115490**

 

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**WII COMPONENTS, INC.**

(Exactname of registrant as specified in its charter)

 

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

 

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

(Addressof principal executive offices) (Zip Code)

 

**(320)252-1503**

(Registrant’stelephone number, Including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.   Yes x  No o.

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).   Yes o  No o.

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company filer.  See definition of “large accelerated filer,” “acceleratedfiler,” and “smaller reporting company” in Rule 12b-2 of the ExchangeAct.:

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   Yes o  No x.

 

As of August 9, 2010,100 shares of common stock, $.01 par value per share, were outstanding (all ofwhich are owned by WII Holding, Inc.).

 

 

 

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**WII COMPONENTS, INC.**

 

**FORM 10-Q**

**Quarter Ended**

**June 30, 2010**

 

**Table of Contents**

 
| **Part I—Financial  Information**                                                                         |   |
|---------------------------------------------------------------------------------------------------------------------|--------|
| Item 1. Financial  Statements                                                                                       |   |
| Condensed Consolidated Balance Sheets (unaudited) as  of June 30, 2010 and December 31, 2009              | 1      |
| Condensed Consolidated Statements of Operations  (unaudited) for the Three Months Ended June 30, 2010 and 2009 | 2      |
| Condensed Consolidated Statements of Operations  (unaudited) for the Six Months Ended June 30, 2010 and 2009   | 3      |
| Condensed Consolidated Statements of Cash Flows  (unaudited) for the Six Months Ended June 30, 2010 and 2009   | 4      |
| Notes to  Condensed Consolidated Financial Statements (unaudited)                                                   | 5      |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                 | 10     |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                                 | 16     |
| Item 4T. Controls and Procedures                                                                                    | 17     |
|                                                                                                                |   |
| **Part II-Other  Information**                                                                                 |   |
| Item  1. Legal Proceedings                                                                                          | 18     |
| Item  1A. Risk Factors                                                                                              | 18     |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                                | 18     |
| Item 3. Defaults Upon Senior Securities                                                                             | 18     |
| Item  4. Removed and Reserved                                                                                       | 18     |
| Item  5. Other Information                                                                                          | 18     |
| Item 6.  Exhibits                                                                                                   | 18     |
| Signatures                                                                                                          | 19     |

 

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**WIICOMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

**(Inthousands)**

 
| ** **                                     | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                     |       |                    |       |                        |       |
| Current  Assets:                               |       |                    |       |                        |       |
| Cash                                           |       | $                       | 3,641      |                        | $          | 13,102 |   |
| Accounts  receivable, net                      |       | 21,232                  |       | 10,754                      |       |
| Inventories                                    |       | 17,355                  |       | 14,407                      |       |
| Other  current assets                          |       | 2,823                   |       | 2,662                       |       |
| Total  current assets                          |       | 45,051                  |       | 40,925                      |       |
|                                           |       |                    |       |                        |       |
| Property,  plant, and equipment, net           |       | 48,570                  |       | 51,279                      |       |
| Goodwill                                       |       | 99,152                  |       | 99,152                      |       |
| Customer  relationship                         |       | 7,437                   |       | 8,266                       |       |
| Noncompete  agreements                         |       | 13                      |       | 31                          |       |
| Other  assets                                  |       | 2,718                   |       | 3,424                       |       |
| TOTAL                                          |       | $                       | 202,941    |                        | $          | 203,077 |   |
|                                           |       |                    |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY** |       |                    |       |                        |       |
| Current  Liabilities:                          |       |                    |       |                        |       |
| Accounts  payable                              |       | $                       | 4,259      |                        | $          | 3,990 |   |
| Accrued  payroll                               |       | 4,060                   |       | 2,713                       |       |
| Due  to Parent                                 |       | 4,535                   |       | 4,578                       |       |
| Other  current liabilities                     |       | 8,255                   |       | 8,648                       |       |
| Total  current liabilities                     |       | 21,109                  |       | 19,929                      |       |
|                                           |       |                    |       |                        |       |
| Long-term  debt                                |       | 108,350                 |       | 108,350                     |       |
| Deferred  income tax liability                 |       | 2,602                   |       | 3,174                       |       |
| Other  long-term liabilities                   |       | 2,594                   |       | 2,324                       |       |
|                                           |       |                    |       |                        |       |
| Stockholders’  Equity:                    |       |                    |       |                        |       |
| Common  stock                                  |       | —                  |       | —                      |       |
| Additional  paid-in capital                    |       | 71,366                  |       | 71,341                      |       |
| Accumulated  deficit                           |       | (3,080                  | )          | (2,041                      | )          |
| Total  stockholders’ equity               |       | 68,286                  |       | 69,300                      |       |
| TOTAL                                          |       | $                       | 202,941    |                        | $          | 203,077 |   |

 

Seenotes to condensed consolidated financial statements (unaudited).

 

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**WIICOMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

**(Inthousands)**

 
| ** **                            | ** ** | **Three  Months  Ended  June 30, 2010** | ** ** | **Three  Months  Ended  June 30, 2009** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| NET  SALES                            |       | $                                            | 40,183     |                                         | $          | 34,346 |   |
| COST  OF SALES                        |       | 34,277                                       |       | 28,469                                       |       |
| Gross  profit                         |       | 5,906                                        |       | 5,877                                        |       |
|                                  |       |                                         |       |                                         |       |
| OPERATING  EXPENSES:                  |       |                                         |       |                                         |       |
| General  and administrative           |       | 2,195                                        |       | 2,331                                        |       |
| Selling  and marketing                |       | 775                                          |       | 782                                          |       |
| Total  operating expenses             |       | 2,970                                        |       | 3,113                                        |       |
|                                  |       |                                         |       |                                         |       |
| OPERATING  INCOME                     |       | 2,936                                        |       | 2,764                                        |       |
|                                  |       |                                         |       |                                         |       |
| OTHER  INCOME (EXPENSE):              |       |                                         |       |                                         |       |
| Interest  income                      |       | 4                                            |       | —                                       |       |
| Interest  expense                     |       | (3,151                                       | )          | (3,151                                       | )          |
| Other  income/expense                 |       | 2                                            |       | 2                                            |       |
| Total  other income (expense)         |       | (3,145                                       | )          | (3,149                                       | )          |
|                                  |       |                                         |       |                                         |       |
| LOSS  BEFORE BENEFIT FOR INCOME TAXES |       | (209                                         | )          | (385                                         | )          |
| INCOME  TAX BENEFIT                   |       | (62                                          | )          | (140                                         | )          |
| NET  LOSS                             |       | $                                            | (147       | )                                            | $          | (245 | ) |

 

Seenotes to condensed consolidated financial statements (unaudited).

