**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

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**FORM 10-Q**

**x****                             ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

**Forthe quarterly period ended June 30, 2006**

**or**

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

**Commission file number:**

**333-115490**

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**WIICOMPONENTS, INC.**

(Exact name of registrant as specified in itscharter)

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

 

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

(Address of principal executive offices) (Zip Code)

**(320)252-1503**

(Registrant’s telephone number, Including area code)

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

Yes **x**  No **o****.**

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

Large Accelerated Filer **o**                                 AcceleratedFiler  **o**                           Non-accelerated Filer **x**.

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

Yes **o**  No **x**.

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

 

 

 

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**WIICOMPONENTS, INC.FORM 10-QQuarter Ended June 30, 2006**

**Table ofContents**

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

 

 

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** **

**WII COMPONENTS, INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(UNAUDITED)(In thousands)**
| ** **                                     | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                     |       |                    |       |                        |       |
| Current Assets:                                |       |                    |       |                        |       |
| Cash                                           |       | $                       | 554        |                        | $          | 3,981 |   |
| Accounts  receivable, net                      |       | 18,457                  |       | 14,682                      |       |
| Inventories                                    |       | 21,234                  |       | 20,770                      |       |
| Other current  assets                          |       | 2,287                   |       | 2,492                       |       |
| Total current  assets                          |       | 42,532                  |       | 41,925                      |       |
|                                           |       |                    |       |                        |       |
| Property, plant, and  equipment, net           |       | 56,350                  |       | 49,921                      |       |
| Goodwill                                       |       | 108,748                 |       | 107,748                     |       |
| Customer relationship                          |       | 14,067                  |       | 14,896                      |       |
| Noncompete agreements                          |       | 617                     |       | 849                         |       |
| Other assets                                   |       | 5,747                   |       | 6,255                       |       |
| TOTAL                                          |       | $                       | 228,061    |                        | $          | 221,594 |   |
| ** **                                     |       |                    |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY** |       |                    |       |                        |       |
| Current  Liabilities:                          |       |                    |       |                        |       |
| Current  maturities of long-term debt          |       | $                       | 635        |                        | $          | 1,262 |   |
| Accounts payable                               |       | 6,765                   |       | 6,993                       |       |
| Accrued payroll                                |       | 4,589                   |       | 3,674                       |       |
| Other current  liabilities                     |       | 11,636                  |       | 13,027                      |       |
| Total current  liabilities                     |       | 23,625                  |       | 24,956                      |       |
|                                           |       |                    |       |                        |       |
| Long-term debt, net of  current maturities     |       | 127,500                 |       | 127,500                     |       |
| Other noncurrent  liabilities                  |       | 5,012                   |       | 5,219                       |       |
|                                           |       |                    |       |                        |       |
| Stockholders’ Equity:                     |       |                    |       |                        |       |
| Common  stock—voting                      |       | 217                     |       | 217                         |       |
| Common  stock—nonvoting                   |       | 9                       |       | 9                           |       |
| Additional  paid-in capital                    |       | 54,210                  |       | 51,927                      |       |
| Retained  earnings                             |       | 17,488                  |       | 11,766                      |       |
| Total  stockholders’ equity               |       | 71,924                  |       | 63,919                      |       |
| TOTAL                                          |       | $                       | 228,061    |                        | $          | 221,594 |   |

 

See notes to condensed consolidated financialstatements (unaudited).

1

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**WII COMPONENTS, INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)(In thousands)**

 
| ** **                                | ** ** | **Three Months  Ended  June 30, 2006** | ** ** | **Three Months  Ended  June 30, 2005** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| NET SALES                                 |       | $                                                     | 75,761     |                                                  | $          | 66,306 |   |
| COST OF SALES                             |       | 62,631                                                |       | 55,348                                                |       |
| Gross profit                              |       | 13,130                                                |       | 10,958                                                |       |
|                                      |       |                                                  |       |                                                  |       |
| OPERATING  EXPENSES:                      |       |                                                  |       |                                                  |       |
| General and administrative                |       | 3,619                                                 |       | 2,958                                                 |       |
| Selling and marketing                     |       | 853                                                   |       | 832                                                   |       |
| (Gain) loss on sale of assets             |       | (6                                                    | )          | 19                                                    |       |
| Total operating expenses                  |       | 4,466                                                 |       | 3,809                                                 |       |
|                                      |       |                                                  |       |                                                  |       |
| OPERATING INCOME                          |       | 8,664                                                 |       | 7,149                                                 |       |
|                                      |       |                                                  |       |                                                  |       |
| OTHER EXPENSE:                            |       |                                                  |       |                                                  |       |
| Interest income                           |       | 7                                                     |       | 4                                                     |       |
| Interest expense                          |       | (3,546                                                | )          | (3,364                                                | )          |
| Other income                              |       | 0                                                     |       | 3                                                     |       |
| Total other expense                       |       | (3,539                                                | )          | (3,357                                                | )          |
|                                      |       |                                                  |       |                                                  |       |
| INCOME BEFORE  PROVISION FOR INCOME TAXES |       | 5,125                                                 |       | 3,792                                                 |       |
| INCOME TAX  PROVISION                     |       | 2,069                                                 |       | 1,409                                                 |       |
| NET INCOME                                |       | $                                                     | 3,056      |                                                  | $          | 2,383 |   |

 

See notes to condensed consolidated financialstatements (unaudited).

2

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**WII COMPONENTS, INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)(In thousands)**

 
| ** **                                | ** ** | **Six Months  Ended  June 30, 2006** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| NET SALES                                 |       | $                                                   | 152,102    |                                                | $          | 124,114 |   |
| COST OF SALES                             |       | 126,316                                             |       | 104,041                                             |       |
| Gross profit                              |       | 25,786                                              |       | 20,073                                              |       |
|                                      |       |                                                |       |                                                |       |
| OPERATING  EXPENSES:                      |       |                                                |       |                                                |       |
| General and administrative                |       | 7,574                                               |       | 5,517                                               |       |
| Selling and marketing                     |       | 1,659                                               |       | 1,616                                               |       |
| (Gain) loss on sale of assets             |       | (6                                                  | )          | 19                                                  |       |
| Total operating expenses                  |       | 9,227                                               |       | 7,152                                               |       |
|                                      |       |                                                |       |                                                |       |
| OPERATING INCOME                          |       | 16,559                                              |       | 12,921                                              |       |
|                                      |       |                                                |       |                                                |       |
| OTHER EXPENSE:                            |       |                                                |       |                                                |       |
| Interest income                           |       | 30                                                  |       | 7                                                   |       |
| Interest expense                          |       | (6,968                                              | )          | (6,560                                              | )          |
| Other (expense) income                    |       | (2                                                  | )          | 6                                                   |       |
| Total other expense                       |       | (6,940                                              | )          | (6,547                                              | )          |
|                                      |       |                                                |       |                                                |       |
| INCOME BEFORE  PROVISION FOR INCOME TAXES |       | 9,619                                               |       | 6,374                                               |       |
| INCOME TAX  PROVISION                     |       | 3,897                                               |       | 2,390                                               |       |
| NET INCOME                                |       | $                                                   | 5,722      |                                                | $          | 3,984 |   |

 

See notes to condensed consolidated financialstatements (unaudited).

3

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** **

**WII COMPONENTS, INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)(In thousands)**

 
| ** **                                                                             | ** ** | **Six Months Ended  June 30, 2006** | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| OPERATING  ACTIVITIES:                                                                 | ** ** | ** **                                              | ** ** | ** **                                              | ** ** |
| Net income                                                                             |       | $                                                       | 5,722      |                                                    | $          | 3,984 |   |
|                                                                                   |       |                                                    |       |                                                    |       |
| Adjustments to  reconcile net income to net cash provided by operating activities:     |       |                                                    |       |                                                    |       |
| Depreciation and amortization                                                          |       | 3,737                                                   |       | 3,162                                                   |       |
| (Gain) loss on sale of assets                                                          |       | (6                                                      | )          | 19                                                      |       |
| Amortization of debt issue costs                                                       |       | 538                                                     |       | 523                                                     |       |
| Stock compensation expense                                                             |       | 2,283                                                   |       | 1,035                                                   |       |
|                                                                                   |       |                                                    |       |                                                    |       |
| Change in  operating assets and liabilities:                                           |       |                                                    |       |                                                    |       |
| Accounts receivable                                                                    |       | (3,775                                                  | )          | (4,977                                                  | )          |
| Inventories                                                                            |       | (464                                                    | )          | (1,820                                                  | )          |
| Other current assets                                                                   |       | 175                                                     |       | 886                                                     |       |
| Accounts payable                                                                       |       | 60                                                      |       | 931                                                     |       |
| Accrued payroll and other current liabilities                                          |       | (1,476                                                  | )          | 1,080                                                   |       |
| Net cash provided by operating activities                                              |       | 6,794                                                   |       | 4,823                                                   |       |
|                                                                                   |       |                                                    |       |                                                    |       |
| INVESTING  ACTIVITIES:                                                                 |       |                                                    |       |                                                    |       |
| Purchases of property, plant, and equipment                                            |       | (9,533                                                  | )          | (4,478                                                  | )          |
| Proceeds from sale of assets                                                           |       | 146                                                     |       | 40                                                      |       |
| Change in other assets                                                                 |       | 0                                                       |       | (55                                                     | )          |
| Net cash used in investing activities                                                  |       | (9,387                                                  | )          | (4,493                                                  | )          |
|                                                                                   |       |                                                    |       |                                                    |       |
| FINANCING  ACTIVITIES:                                                                 |       |                                                    |       |                                                    |       |
| Principal payments under long-term financing  agreements                               |       | (1,734                                                  | )          | (7,330                                                  | )          |
| Borrowings of long-term debt                                                           |       | 900                                                     |       | 7,000                                                   |       |
| Net cash used in financing activities                                                  |       | (834                                                    | )          | (330                                                    | )          |
|                                                                                   |       |                                                    |       |                                                    |       |
| NET (DECREASE)  INCREASE IN CASH                                                       |       | (3,427                                                  | )          | 0                                                       |       |
| CASH—Beginning  of period                                                         |       | 3,981                                                   |       | 2                                                       |       |
|                                                                                   |       |                                                    |       |                                                    |       |
| CASH—End of  period                                                               |       | $                                                       | 554        |                                                    | $          | 2 |   |
|                                                                                   |       |                                                    |       |                                                    |       |
| SUPPLEMENTAL  CASH FLOW INFORMATION:                                                   |       |                                                    |       |                                                    |       |
| Cash paid for interest                                                                 |       | $                                                       | 6,374      |                                                    | $          | 6,189 |   |
|                                                                                   |       |                                                    |       |                                                    |       |
| Cash paid for income taxes—net                                                    |       | $                                                       | 4,367      |                                                    | $          | 694 |   |
| NONCASH  ACTIVITY:                                                                     |       |                                                    |       |                                                    |       |
| Note receivable received in connection with the sale  of property, plant and equipment |       | $                                                       | —     |                                                    | $          | 150 |   |
| Capital  expenditures in accounts payable                                              |       | $                                                       | 363        |                                                    | $          | — |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