 

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**WIICOMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

**(Inthousands)**

 
| ** **                            | ** ** | **Six  Months  Ended  June 30, 2010** | ** ** | **Six  Months  Ended  June 30, 2009** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| NET  SALES                            |       | $                                          | 74,825     |                                       | $          | 67,151 |   |
| COST  OF SALES                        |       | 64,139                                     |       | 56,806                                     |       |
| Gross  profit                         |       | 10,686                                     |       | 10,345                                     |       |
|                                  |       |                                       |       |                                       |       |
| OPERATING  EXPENSES:                  |       |                                       |       |                                       |       |
| General  and administrative           |       | 4,559                                      |       | 4,631                                      |       |
| Selling  and marketing                |       | 1,538                                      |       | 1,516                                      |       |
| Loss  on sale of assets               |       | 1                                          |       | 11                                         |       |
| Total  operating expenses             |       | 6,098                                      |       | 6,158                                      |       |
|                                  |       |                                       |       |                                       |       |
| OPERATING  INCOME                     |       | 4,588                                      |       | 4,187                                      |       |
|                                  |       |                                       |       |                                       |       |
| OTHER  INCOME (EXPENSE):              |       |                                       |       |                                       |       |
| Interest  income                      |       | 3                                          |       | 4                                          |       |
| Interest  expense                     |       | (6,206                                     | )          | (6,177                                     | )          |
| Other  income/expense                 |       | 4                                          |       | 3                                          |       |
| Total  other income (expense)         |       | (6,199                                     | )          | (6,170                                     | )          |
|                                  |       |                                       |       |                                       |       |
| LOSS  BEFORE BENEFIT FOR INCOME TAXES |       | (1,611                                     | )          | (1,983                                     | )          |
| INCOME  TAX BENEFIT                   |       | (572                                       | )          | (733                                       | )          |
| NET  LOSS                             |       | $                                          | (1,039     | )                                          | $          | (1,250 | ) |

 

Seenotes to condensed consolidated financial statements (unaudited).

 

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**WIICOMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

**(Inthousands)**

 
| ** **                                                                                 | ** ** | **Six  Months  Ended  June 30, 2010** | ** ** | **Six  Months  Ended  June 30, 2009** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| OPERATING  ACTIVITIES:                                                                     |       |                                       |       |                                       |       |
| Net  loss                                                                                  |       | $                                          | (1,039     | )                                          | $          | (1,250 | ) |
|                                                                                       |       |                                       |       |                                       |       |
| Adjustments  to reconcile net loss to net cash provided by (used in) operating activities: |       |                                       |       |                                       |       |
| Depreciation  and amortization                                                             |       | 4,045                                      |       | 4,269                                      |       |
| Loss  on sale of assets                                                                    |       | 1                                          |       | 11                                         |       |
| Amortization  of debt issuance costs                                                       |       | 756                                        |       | 750                                        |       |
| Deferred  income tax benefit                                                               |       | (572                                       | )          | (733                                       | )          |
| Stock  compensation expense                                                                |       | 25                                         |       | 25                                         |       |
|                                                                                       |       |                                       |       |                                       |       |
| Change  in operating assets and liabilities:                                               |       |                                       |       |                                       |       |
| Accounts  receivable                                                                       |       | (10,478                                    | )          | (3,946                                     | )          |
| Inventories                                                                                |       | (2,948                                     | )          | (1,009                                     | )          |
| Other  current assets                                                                      |       | (161                                       | )          | (412                                       | )          |
| Accounts  payable                                                                          |       | 269                                        |       | 2,681                                      |       |
| Accrued  payroll and other current liabilities                                             |       | 954                                        |       | 738                                        |       |
| Other  long term liabilities                                                               |       | 270                                        |       | —                                     |       |
| Net  cash provided by (used in) operating activities                                       |       | (8,878                                     | )          | 1,124                                      |       |
|                                                                                       |       |                                       |       |                                       |       |
| INVESTING  ACTIVITIES:                                                                     |       |                                       |       |                                       |       |
| Purchases  of property, plant, and equipment                                               |       | (493                                       | )          | (522                                       | )          |
| Proceeds  from sale of property, plant and equipment                                       |       | 3                                          |       | 10                                         |       |
| Net  cash used in investing activities                                                     |       | (490                                       | )          | (512                                       | )          |
|                                                                                       |       |                                       |       |                                       |       |
| FINANCING  ACTIVITIES:                                                                     |       |                                       |       |                                       |       |
| Principal  payments under long-term financing agreements                                   |       | —                                     |       | (3,597                                     | )          |
| Debt  issuance costs                                                                       |       | (50                                        | )          | (136                                       | )          |
| Due  to Parent                                                                             |       | (43                                        | )          | (55                                        | )          |
| Net  cash used in financing activities                                                     |       | (93                                        | )          | (3,788                                     | )          |
|                                                                                       |       |                                       |       |                                       |       |
| NET  DECREASE IN CASH                                                                      |       | (9,461                                     | )          | (3,176                                     | )          |
| CASH—Beginning  of period                                                             |       | 13,102                                     |       | 14,721                                     |       |
|                                                                                       |       |                                       |       |                                       |       |
| CASH—End  of period                                                                   |       | $                                          | 3,641      |                                       | $          | 11,545 |   |
|                                                                                       |       |                                       |       |                                       |       |
| SUPPLEMENTAL  CASH FLOW INFORMATION:                                                       |       |                                       |       |                                       |       |
| Cash  paid for interest                                                                    |       | $                                          | 5,480      |                                       | $          | 5,518 |   |
|                                                                                       |       |                                       |       |                                       |       |
| Cash  paid for income taxes                                                                |       | $                                          | 90         |                                       | $          | 112 |   |

 

Seenotes to condensed consolidated financial statements (unaudited).

 

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**WIICOMPONENTS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED**

**CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.  BASIS OF PRESENTATION**

 

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

 

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

 

In management’s opinion, theaccompanying unaudited condensed consolidated financial statements include alladjustments (consisting of normal recurring items) considered necessary topresent fairly, when read in conjunction with the consolidated financialstatements and accompanying notes for the period ended December 31, 2009included in our Form 10-K as filed with the Securities and ExchangeCommission on March 31, 2010, our financial position, results ofoperations and cash flows for the periods presented.

 

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

 

**2.SIGNIFICANT ACCOUNTING POLICIES**

 

***Revenue Recognition***—Sales are recognized whenrevenue is realized or realizable and has been earned.  The Company’s policy is to recognize revenueand the related cost of sales when risk and title passes to the customer.  This is generally on the date of shipment,however, certain sales are shipped FOB destination and revenue is recognizedwhen received by the customer.  Freightbilled to customers is included in sales and shipping costs are included incost of sales.  The Company records anestimate for anticipated sales returns and customer discounts at the timerevenue is recognized based on historical experience and current trends.  These estimates have been consistent with theCompany’s actual experiences.  Provisionsfor estimated sales returns and customer discounts are recorded as a reductionof net sales.  For the three month andsix month periods ended June 30, 2010 and 2009, the provision forestimated sales returns and customer discounts as a percentage of net sales wasapproximately 2% and 3%, respectively.

 

***Concentration of Credit Risk***—The Company receives asignificant portion of its revenue from two customers.  For the six months ended June 30, 2010 and2009, the Company’s two largest customers accounted for approximately 56% and57%, respectively, of its net sales.  Asof June 30, 2010 and December 31, 2009, these two largest customersaccounted for approximately 75% and 73%, respectively, of the Company’sconsolidated accounts receivables balance. The permanent loss of, or a significant decrease in the level ofpurchases by, one or more of our major customers would have a material adverseeffect on our results of operations and future cash flows.