4

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**WII COMPONENTS, INC. ANDSUBSIDIARIESNOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)**

**1.  BASIS OFPRESENTATION**

The Company prepared the accompanying unauditedcondensed consolidated financial statements following the requirements of the Securitiesand Exchange Commission for interim reporting. As permitted under those rules,certain notes or other financial information normally required by accountingprinciples generally accepted in the United States of America have beencondensed or omitted. Therefore, the Company suggests that these financialstatements be read in conjunction with the consolidated financial statementsand accompanying notes for the year ended December 31, 2005 included inits Form 10-K as filed with the Securities and Exchange Commission on March 23,2006. The condensed consolidated balance sheet as of December 31, 2005 hasbeen derived from the audited consolidated financial statements at that date,but does not include all the information and notes required by accountingprinciples generally accepted in the United States of America for completepresentation.

Inour opinion, the accompanying unaudited condensed consolidated financialstatements include all adjustments (consisting of normal recurring items)considered necessary to present fairly, when read in conjunction with theconsolidated financial statements and accompanying notes for the period endedDecember 31, 2005 included in our 10-K as filed with the Securities andExchange Commission on March 23, 2006, our financial position, results ofoperations and cash flows for the periods presented.

The unaudited condensed consolidated financialstatements include the accounts of the Company and its wholly ownedsubsidiaries. On July 28, 2005 the Company completed the acquisition ofsubstantially all of the assets of Dimension Moldings, Inc.  (Note 3). All intercompany accounts andtransactions have been eliminated in the preparation of the consolidatedfinancial statements.

***Reclassifications***—Certain prior year amounts have beenreclassified to conform to the current fiscal year presentation.  These reclassifications have no impact on theCompany’s net income.

**2. SIGNIFICANT ACCOUNTING POLICIES**

***Inventories***—Inventories consisted of the following (inthousands):
| ** **      | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                       | 12,497     |                        | $          | 11,369 |   |
| Work in process |       | 5,508                   |       | 5,954                       |       |
| Finished goods  |       | 4,280                   |       | 4,360                       |       |
| LIFO adjustment |       | (1,051                  | )          | (913                        | )          |
|            |       | $                       | 21,234     |                        | $          | 20,770 |   |

 

The majority of inventory is valued at the lower oflast-in, first-out (“LIFO”) cost or market. The remainder of the inventory isvalued under the first-in, first-out method (“FIFO”). As of June 30, 2006 andDecember 31, 2005, inventory on the LIFO method represented 63% and 59%,respectively, of consolidated inventories.

***Goodwill***—As discussed in Note 3, in 2002, theCompany adopted and accounts for goodwill in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 142, *Goodwill and Other Intangible Assets*. Inpart, SFAS No. 142 states that companies are no longer required toamortize goodwill but instead must evaluate goodwill for impairment at leastannually.  The Company has elected toperform its annual tests for goodwill impairment as of December 31 of eachyear. Fair value is measured using a market multiple valuation method.  The carrying amount of goodwill increasedfrom $107.7 million at December 31, 2005 to $108.7 million at June 30,2006.  As described in Footnote 3, theassets of Dimension Moldings, Inc. earningstarget associated with the acquired business is projected to be met in 2006resulting in an earnout payment.  TheCompany therefore has accrued $1.0 million contingent consideration at June 30,2006, the maximum earn out payment for the year, which was allocated togoodwill.

***Customer Relationship***—Customer relationships relates to an intangible asset recorded throughthe purchase price allocation of the Grand Valley acquisition and theacquisition of the assets of Dimension Moldings, Inc. for relationships with asignificant customer. The original cost of these customer relationshipsis $16.6 million, and the related accumulated amortization as of June 30, 2006is $2.5 million.  The intangible assets are being amortized over the estimated life of 10years. Amortization for the six-month period ended June 30, 2006 was$828,000.  Expected annual amortizationis as follows for the years ending December 31 (in thousands):
| 2006      |   | $     | 1,657  |   |
|-----------|--------|-------|--------|--------|
| 2007      |   | 1,657 |   |
| 2008      |   | 1,657 |   |
| 2009      |   | 1,657 |   |
| 2010      |   | 1,657 |   |
| 2011-2015 |   | 6,611 |   |

*** ***

5

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*** ***

***NoncompeteAgreement***—Noncompeteagreements primarily relate to agreements with the former owners of Brentwood,Grand Valley, and Dimension Moldings, Inc. The original cost of thesenoncompete agreements is $2.3 million, and the related accumulated amortizationas of June 30, 2006 is $1.7 million.  Noncompete rights are being amortized over theapplicable terms of the agreements (5 years, 7 years, and 5 yearsrespectively), and are expected to be fully amortized by July 2007,April 2011, and July 2010 respectively. Amortization for the six-month periodended June 30, 2006 was $232,000. Expected annual amortization is as follows for the years endingDecember 31 (in thousands):

 
| 2006 |   | $   | 465    |   |
|------|--------|-----|--------|--------|
| 2007 |   | 285 |   |
| 2008 |   | 34  |   |
| 2009 |   | 34  |   |
| 2010 |   | 26  |   |
| 2011 |   | 5   |   |

 

***Stock Options***—In April 2003, the2003 Stock Option and Grant Plan (“2003 Plan”) was approved by the stockholdersof the Company. The 2003 Plan allows the granting of both incentive stockoptions and nonqualified stock options. Under the terms of the 2003 Plan, amaximum of 2,500,000 shares of stock, subject to adjustment, were madeavailable for awards to officers, employees, directors, consultants, and otherkey persons of the Company. Awards may include, but are not limited to, stockoptions, restricted stock, unrestricted stock awards, and substitute performanceawards.  Option awards are generallygranted with an exercise price equal to the calculated fair market value of thecompany’s stock.  Options generally vestover four years and have 10-year contractual terms.  On May 31, 2006, the 2003 Plan was amended bythe Board to provide for the issuance of an additional 500,000 shares of stock fora total of 3,000,000 shares of stock. The stockholders approved the amendment on June 8, 2006.

Effective January1, 2006 the Company adopted Statement of Financial Accounting Standards No.123(R), *Share Based Payment* (SFAS No. 123(R)),which requires all share-based payments, including grants of stock options, tobe recognized in the statement of operations as an operating expense, based ontheir fair values over the requisite service period. The Company utilized theprospective transition method as permitted by SFAS 123(R). Under thistransition method, SFAS No. 123(R) will be applied prospectively to all newawards issued as well as awards modified, repurchased, or cancelled after theeffective date.  The Company shallcontinue to account for the 1,517,000 options outstanding at the effective dateusing the accounting principles originally applied to those options.  The Company recorded $1,129,000 and$2,283,000 for the three months ended and six months ended June 30, 2006,respectively, of related stock-based compensation expense. The total income taxbenefit for share-based compensation arrangements was $457,000 and $924,000 forthe three months ended and six months ended June 30, 2006, respectively.  In accordance with the prospective transitionmethod of SFAS 123(R), results for prior periods have not been restated.

As of June 30,2006, $1,718,000 of unrecognized compensation costs related to non-vestedawards is expected to be recognized over a weighted average period ofapproximately ten months.  In addition,$343,000 of unrecognized compensation costs related to non-vested awards isexpected to be recognized over a weighted average period of approximately threeyears.