 

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

 
| ** **       | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw  materials   |       | $                       | 9,582      |                        | $          | 7,338 |   |
| Work  in process |       | 3,587                   |       | 3,213                       |       |
| Finished  goods  |       | 2,915                   |       | 2,322                       |       |
| LIFO  adjustment |       | 1,271                   |       | 1,534                       |       |
|             |       | $                       | 17,355     |                        | $          | 14,407 |   |

 

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The majority of inventory isvalued at the lower of last-in, first-out (“LIFO”) cost or market.  The remainder of the inventory is valued atthe lower of first-in, first-out method (“FIFO”) cost or market.  As of June 30, 2010 and December 31,2009, inventory on the LIFO method represented 69% and 62%, respectively, ofconsolidated inventories.

 

IfLIFO inventories had been valued at current costs determined on a FIFO basisthe effect on costs of sales would be a decrease of $0.3 million for the sixmonths ended June 30, 2010, and an increase of $0.5 million for the sixmonths ended June 30, 2009.

 

***Goodwill***—The Company evaluates goodwill for impairment atleast annually or when events or changes in circumstances indicateimpairment.  The Company has elected toperform its annual tests for goodwill impairment as of December 31 of eachyear.  Since December 31, 2009, theCompany concluded there were no events or changes in circumstances requiring aninterim goodwill impairment analysis to be completed as of June 30,2010.  Fair value is measured using amarket multiple valuation method.  Thecarrying amount of goodwill was $99.2 million at June 30, 2010 and December 31,2009.

 

***Customer Relationships—***Customerrelationships relate to intangible assets recorded through previousacquisitions for relationships with significant customers.  The original cost of these customerrelationships was $16.6 million, and the related accumulated amortization as ofJune 30, 2010 is $9.1 million.  Theintangible assets are being amortized over the estimated life of 10 years.  Amortization was $0.8 million for thesix-month periods ended June 30, 2010 and 2009.  Expected annual amortization is as followsfor the years ending December 31 (in thousands):

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

 

***Noncompete Agreements***—Noncompete agreements primarilyrelate to agreements with the former owners of Brentwood, Grand Valley, andDimension Moldings, Inc. (DMI).  Theoriginal cost of these noncompete agreements was $2.4 million, and the relatedaccumulated amortization as of June 30, 2010 is $2.3 million.  Noncompete rights are being amortized overthe applicable terms of the agreements (5 years, 7 years, and 5years, respectively).  The noncompeteagreement with the former owner of Brentwood was fully amortized inJuly 2007.  The noncompete agreementwith the former owners of Grand Valley and DMI are expected to be fullyamortized by April 2011 and July 2010, respectively.  Amortization was $17,000 for the six-monthperiods ended June 30, 2010 and 2009. Expected annual amortization is as follows for the years endingDecember 31 (in thousands):

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

 

***New Accounting Pronouncements***—In January 2010,the FASB issued ASU No. 2010-06, “FairValue Measurements and Disclosures (Topic 820)—Improving Disclosures about FairValue Measurements”.  Thisguidance requires reporting entities to provide information about movements ofassets among Levels 1 and 2 of the three-tier fair value hierarchy establishedby ASC 820 and provide a reconciliation of purchases, sales, issuance, andsettlements of financial instruments valued with a Level 3 method, which isused to price the hardest to value instruments. Entities must provide fairvalue measurement disclosures for each class of financial assets andliabilities.  The guidance was effectivefor interim and annual periods that begin after December 15, 2009 exceptfor certain Level 3 activity disclosure requirements that are effective forfiscal years beginning after December 15, 2010 and interim periods within thosefiscal years.  The adoption of this guidancedid not have a material impact on the Company’s consolidated financialstatements.

 

**3.RECAPITALIZATION**

 

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

 

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

 

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

 

In conjunction with theTransaction, Parent entered into note purchase agreements with OCM MezzanineFund II, L.P. and Olympus Growth Fund IV, L.P (the “Note Purchase Agreements”).  The Note Purchase Agreement with OCMMezzanine Fund II, L.P. consisted of $43.0 million senior payment-in-kind noteswith no required principal amortization. The Note Purchase Agreement with Olympus Growth Fund IV, L.P. consistedof $43.0 million junior payment-in-kind notes with no required principalamortization.  These notes (the “ParentNotes”) are scheduled to mature in April 2012.  During the term of the Parent Notes, Parentis able at its option to pay interest on the Parent Notes through the issuanceof additional notes.  The Company is notliable for, and has not otherwise guaranteed, any of the obligations of Parentwith respect to the Parent Notes.  Parentand its Subsidiaries (including the Company) are, however, subject to a numberof restrictive covenants under the Note Purchase Agreements.  Parent and its Subsidiaries (including theCompany) were in compliance with all covenants as of June 30, 2010.  In addition, the Company is limited in itsability to pay dividends or otherwise make distributions to Parent under theSenior Credit Facility and the indenture governing the 10% Senior Notes due2012 (the “Senior Notes”). The Parent Notes are not reflected in the Company’s consolidated balancesheet as the Company did not push down the new accounting basis because of thesignificance of the public debt holders’ influence on the Company’s ability tocontrol the form of ownership.

 

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

 

In conjunction with theTransaction, Parent issued equity securities of approximately $86.2 million(including rollover equity from management) to fund the equity necessary forthe acquisition, consisting of $81.0 million of preferred equity securities and$5.2 million of common equity securities. Preferred dividends accrue and accumulate on the outstanding preferredequity securities at the rate of 10% per annum, compounding quarterly, on thesum of its liquidation value per share ($1,000) plus all accumulated and unpaiddividends thereon.  Dividends are payableas and when declared by Parent’s board of directors out of funds legallyavailable for the payment of dividends. Such dividends accrue, whether or not they have been declared andwhether or not there are profits, surplus or other funds of Parent legallyavailable for the payment of dividends, until such time as such dividends areactually paid by Parent.  The holders ofa majority of the outstanding preferred equity securities at any time and fromtime to time may demand that Parent redeem all or any portion of theoutstanding preferred equity securities by delivering to the holder(s) thereof(i) an amount of cash per share equal to the sum of its liquidation valueper share ($1,000) plus all accumulated and unpaid dividends thereon and (ii) anumber of shares of Parent’s common equity securities as determined inaccordance with the redemption procedures contained in Parent’s certificate ofincorporation.  If Parent does not havefunds legally available for any particular redemption, Parent is obligated touse those funds that are legally available for the redemption of suchsecurities to redeem the maximum possible number of preferred equity securitieswhich would otherwise be redeemed in connection with such redemption.  Thereafter, when additional funds of Parentare legally available for redemption of such securities, Parent is obligated toredeem the balance of such securities. Parent is prohibited from redeeming any preferred equity securities ifany such redemption is prohibited under any credit facility or indenture towhich Parent or any of its subsidiaries is a party or is otherwise bound.  The Company is not liable for, and has nototherwise guaranteed, any of these obligations of Parent with respect to theequity securities issued by Parent. These equity securities are not reflected in the Company’s consolidatedbalance sheet due to the significance of the public debt holders’ influence onthe Company’s ability to control the form of ownership.

 

Inconjunction with the Transaction, the previous stockholders of the Company willreceive the benefit of certain negotiated transaction related tax deductionswhenever such deductions are realized. As of June 30, 2010, the entire liability for the agreement is $1.8million and is included in Other Long-Term Liabilities.

 

**4.FINANCING ARRANGEMENTS**

 

***Senior Notes***** **The Company has outstanding10% Senior Notes due in 2012.  Each ofthe Company’s subsidiaries,which are all 100% owned subsidiaries of the Company, have fully andunconditionally guaranteed the Senior Notes on a joint and several basis.  The Company has no assets or operationsindependent of its subsidiaries.  As aresult, the Company has not presented separate financial statements of thesubsidiary guarantors.

 

***Credit Facility***** Inconjunction with the Transaction, the Company entered into the Senior CreditFacility, with Credit Suisse, Cayman Islands Branch, which provided for (i) theFirst Lien Term Facility in an aggregate principal amount of $150.0 million and(ii) the Revolving Facility in an aggregate principal amount up to $25.0million, subject to certain conditions, of which $10.0 million is availablethrough a sub facility in the form of letters of credit.  On March 31, 2009, the Company repaidall amounts outstanding under the First Lien Term Facility, and no additionalborrowings were available thereunder.  Asof June 30, 2010, the maximum amount of borrowings available to theCompany under the Revolving Facility was $12.5 million.  As of June 30, 2010, the Company had nooutstanding borrowings under the Revolving Facility.  Borrowings under the Revolving Facility bearinterest at a fluctuating 

 

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rateequal to either the base rate plus 4.75% per annum or LIBOR plus5.75% per annum (effective rate of 8.00% and 6.06% at June 30, 2010 and June 30,2009, respectively).

 

On March 26, 2010, the Company entered into anamendment to its Senior Credit Facility, which among other things: (i) extendedthe date by which the Company must amend the indenture governing the SeniorNotes to eliminate certain of the restrictive covenants contained therein(including covenants related to the incurrence of indebtedness and liens) orredeem the Senior Notes to March 31, 2011; (ii) increased the maximumtotal leverage ratio the Company may have at the end of each quarterly periodfrom March 31, 2010 through December 31, 2010; (iii) added anasset-based borrowing base as a condition to borrowing under the Senior CreditFacility; (iv) extended the Company’s ability to continue to pay cashdividends to enable Parent to make cash interest payments on the Parent Notesto March 31, 2011; and (v) decreased the minimum interest coverageratio the Company is required to maintain at the end of each quarterly periodfrom March 31, 2010 through December 31, 2010.  The Company must comply with certainfinancial covenants under its Senior Credit Facility, including maintenance ofan interest coverage ratio and a total leverage ratio.  The Company was in compliance with suchcovenants as of June 30, 2010.

 

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

 

***Restrictions on Indebtedness ***Our SeniorCredit Facility and the indenture for the Senior Notes impose certainrestrictions on the Company’s ability to incur indebtedness, pay dividends,make investments, grant liens, sell assets and engage in certain otheractivities.  The subsidiary guarantors are generally not restricted in theirability to dividend or otherwise distribute funds to the Company except forrestrictions imposed under applicable state corporate law.  The Company islimited in its ability to pay dividends or otherwise make other distributionsto Parent under the Senior Credit Facility and the indenture governing theSenior Notes. Specifically, the Senior Credit Facility, as amended,  prohibits the Company from making anydistributions to Parent except for limited purposes, including, but not limitedto: (i) prior to March 31, 2011, the Company may pay cash dividendsand distributions to Parent to enable Parent to make cash interest payments onthe acquisition loan, providedthat (x) after giving pro formaeffect to such dividend or distribution, the consolidated first lien leverageratio does not exceed 1.0 to 1.0, and (y) the amount of such dividends anddistributions shall not exceed $3,225,000 in any calendar quarter, (ii) customaryand reasonable out-of-pocket expenses, legal and accounting fees and expensesand overhead of Parent incurred in the ordinary course of business to theextent attributable to the business of the Company and its subsidiaries and inthe aggregate not to exceed $500,000 in any fiscal year, and (iii) theCompany may pay management fees of Parent not to exceed $750,000 in any fiscalyear, as well as any previously accrued but unpaid management fees for anyprevious fiscal years without regard to this $750,000 limitation, so long asthe amount accrued in any such previous fiscal year did not exceed $750,000, ineach case, so long as no default has occurred.  The indenture providesthat the Company can generally pay dividends and make other distributions toParent in an amount not to exceed (i) 50% of the Company’s consolidatednet income for the period beginning April 1, 2004 and ending as of the endof the last fiscal quarter before the proposed payment, plus (ii) 100% ofthe net cash proceeds received by the Company from the issuance and sale ofcapital stock, plus (iii) the net return of certain investments, providedthat certain conditions are satisfied, including that the Company has aconsolidated interest coverage ratio of greater than 2.0 to 1.0.  For the period ended June 30, 2010, theCompany’s consolidated interest coverage ratio was less than 2.0 to 1.0.

 

**5.RELATED-PARTY TRANSACTIONS**

 

The Company has noncompeteagreements with the former owners of Grand Valley and Dimension Moldings, Inc.

 

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

 

The Company and Parent filea consolidated federal income tax return, and federal income taxes areallocated to the Company based upon the respective taxable earnings orloss.  The Company records income taxliabilities as an amount due to Parent.  As of June 30, 2010 and December 31, 2009, the Companyincluded a total of $4.5 million and $4.6 million, respectively as an amountdue to Parent for these income tax liabilities.

 

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**6. BUSINESSSEGMENTS**

 

TheCompany conducts 93% of its business within one reportable market segment: thewood kitchen and bath products segment. The Company has two primary product categories: hardwood products andengineered wood products.  Hardwoodproducts produce a comprehensive line of hardwood doors and components.  Engineered wood products includes rigidthermofoil doors and components, veneer raised panels, and wrapped profiles.

 

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

 
| ** **                | ** ** | **Six  Months Ended  June 30,** | ** ** | **Three  Months Ended  June 30,** | ** ** |
|---------------------------|------------|--------------------------------------|------------|----------------------------------------|------------|
| ** **                | ** ** | **2010**                             | ** ** | **2009**                               | ** ** | **2010** | ** ** | **2009** | ** ** |
| Hardwood  products        |       | $                                    | 60,147     |                                   | $          | 52,926 |   | $ | 32,466 |   | $ | 26,814 |   |
| Engineered  wood products |       | 14,678                               |       | 14,225                                 |       | 7,717 |   | 7,532 |   |
| Total                     |       | $                                    | 74,825     |                                   | $          | 67,151 |   | $ | 40,183 |   | $ | 34,346 |   |

 

Substantiallyall assets are located and sales are made within North America.

 

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**Item 2. Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

As used in this Management’sDiscussion and Analysis of Financial Condition and Results of Operations andelsewhere in this Quarterly Report on Form 10-Q, the terms “we,” “us” or “our”refer to WII Components, Inc. and its consolidated subsidiaries and theirrespective predecessors.