On May 31, 2006 the Company issued 160,000 incentivestock options under the 2003 Plan to a key employee.  The options fully vest at the earlier of asale event or June 30, 2009, and have an exercise price per share of $5.54 atthe date of issuance.  The optionsexercise price increases by $0.83 on July 1, 2007, and each anniversary datethereafter until termination of the options. The Company chose to use a bi-nominal option pricing model to determinethe average fair value of these options instead of the Black-Scholes model dueto this adjusting exercise price adjustment. The fair value of these options was calculated to be $1.02 pershare.  The activity for these options isimmaterial and is therefore not stated separately, but included in the tablesbelow with the other option activity.

The Company usesthe Black-Scholes option pricing model to determine the weighted average fairvalue of the non-adjusting exercise price options, and a bi-nominal optionpricing model for the adjusting exercise price options as described above. Theweighted average fair value of options granted during the three months endedand six months ended June 30, 2006 was $1.42 and $1.43, respectively. The fairvalue of options at the date of grant and the weighted-average assumptionsutilized to determine such values are indicated in the following table:

 

|                           | ** ** | **Six Months Ended  June 30, 2006** | ** ** |
|---------------------------|------------|---------------------------------------------------------|------------|
| Risk-free  interest rate  |       | 4.94                                                    | %          |
| Expected  volatility      |       | 28.0                                                    | %          |
| Expected life  (in years) |       | 6.5                                                     |       |
| Dividend yield            |       | —                                                  |       |

 

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

6

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Option transactions during the six months ended June30, 2006 are summarized as follows:
| ** **                        | ** ** | **Options** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining Contractual  Term (Yrs.)** | ** ** |
|-----------------------------------|------------|-------------|------------|------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| Outstanding,  beginning of period |       | 2,351,000   |       | $                                              | 2.62       |                                                                    |       |   |
| Granted                           |       | 250,000     |       | 5.51                                           |       |                                                                    |       |
| Exercised                         |       | —      |       | —                                         |       |                                                                    |       |
| Canceled                          |       | (71,750     | )          | 4.26                                           |       |                                                                    |       |
| Outstanding, end  of period       |       | 2,529,250   |       | $                                              | 2.86       |                                                                    | 7.6        |   |
| Exercisable, end of  period       |       | 1,385,375   |       | $                                              | 2.16       |                                                                    | 7.0        |   |

 

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

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

**3. ACQUISITIONS**

On July 28, 2005, the Company acquired substantially all of the assetsof a moldings manufacturing company operating under the name of DimensionMoldings, Inc.  The Company paid a cashpurchase price at closing of $9.3 million. In addition, the Company will be required to pay up to anaggregate of $7.0 million if certain earnings targets are met at the end ofeach calendar year from 2005 to 2010, of which, in the first quarter 2006, the Company paid $2.0 million to the sellersof Dimension Moldings as a result of the acquired business meeting the earningstarget set for 2005.  Slightly less thanhalf of the purchase price paid at closing was funded with borrowings under thesenior secured revolving credit facility and the remainder was funded from theproceeds of an equity contribution from existing stockholders. The acquiredassets of Dimension Moldings, Inc. are now operated and owned by WoodcraftIndustries, Inc., the Company’s subsidiary. Based on year-to-date results the earnings targets are projectedto be met for 2006.  The Companytherefore accrued $1.0 million contingent consideration at June 30, 2006, themaximum earn out payment for the year, which was allocated to goodwill.

The acquisition of the assets of Dimension Moldings, Inc. was accountedfor using the purchase method of accounting. Accordingly, the assets acquiredand the liabilities assumed by the Company were recorded at fair value as ofthe date of the acquisition, including assigning value to certain intangibleassets acquired (a customer relationship for $8.7 million and a noncompete for$0.1 million).  Based on the purchaseprice allocation, the Company determined the fair value of the net assetsacquired exceeded the $9.3 million closing purchase price by approximately $2.0million.  As a result, the Companyrecorded a current liability for $2.0 million as of December 31, 2005, whichwas paid in the first quarter 2006.  Anyadditional contingent consideration paid in excess of the original purchaseprice allocation will be recorded as goodwill. The components of the purchaseprice allocation are as follows (in thousands):
| Current assets                  |   | $      | 1,504  |   |
|---------------------------------|--------|--------|--------|--------|
| Property, plant,  and equipment |   | 1,271  |   |
| Goodwill                        |   | 147    |   |
| Customer  relationship          |   | 8,704  |   |
| Noncompete  agreement           |   | 100    |   |
| Assets acquired                 |   | 11,726 |   |
| Liabilities  assumed            |   | (437   | )      |
| Net assets  acquired            |   | 11,289 |   |
| Contingent  consideration       |   | (2,000 | )      |
| Closing purchase price          |   | $      | 9,289  |   |