 

**Forward-LookingStatements**

 

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

 

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

 

·                  financial results andconditions;

 

·                  margins, costs andexpenditures;

 

·                  cash flows and growth rates;

 

·                  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 oursenior management, from time to time make forward-looking public statementsconcerning our expected future operations, performance and other developments.  Such forward-looking statements arenecessarily estimates reflecting our judgment based upon current informationand involve a number of risks and uncertainties.  There can be no assurance that other factorswill not affect the accuracy of these forward-looking statements or that ouractual results will not differ materially from the results anticipated in suchforward-looking statements.  Although webelieve that these forward-looking statements are based on reasonableassumptions, you should be aware that many factors could affect our actualfinancial results or results of operations and could cause actual results todiffer materially from those expressed in the forward-looking statements.  Those factors include, among other things:

 

·                  our high degree 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;

 

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·                  the highly competitivenature of our industry; and

 

·                  changes in the cost oflabor.

 

**Overview**

 

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

 

In the past twelve years, wehave consummated four strategic acquisitions that have enhanced our marketposition, product breadth and geographic reach. In June 1998, we acquired PrimeWood, a manufacturer of RTF, VRP andprofile-wrapped engineered wood products based in North Dakota.  In July 2002, we acquired Brentwood, amanufacturer of solid wood and RTF cabinet doors located in Oregon.  In April 2004, we acquired Grand Valley,a manufacturer of solid wood cabinet doors located in Ohio.  In July 2005, we acquired substantially allof the assets of Dimension Moldings, Inc. (DMI), an Ohio corporation,which was in the business of manufacturing hardwood component moldings at afacility located in Middlefield, Ohio. Following the acquisition, our Woodcraft subsidiary manufactures hardwoodcomponent moldings at the Middlefield facility.

 

OnJanuary 9, 2007, WII Components, Inc. (the “Company”) was acquired byWII Holding, Inc. (“Parent”), a newly formed investment entity controlledby two investment funds managed by Olympus Partners.  For ease of reference, these funds aresometimes collectively referred to herein as the “Olympus Funds.”  The acquisition was consummated through amerger of WII Merger Corporation (“MergerCo”), a wholly owned subsidiary ofParent, with and into the Company with the Company being the survivingcorporation in the transaction (the “Transaction”).  The aggregate purchase price paid by Parentfor all of the shares of capital stock of the Company and options to purchaseshares of capital stock of the Company in the Transaction was approximately$293.1 million, less indebtedness and certain expenses.  The Transaction has been accounted for as arecapitalization in the Company’s financial statements, with no adjustments tothe historical basis of the Company’s assets and liabilities.  The Company did not push down the newaccounting basis because of the significance of the publicly traded debtoutstanding, which hinders the Parent’s ability to control the form ofownership of the Company.

 

**Results ofOperations**

 

Asdiscussed below, we continued to experience the slowdown in net sales for thesix months ended June 30, 2010 that began in the second half of 2006.  While sales for the six months ended June 30,2010 are much lower than sales for the same period of 2006, 2007 and 2008, theyare modestly higher than sales for the six months ended June 30,2009.  We believe this is a short-termimpact due to the personal income tax incentives related to either acquiring anew or existing home in the first half of 2010. The kitchen and bath industry-wide slowdown had a negative impact on ourgross profit and operating income margin percentages due to fixed costsbecoming a higher percentage of sales.  In addition, we continued to experience decreases in hardwood materialprices from the fourth quarter of 2006 through the second quarter of 2009,which generally were passed on to our customers.  We have agreements with most customers thatreset prices in the future period based on the movement of hardwood lumbercosts in the prior period.  The length ofthe period varies by customer from three to twelve months.  While the prices we paid for hardwoodmaterials continued to decline through April 2009, they then stabilized bymid-year 2009 and began to increase in December 2009 through June 2010.  The declines in our material costs through April 2009resulted in lower selling prices in the second half of 2009 and into the firsthalf of 2010 due to our indexing agreements with our customers.  Our ability to pass through these price changesto our customers is dependent on prevailing economic and competitiveconditions.

 

***Three Months Ended June 30, 2010 Compared to the Three MonthsEnded June 30, 2009***

 

The following tableincludes, for the three months ended June 30, 2010 and 2009, selectedoperating data derived from our condensed consolidated statements of operationsand presents this information as a percentage of net sales:

 

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| ** **                | ** ** | **Three Months  Ended  June 30, 2010** | ** ** | **Three Months  Ended  June 30, 2009** | ** ** |
|---------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                | ** ** | **(dollars in thousands)**                  | ** ** |
| Net  sales                |       | $                                                     | 40,183     |                                                  | $          | 34,346 |   |
| *% of  net sales*         | * *   | *100.0*                                               | *%*        | *100.0*                                               | *%*        |
| Cost  of sales            |       | 34,277                                                |       | 28,469                                                |       |
| *% of  net sales*         | * *   | *85.3*                                                | *%*        | *82.9*                                                | *%*        |
| * *                  | * *   | * *                                              | * *   | * *                                              | * *   |
| Gross  profit             |       | 5,906                                                 |       | 5,877                                                 |       |
| *% of  net sales*         | * *   | *14.7*                                                | *%*        | *17.1*                                                | *%*        |
| Operating  expenses       |       | 2,970                                                 |       | 3,113                                                 |       |
| *% of  net sales*         | * *   | *7.4*                                                 | *%*        | *9.1*                                                 | *%*        |
| * *                  | * *   | * *                                              | * *   | * *                                              | * *   |
| Operating  income         |       | 2,936                                                 |       | 2,764                                                 |       |
| *% of  net sales*         | * *   | *7.3*                                                 | *%*        | *8.0*                                                 | *%*        |
| Other  expenses (income): |       |                                                  |       |                                                  |       |
| Interest  expense         |       | 3,151                                                 |       | 3,151                                                 |       |
| *% of  net sales*         | * *   | *7.8*                                                 | *%*        | *9.2*                                                 | *%*        |
| Other  income, net        |       | (6                                                    | )          | (2                                                    | )          |
| *% of  net sales*         | * *   | *-0.0*                                                | *%*        | *-0.0*                                                | *%*        |
| Income  tax benefit       |       | (62                                                   | )          | (140                                                  | )          |
| *% of  net sales*         | * *   | *-0.2*                                                | *%*        | *-0.4*                                                | *%*        |
| * *                  | * *   | * *                                              | * *   | * *                                              | * *   |
| Net  loss                 |       | (147                                                  | )          | (245                                                  | )          |
| *% of  net sales*         | * *   | *-0.4*                                                | *%*        | *-0.7*                                                | *%*        |
|                           |            |                                                       |            |                                                       |            |  |  |

 

*Net sales.*  Net sales increased $5.9 million, or 17.2%,from $34.3 million for the three months ended June 30, 2009 to $40.2million for the three months ended June 30, 2010.  Sales in our hardwood and engineered woodproduct line increased $5.7 million and $0.2 million, respectively.  These increases are mainly attributable to (i) anoverall modest increase in the market and (ii) market share gain by ourCompany.  These increases were partiallyoffset with an approximately 4% decline in our overall selling prices, mainlydue to the decline of hardwood lumber costs during 2009.  We have indexing agreements with a majorityof our customers, whereby selling prices to customers in the future period areincreased or decreased based on hardwood lumber cost changes in the priorperiod.

 

*Cost ofsales.*  Cost of sales increased $5.8million, or 20.4%, from $28.5 million for the three months ended June 30,2009 to $34.3 million for the three months ended June 30, 2010.  This increase in cost of sales is primarilyattributable to higher material, labor and overhead costs as a result of highervolume of sales.

 

*Grossprofit.*  Gross profit was $5.9 millionfor the three months ended June 30, 2009 and for the three months ended June30, 2010.  As a percentage of net sales,our gross profit decreased 240 basis points from 17.1% for the three monthsended June 30, 2009 to 14.7% for the three months ended June 30,2010.  This decrease is related to (i) lowerselling prices in 2010 related to lower hardwood lumber costs during 2009, (ii) higherlumber costs in 2010, and (iii) higher premiums for purchases of kilndried lumber in 2010.  This decrease waspartially offset with (i) improved operating efficiencies in 2010 and (ii) absorbingfixed costs over higher sales volume.

 

*Operatingexpenses.*  Operatingexpenses decreased $0.1 million, or 3.2%, from $3.1 million for the threemonths ended June 30, 2009 to $3.0 million for the three months ended June 30,2010.  The decrease primarily consists oflower professional fees and lower bad debt expense in 2010.

 

*Operatingincome.*  Operating income increased by$0.1 million, or 3.6%, from $2.8 million for the three months ended June 30,2009 to $2.9 million for the three months ended June 30, 2010 as a resultof the net effect of the factors described above.

 

*Interestexpense.*  Interestexpense was $3.2 million for each of the three month periods ended June 30,2009 and June 30, 2010.

 

*Otherincome.*  Other income was $2,000 and$6,000 for each of the three months ended June 30, 2009 and June 30,2010, respectively.

 

*Income taxbenefit. *Income tax benefit was $0.1million for the three months ended June 30, 2009 and for the three monthsended June 30, 2010.  The effectivetax rate decreased from 36.4% in 2009 to 29.7% in 2010 due to permanentdifferences.

 

*Net loss.*  Net loss decreased $0.1 million, or 50.0%,from $0.2 million for the three months ended June 30, 2009 to $0.1 millionfor the three months ended June 30, 2010 as a result of the factorsdescribed above.

 

**Results ofOperations**

 

***Six Months Ended June 30, 2010 Compared to the Six Months Ended June 30,2009***

 

The following tableincludes, for the six months ended June 30, 2010 and 2009, selectedoperating data derived from our condensed consolidated statements of earningsand presents this information as a percentage of net sales:

 

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| ** **                | ** ** | **Six  Months Ended  June 30, 2010** | ** ** | **Six  Months Ended  June 30, 2009** | ** ** |
|---------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                | ** ** | **(dollars  in thousands)**               | ** ** |
| Net  sales                |       | $                                         | 74,825     |                                      | $          | 67,151 |   |
| *% of  net sales*         | * *   | *100.0*                                   | *%*        | *100.0*                                   | *%*        |
| Cost  of sales            |       | 64,139                                    |       | 56,806                                    |       |
| *% of  net sales*         | * *   | *85.7*                                    | *%*        | *84.6*                                    | *%*        |
| * *                  | * *   | * *                                  | * *   | * *                                  | * *   |
| Gross  profit             |       | 10,686                                    |       | 10,345                                    |       |
| *% of  net sales*         | * *   | *14.3*                                    | *%*        | *15.4*                                    | *%*        |
| Operating  expenses       |       | 6,098                                     |       | 6,158                                     |       |
| *% of  net sales*         | * *   | *8.2*                                     | *%*        | *9.2*                                     | *%*        |
| * *                  | * *   | * *                                  | * *   | * *                                  | * *   |
| Operating  income         |       | 4,588                                     |       | 4,187                                     |       |
| *% of  net sales*         | * *   | *6.1*                                     | *%*        | *6.2*                                     | *%*        |
| Other  expenses (income): |       |                                      |       |                                      |       |
| Interest  expense         |       | 6,206                                     |       | 6,177                                     |       |
| *% of  net sales*         | * *   | *8.3*                                     | *%*        | *9.2*                                     | *%*        |
| Other  income, net        |       | (7                                        | )          | (7                                        | )          |
| *% of  net sales*         | * *   | *-0.0*                                    | *%*        | *-0.0*                                    | *%*        |
| Income  tax benefit       |       | (572                                      | )          | (733                                      | )          |
| *% of  net sales*         | * *   | *-0.8*                                    | *%*        | *-1.1*                                    | *%*        |
| * *                  | * *   | * *                                  | * *   | * *                                  | * *   |
| Net  loss                 |       | (1,039                                    | )          | (1,250                                    | )          |
| *% of  net sales*         | * *   | *-1.4*                                    | *%*        | *-1.9*                                    | *%*        |
|                           |            |                                           |            |                                           |            |  |  |

 

*Net sales.*  Net sales increased $7.6 million, or 11.3%,from $67.2 million for the six months ended June 30, 2009 to $74.8 millionfor the six months ended June 30, 2010. Sales in our hardwood and engineered wood product line increased $7.2million and $0.4 million, respectively. These increases are mainly attributable to (i) an overall modestincrease in the market, (ii) market share gain by our Company, and (iii) certainsuccessful promotions by a few of our customers.  These increases were partially offset with anapproximately 4% decline in our overall selling prices mainly due to thedecline of hardwood lumber costs during 2009. We have indexing agreements with a majority of our customers, wherebyselling prices to customers in the future period are increased or decreasedbased on hardwood lumber cost changes in the prior period.

 

*Cost ofsales.*  Cost of sales increased $7.3million, or 12.9%, from $56.8 million for the six months ended June 30,2009 to $64.1 million for the six months ended June 30, 2010.  This increase in cost of sales is primarilyattributable to higher material, labor and overhead costs as a result of highervolume of sales.

 

*Grossprofit.*  Gross profit increased $0.4million, or 3.9%, from $10.3 million for the six months ended June 30,2009 to $10.7 million for the six months ended June 30, 2010.  As a percentage of net sales, our grossprofit decreased 110 basis points from 15.4% for the six months ended June 30,2009 to 14.3% for the six months ended June 30, 2010.  This decrease is related to (i) lowerselling prices in 2010 related to lower hardwood lumber costs during 2009, (ii) higherlumber costs in 2010, and (iii) higher premiums for purchases of kilndried lumber in 2010.  This decrease waspartially offset with (i) improved operating efficiencies in 2010 and (ii) absorbingfixed costs over higher sales volume.

 

*Operatingexpenses.*  Operatingexpenses decreased $0.1 million, or 1.6%, from $6.2 million for the sixmonths ended June 30, 2009 to $6.1 million for the six months ended June 30,2010.  The decrease primarily consists oflower professional fee expense and bad debt expense in 2010, offset partiallywith higher incentive compensation expense in 2010.

 

*Operatingincome.*  Operating income increased by$0.4 million, or 9.5%, from $4.2 million for the six months ended June 30,2009 to $4.6 million for the six months ended June 30, 2010 as a result ofthe net effect of the factors described above.

 

*Interestexpense.*  Interestexpense was $6.2 million for each of the six month periods ended June 30,2009 and June 30, 2010.

 

*Otherincome.*  Other income was $7,000 foreach of the six months ended June 30, 2009 and June 30, 2010.

 

*Income taxbenefit. *Income tax benefit decreased$0.1 million, or 14.3%, from $0.7 million for the six months ended June 30,2009 to $0.6 million for the six months ended June 30, 2010 due todecreased net losses before income taxes in 2010.  The effective tax rate decreased from 37.0%in 2009 to 35.5% in 2010 due to permanent differences.