 

7

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**4. RELATED-PARTY TRANSACTIONS**

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

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

 

8

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

**FORWARD-LOOKINGSTATEMENTS**

Certain statements in this report are “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Act of1995. Statements that are predictive in nature, that depend upon or refer tofuture events or conditions or that include words such as “believe,” “anticipate,”“expect,” “estimate,” “may,” “will,” “should,” “continue,” “plans,” “intends,” “likely”or other similar expressions are forward-looking statements. We caution youthat forward-looking statements involve unknown risks, uncertainties and otherfactors that may cause our actual results and performance to differ materiallyfrom any future results or performance expressed or implied by theseforward-looking statements.  Please alsosee our discussion of risk factors contained in Item 1A. Part II of this Reporton Form 10-Q.

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

•                    financial results andconditions;

•                    margins, costs andexpenditures;

•                    cash flows and growthrates;

•                    demand for our products;

•                    industry trends;

•                    new product and customerinitiatives;

•                    our current plans forcapital expenditures;

•                    manufacturing and othercost-saving initiatives; and

•                    our liquidity and capitalresources.

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

•                    our high degree of leverageand significant debt service obligations;

•                    our ability to integrateacquired businesses;

•                    our need for additionalmanufacturing capacity;

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

•                    changes in interest ratesand general economic, homebuilding industry or home repair and remodelingindustry conditions;

•                    changes in the price of rawmaterials;

•                    interruptions in deliveriesof raw materials or finished goods;

•                    the highly competitivenature of our industry; and

•                    increases in the cost oflabor.

9

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**Overview**

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

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

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

**Results of Operations**

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

The following table outlines, for the three monthsended June 30, 2006 and for the three months ended June 30, 2005, selectedoperating data derived from our condensed consolidated statements of operationsand presents this information as a percentage of net sales:

 
| ** **                | ** ** | **WII Components, Inc.**                              | ** ** |
|---------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                | ** ** | **Three Months Ended   June 30, 2006** | ** ** | **Three Months Ended  June 30, 2005** | ** ** |
| ** **                | ** ** | **(dollars in thousands)**                            | ** ** |
| Net sales                 |       | $                                                               | 75,761     |   | $ | 66,306 |   |
| *% of  net sales*         | * *   | *100.0*                                                         | *%*        | *100.0* | *%* |
| Cost of sales             |       | 62,631                                                          |       | 55.348 |   |
| *% of  net sales*         | * *   | *82.7*                                                          | *%*        | *83.5* | *%* |
| * *                  | * *   | * *                                                        | * *   | * * | * * |
| Gross profit              |       | 13,130                                                          |       | 10,958 |   |
| *% of  net sales*         | * *   | *17.3*                                                          | *%*        | *16.5* | *%* |
| Operating  expenses       |       | 4,466                                                           |       | 3,809 |   |
| *% of  net sales*         | * *   | *5.9*                                                           | *%*        | *5.7* | *%* |
| * *                  | * *   | * *                                                        | * *   | * * | * * |
| Operating income          |       | 8,664                                                           |       | 7,149 |   |
| *% of  net sales*         | * *   | *11.4*                                                          | *%*        | *10.8* | *%* |
| Other expenses  (income): |       |                                                            |       |   |   |
| Interest expense          |       | 3,546                                                           |       | 3,364 |   |
| *% of  net sales*         | * *   | *4.7*                                                           | *%*        | *5.1* | *%* |
| Other income,  net        |       | (7                                                              | )          | (7 | ) |
| *% of  net sales*         | * *   | *-0.0*                                                          | *%*        | *-0.0* | *%* |
| Income tax  provision     |       | 2,069                                                           |       | 1,409 |   |
| *% of  net sales*         | * *   | *2.7*                                                           | *%*        | *2.1* | *%* |
| * *                  | * *   | * *                                                        | * *   | * * | * * |
| Net income                |       | 3,056                                                           |       | 2,383 |   |
| *% of net sales*          | * *   | *4.0*                                                           | *%*        | *3.6* | *%* |
|                           |            |                                                                 |            |  |  |  |  |

 

*Net sales.*  Net sales increased $9.5 million,or 14.3%, from $66.3 million for the three months ended June 30, 2005 to$75.8 million for the three months ended June 30, 2006.  Sales in our hardwood product line increased$11.2 million attributable to a combination of (i) increases involume due to overall industry growth and market share gain, (ii) the inclusionof the results of the business acquired in the purchase of the assets ofDimension Moldings, Inc. in July 2005, and (iii) to a lesser extent, priceadjustments made in response to prior increases in raw material costs. Thisincrease was offset by a $1.7 million decrease in sales related to ourengineered wood products line, attributable to softness in the engineered woodproducts industry and decreases in market share.

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*Cost of sales.*  Costof sales increased $7.3 million, or 13.2%, from $55.3 million for thethree months ended June 30, 2005 to $62.6 million for the three monthsended June 30, 2006. This increase in cost of sales is primarily attributableto higher material, labor and overhead costs as a result of higher volume ofsales, but other factors include; (i) the acquisition of the assets ofDimension Moldings, Inc. in July 2005, (ii) start-up costs in ourPennsylvania facility, and (iii) increased stock compensation expense. Thesecosts were partially offset by (i) improved operational performance, primarilyat our Ohio and Oregon door making facilities, and (ii) the spreading of ourfixed costs over a larger sales base.

*Gross profit.*  Gross profit increased$2.2 million, or 20.0%, from $11.0 million for the three months endedJune 30, 2005 to $13.2 million for the same period in 2006. As apercentage of net sales, our gross profit increased 80 basis points from 16.5%for the three months ended June 30, 2005 to 17.3% for the same period in 2006.This increase reflects (i) improved operational performance,primarily  at our Ohio and Oregon doormaking facilities, (ii) stabilized raw material costs in our hardwoodproduct line since the first half 2005, and (iii) the spreading of our fixedcosts over a larger sales base.

*Operating expenses.*  Operating expenses increased$0.7 million, or 18.4%, from $3.8 million for the three months endedJune 30, 2005 to $4.5 million for the same period in 2006. The increasepartially consists of (i) $0.3 million additional stock compensationexpense in 2006, (ii) $0.3 million due to the inclusion of three full months ofoperations of our Middlefield facility, which includes $0.2 millionamortization for a customer relationship intangible asset, and (iii) $0.1million of additional bad debt expenses.

*Operating income.* Operating income increased by $1.5 million, or 20.8%, from$7.2 million for the three months ended June 30, 2005 to $8.7 millionfor the three months ended June 30, 2006 as a result of the net effect of thefactors described above.

*Interest expense.* Interest expense increased $0.1 million, or 2.9%, from$3.4 million for the three months ended June 30, 2005 to $3.5 millionfor the three months ended June 30, 2006. This increase relates to a higheraverage debt balance due to increased capital expenditures and the acquisitionof the assets of Dimension Moldings, Inc. in July 2005.

*Other income.*  Other income was $7,000 for thethree months ended June 30, 2006 and June 30, 2005.  This income is from interest paid by ourcustomers on past due balances.

*Income tax provision.*  Incometax expense increased $0.7 million, or 50.0% from an income tax expense of$1.4 million for the three months ended June 30, 2005 to an income taxexpense of $2.1 million for the three months ended June 30, 2006 as aresult of higher earnings and a higher effective tax rate. The effective taxrate increased 320 basis points from 37.2% in 2005 to 40.4% in 2006 due toadditional state taxes as a result of acquisitions.

*Net income.*  Net income increased$0.7 million, or 29.2%, from a net income of $2.4 million for thethree months ended June 30, 2005 to a net income of $3.1 million for thethree months ended June 30, 2006 as a result of the factors described above.

***Six Months Ended June 30, 2006Compared to the Six Months Ended June 30, 2005***

The following table outlines, for the six monthsended June 30, 2006 and for the six months ended June 30, 2005, selectedoperating data derived from our consolidated statements of operations andpresents this information as a percentage of net sales:

 
| ** **                | ** ** | **Six Months Ended  June 30, 2006** | ** ** | **Six Months Ended   June 30, 2005** | ** ** |
|---------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                | ** ** | **(dollars in thousands)**                    | ** ** |
| Net sales                 |       | $                                                       | 152,102    |                                                          | $          | 124,114 |   |
| *% of  net sales*         | * *   | *100.0*                                                 | *%*        | *100.0*                                                       | *%*        |
| Cost of sales             |       | 126,316                                                 |       | 104,041                                                       |       |
| *% of  net sales*         | * *   | *83.0*                                                  | *%*        | *83.8*                                                        | *%*        |
| * *                  | * *   | * *                                                | * *   | * *                                                      | * *   |
| Gross profit              |       | 25,786                                                  |       | 20,073                                                        |       |
| *% of  net sales*         | * *   | *17.0*                                                  | *%*        | *16.2*                                                        | *%*        |
| Operating  expenses       |       | 9,227                                                   |       | 7,152                                                         |       |
| *% of  net sales*         | * *   | *6.1*                                                   | *%*        | *5.8*                                                         | *%*        |
| * *                  | * *   | * *                                                | * *   | * *                                                      | * *   |
| Operating income          |       | 16,559                                                  |       | 12,921                                                        |       |
| *% of  net sales*         | * *   | *10.9*                                                  | *%*        | *10.4*                                                        | *%*        |
| Other expenses  (income): |       |                                                    |       |                                                          |       |
| Interest expense          |       | 6,968                                                   |       | 6,560                                                         |       |
| *% of  net sales*         | * *   | *4.6*                                                   | *%*        | *5.3*                                                         | *%*        |
| Other income,  net        |       | (28                                                     | )          | (13                                                           | )          |
| *% of  net sales*         | * *   | *0.0*                                                   | *%*        | *0.0*                                                         | *%*        |
| Income tax  provision     |       | 3,897                                                   |       | 2,390                                                         |       |
| *% of  net sales*         | * *   | *2.5*                                                   | *%*        | *1.9*                                                         | *%*        |
| * *                  | * *   | * *                                                | * *   | * *                                                      | * *   |
| Net income                |       | 5,722                                                   |       | 3,984                                                         |       |
| *% of net sales*          | * *   | *3.8*                                                   | *%*        | *3.2*                                                         | *%*        |
|                           |            |                                                         |            |                                                               |            |  |  |