 

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*Net loss.*  Net loss decreased $0.3 million, or 23.1%,from $1.3 million for the six months ended June 30, 2009 to $1.0 millionfor the six months ended June 30, 2010 as a result of the factorsdescribed above.

 

**Liquidityand Capital Resources**

 

Our primary cash needs arefor working capital, capital expenditures and debt service.  We have historically financed these cashrequirements through internally generated cash flow and funds borrowed underour prior and existing senior secured credit facilities.

 

In conjunction with theTransaction on January 9, 2007, the Company entered into the senior creditfacility (as amended from time to time, the “Senior Credit Facility”), whichprovided for (i) a senior secured first lien term loan facility in theinitial aggregate principal amount of $150.0 million (the “First Lien TermFacility”) and (ii) a seniorsecured first lien revolving credit facility in an aggregate principal amountup to $25.0 million, subject to certain conditions, (the “Revolving Facility”and, together with the First Lien Term Facility, the “First Lien Facilities”)of which $10.0 million is available through a subfacility in the form ofletters of credit.  As of March 30,2009, the Company repaid all amounts outstanding under the First Lien TermFacility and no additional borrowings were available thereunder.  As of June 30, 2010, the maximum amountof borrowings available to the Company under the Revolving Facility was $12.5million, of which no borrowings were outstanding as of this date.  Borrowings under the Revolving Facility bearinterest at a fluctuating rate equal to either the base rate plus 4.75% perannum or LIBOR plus 5.75% per annum (effective rate of 8.00% at June 30,2010).  The Company must comply withcertain financial covenants under the Senior Credit Facility, includingmaintenance of an interest coverage ratio and a total leverage ratio.  The Company was in compliance with suchcovenants as of June 30, 2010.

 

On March 26, 2010, the Company entered into anamendment to its  Senior Credit Facility,which among other things: (i) extended the date by which the Company mustamend the indenture governing the Senior Notes to eliminate certain of therestrictive covenants contained therein (including covenants related to theincurrence of indebtedness and liens) or redeem the Senior Notes to March 31,2011; (ii) increased the maximum total leverage ratio the Company may haveat the end of each quarterly period from March 31, 2010 through December 31,2010; (iii) added an asset-based borrowing base as a condition toborrowing under the Senior Credit Facility; (iv) extended the Company’sability to continue to pay cash dividends to enable Parent to make cashinterest payments on the Parent Notes to March 31, 2011; and (v) decreasedthe minimum interest coverage ratio the Company is required to maintain at theend of each quarterly period from March 31, 2010 through December 31,2010.

 

Indebtednessfor borrowed money incurred under our Senior Credit Facility is secured bysubstantially all of our assets, including our real and personal property,inventory, accounts receivable, intellectual property and otherintangibles.  The Senior Credit Facilityis scheduled to mature in January 2013.

 

As of June 30, 2010,the weighted average interest rate for the Company’s outstanding debt was10.1%.

 

Our Senior Credit Facilityand the indenture for the Senior Notes impose certain restrictions on ourability to incur indebtedness, pay dividends, make investments, grant liens,sell our assets and engage in certain other activities.  The subsidiaryguarantors are generally not restricted in their ability to dividend orotherwise distribute funds to the Company except for restrictions imposed underapplicable state corporate law.  The Company is limited in its ability topay dividends or otherwise make other distributions to Parent under the SeniorCredit Facility and the indenture governing the Senior Notes. Specifically, as amended, the Senior Credit Facility prohibits theCompany from making any distributions to Parent except for limited purposes,including, but not limited to: (i) prior to March 31, 2011, theCompany may pay cash dividends and distributions to Parent to enable Parent tomake cash interest payments on the Parent Notes, provided that (x) aftergiving pro forma effect to such dividend or distribution, the consolidatedfirst lien leverage ratio does not exceed 1.0 to 1.0, and (y) the amountof such dividends and distributions shall not exceed $3,225,000 in any calendarquarter, (ii) customary and reasonable out-of-pocket expenses, legal andaccounting fees and expenses and overhead of Parent incurred in the ordinarycourse of business to the extent attributable to the business of the Companyand its subsidiaries and in the aggregate not to exceed $500,000 in any fiscalyear, and (iii) the Company may pay management fees of Parent not toexceed $750,000 in any fiscal year, as well as any previously accrued butunpaid management fees for any previous fiscal years without regard to this$750,000 limitation, so long as the amount accrued in any such previous fiscalyear did not exceed $750,000, in each case, so long as no default has occurred.  The indenture provides thatthe Company can generally pay dividends and make other distributions to Parentin an amount not to exceed (i) 50% of the Company’s consolidated netincome for the period beginning April 1, 2004 and ending as of the end ofthe last fiscal quarter before the proposed payment, plus (ii) 100% of thenet cash proceeds received by the Company from the issuance and sale of capitalstock, plus (iii) the net return of certain investments, provided thatcertain conditions are satisfied, including that the Company has a consolidatedinterest coverage ratio of greater than 2.0 to 1.0.  For the period ended June 30, 2010, theCompany’s consolidated interest coverage ratio was less than 2.0 to 1.0.

 

On March 26, 2010,Parent amended the Note Purchase Agreements related to the Parent Notes to,among other things, adjust the total leverage ratio that Parent and itsSubsidiaries (including the Company) are required to maintain as of the end ofeach quarterly period through December 31, 2010.  The Parent was in compliance with allcovenants as of June 30, 2010.

 

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Asof June 30, 2010 and December 31, 2009, we had no capital leaseobligations.

 

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

 

Asof June 30, 2010, we had $3.6 million of cash available for any corporatepurposes, compared to $13.1 million as of December 31, 2009.

 

*Cash flowfrom operating activities.*  Cash used in operating activities was $8.9million for the six months ended June 30, 2010, while cash provided byoperating activities for the six months ended June 30, 2009 was $1.1million.  The $10.0 million increase incash used in operating activities for the six month period ended June 30,2010 versus the six month period ended June 30, 2009 was primarily due to:(i) an increase in cash used for inventories for 2010 versus 2009 of $1.9million and (ii),an increase in cash used for accounts receivable in 2010versus 2009 of $6.5 million.  These wereoffset partially by a decrease in cash provided by accounts payable for 2010versus 2009 of approximately $2.4 million. Days of receivables outstanding increased by approximately twenty-onedays as of June 30, 2010 versus June 30, 2009 mainly due to certaincustomer payment terms being modified over the past year.  These were offset partially by a decrease incash used for other current assets, and an increase in cash provided by otherlong term liabilities, accrued payroll and other current liabilities for 2010versus 2009 of approximately $0.7 million.

 

*Cash flowfrom investing activities.*  Net cash used in investing activities was$0.5 million for the six months ended June 30, 2010 and June 30,2009.  Capital expenditures in the sixmonths ended June 30, 2010 and June 30, 2009 were $0.5 million.

 

*Cash flowfrom financing activities.*  Net cash used in financing activities for thesix months ended June 30, 2010 totaled $0.1 million primarily due to debtissue costs.  Net cash used in financingactivities for the six months ended June 30, 2009 totaled $3.8 millionprimarily due to principal payments on the Senior Credit Facility.

 

For the six month periodsended June 30, 2010 and June 30, 2009, our two largest customersaccounted for approximately 56% and 57% of our net sales, respectively.  As of June 30, 2010 and December 31,2009, our two largest customers accounted for approximately 75% and 73%,respectively, of our consolidated accounts receivables balance.  The permanent loss of, or a significantdecrease in the level of purchases by, one or more of our major customers wouldhave a material adverse effect on our results of operations and future cashflows.

 

Accounts receivableincreased $10.4 million, from a balance of $10.8 million as of December 31,2009 to $21.2 million as of June 30, 2010. This increase was primarily due to (i) the number of days ofreceivables outstanding increasing by approximately eighteen days as of June 30,2010 versus December 31, 2009 mainly due to certain customer payment termsbeing modified over the past year and (ii) the average daily sales ratewas higher in June 2010 versus December 2009 due to a number ofreasons, including seasonality and increased market share by the Company

 

We cannot provide assurancesthat our business will generate sufficient cash flow from operations, thatanticipated net sales growth and operating improvements will be realized orthat future borrowings will be available under our Senior Credit Facility in anamount sufficient to enable us to service our indebtedness, including theSenior Notes, or to fund our other liquidity needs.  In addition, we cannot provide assurances thatwe will be able to refinance any of our indebtedness, including our SeniorCredit Facility and the Senior Notes, on commercially reasonable terms, if atall.

 

We derive a significantportion of our revenue as a result of demand for our products created by thebuilding of new homes, and repair and remodeling of existing homes.  During the second half of 2006, the homebuilding, and repair and remodeling industry experienced a slowdown as a resultof general economic conditions.  Thisslowdown worsened into 2009 and then stabilized into the first half of 2010,and has had a negative impact on our results of operations for the six monthsended June 30, 2010.  If thisslowdown were to continue or worsen over an extended period of time, it couldhave a material adverse effect on our business, financial condition or resultsof operations which may include impairment charges of goodwill and otherlong-term assets.

 

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

 

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

 

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

 

**Inflation**

 

In general, our cost ofsales is subject to inflationary pressures on labor costs, prices of the rawmaterials we use and various overhead costs. We generally have been able over time to offset the effects of inflationand price fluctuations through a combination of sales price increases andoperational efficiencies.  We currentlybelieve that raw material cost pressure has increased beginning in the fourthquarter 2009 and continuing into the first half of 2010.  We continue to attempt to pass along thesecosts to our customers, but such efforts typically lag three to twelve monthsbehind material cost changes and we cannot guarantee a full offset.  Our ability to pass through these pricechanges to our customers is dependent on prevailing economic and competitiveconditions.

 

**Seasonality**

 

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

 

**CriticalAccounting Policies**

 

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

 

The Company performed itsgoodwill impairment (ASC 350, “Intangibles-Goodwill and Other”) analysis as of December 31,2009.  To establish fair market value,items considered were:  (1) comparablepublic company trading multiples, (2) other comparable transactionmultiples and (3) the Woodcraft transaction multiple resulting from acompetitive auction process.  Based onthe fair market value methodology and the assumptions above, as compared to theCompany’s December 31, 2009 net worth and interest-bearing indebtedness,it was concluded that there was a goodwill impairment of $13.6 million, whichwas recorded during the fourth quarter of 2009. The Company determined there were no events that would require an ASC350 analysis to be completed as of June 30, 2010.

 

**NewAccounting Standards**

 

See Note 2 of the CondensedConsolidated Financial Statements for information pertaining to recentlyadopted accounting standards or accounting standards to be adopted in thefuture.

 

**Item 3.Quantitative and Qualitative Disclosures About Market Risk**

 

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

 

*Commodity price risk.*  Hardwood lumber accounts for the largestportion of our material costs.  Ourprofitability is therefore affected by the prices of lumber which may fluctuatebased on a number of factors beyond our control, including, among others,changes in supply and demand, general economic conditions, labor costs,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 primaryhardwood species we use in the production of our hardwood doors and componentsare subject to some volatility.  Wegenerally pass through cost increases to our customers, but such effortstypically lag three to twelve months behind material cost changes and we cannot guarantee a full offset.  Our abilityto pass through these price changes to our customers is dependent on prevailingeconomic and competitive conditions.

 

*Interestrate risk.*  We areexposed to market risk relating to changes in interest rates in respect to ourRevolving Facility.  As of June 30,2010, we had no outstanding indebtedness which bears interest at a variablerate.  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.

 

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**Item 4T.Controls and Procedures**

 

(a)           Evaluation ofdisclosure controls and procedures.

 

As required byRule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”),we carried out an evaluation under the supervision and with the participationof our management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of our disclosure controls and procedures as of June 30,2010.  For purposes of the foregoing, theterm disclosure controls and procedures means controls and other procedures ofan issuer that are designed to ensure that information required to be disclosedby the issuer in the reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed byan issuer in the reports that it files or submits under the Exchange Act isaccumulated and communicated to the issuer’s management, including itsprincipal executive and principal financial officers, or persons performingsimilar functions, as appropriate to allow timely decisions regarding requireddisclosure.  Our disclosure controls andprocedures are designed to provide us with a reasonable level of assurance ofachieving their objectives as outlined above. Based upon that evaluation, our Chief Executive Officer and Chief FinancialOfficer have concluded that they believe that, as of June 30, 2010, ourdisclosure controls and procedures were effective at a reasonable level ofassurance.

 

(b)           Changes ininternal controls over financial reporting.

 

There were no changes in ourinternal controls over financial reporting during our second fiscal quarter of2010 that have materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

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**PART II—OTHER INFORMATION**

 

**Item 1.Legal Proceedings**

 

No pending material legalproceedings.

 

**Item 1A.Risk Factors**

 

The Company has included inits Annual Report on Form 10-K for the year ended December 31, 2009,a description 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 in Part II, Item1A of this Form 10-Q.  Investorsshould consider the Risk Factors prior to making an investment decision withrespect to the Company’s securities.

 

**Item 2.Unregistered Sales of Equity Securities and Use of Proceeds**

 

None.

 

**Item 3.Defaults Upon Senior Securities**

 

None.

 

**Item 4. Removedand Reserved**

 

**Item 5.Other Information**

 

None.

 

**Item 6.Exhibits**

 

31.1         Certificationof Vice President, Treasurer and Secretary of WII Components, Inc.,pursuant to Rule 15d-14(a), as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002

31.2         Certificationof Chief Executive Officer of WII Components, Inc., pursuant to Rule 15d-14(a),as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

32.2*       Certificationof Chief Executive Officer of WII Components, Inc., pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002

 

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

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                         | WII COMPONENTS, INC. |
|------------------------------|---------------------------|
|                         |                      |
| Dated: August 12,  2010 | By:                       |   |
|                         |                      | /s/ John Fitzpatrick |
|                         |                      | John Fitzpatrick |
|                         |                      | President and Chief  Executive Officer |
|                         |                      | (Principal Executive  Officer) |
| Dated: August 12,  2010 |                      |   |
|                         |                      | /s/ Dale B. Herbst |
|                         |                      | Dale B. Herbst |
|                         |                      | Chief Financial Officer,  Treasurer and Secretary |
|                         |                      | (Principal Financial and  Accounting Officer) |

 

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