 

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*Net sales.*  Net sales increased$28.0 million, or 22.6%, from $124.1 million for the six months endedJune 30, 2005 to $152.1 million for the six months ended June 30,2006.  Sales in our hardwood product lineincreased $29.9 million attributable to a combination of(i) increases in volume due to overall industry growth and market sharegain, (ii) the inclusion of the results of the business acquired in thepurchase of the assets of Dimension Moldings, Inc. in July 2005, and (iii) toa lesser extent, price adjustments made in response to prior increases in rawmaterial costs. This increase was offset by a $1.9 million decrease in salesrelated to our engineered wood products line, attributable to softness in theengineered wood products industry and decreases in market share.

*Cost of sales.*  Costof sales increased $22.3 million, or 21.4%, from $104.0 million forthe six months ended June 30, 2005 to $126.3 million for the six monthsended June 30, 2006. This increase in cost of sales is primarily attributableto higher material, labor and overhead costs as a result of higher volume ofsales, but other factors include; (i) the acquisition of the assets ofDimension Moldings, Inc. in July 2005, (ii) start-up costs in our Pennsylvaniafacility, and (iii) stock compensation expense. These costs were partiallyoffset by (i) improved operational performance, primarily at our Ohio andOregon door making facilities, and (ii) the spreading of our fixed costs over alarger sales base.

*Gross profit.*  Gross profit increased$5.7 million, or 28.4%, from $20.1 million for the six months endedJune 30, 2005 to $25.8 million for the same period in 2006 as a result ofthe factors described above. As a percentage of net sales, our gross profitincreased 80 basis points from 16.2% for the six months ended June 30, 2005 to17.0% for the same period in 2006. This increase reflects (i) improvedoperational performance, primarily  atour Ohio and Oregon door making facilities, (ii) stabilized raw materialcosts in our hardwood product line since the first half 2005, and (iii) thespreading of our fixed costs over a larger sales base.

*Operating expenses.*  Operating expenses increased$2.0 million, or 27.8%, from $7.2 million for the six months endedJune 30, 2005 to $9.2 million for the same period in 2006. The increasepartially consists of (i) $0.9 million additional stock compensationexpense in 2006, (ii) $0.6 million due to the inclusion of six full months ofoperations of our Middlefield facility, which includes $0.4 millionamortization for a customer relationship intangible asset, and (iii) $0.4million of additional professional fees, bad debt, information systems andemployee incentive expenses.

*Operating income.* Operating income increased by $3.7 million, or 28.7%, from$12.9 million for the six months ended June 30, 2005 to $16.6 millionfor the six months ended June 30, 2006 as a result of the net effect of thefactors described above.

*Interest expense.* Interest expense increased $0.5 million, or 7.7%, from$6.5 million for the six months ended June 30, 2005 to $7.0 millionfor the six months ended June 30, 2006. This increase relates to a higher average debt balance due to increasedcapital expenditures and the acquisition of the assets of Dimension Moldings,Inc. in July 2005.

*Other income.*  Other income increased from$13,000 for the six months ended June 30, 2005 to $28,000 of other income forthe six months ended June 30, 2006.  Thisincrease relates to the interest received related to short term investments incertificate of deposits.

*Income tax provision.*  Incometax expense increased $1.5 million, or 62.5% from $2.4 million forthe six months ended June 30, 2005 to $3.9 million for the six monthsended June 30, 2006 as a result of higher earnings, and a higher effective taxrate. The effective tax rate increased 300 basis points from 37.5% in 2005 to40.5% in 2006 due to additional state taxes as a result of acquisitions.

*Net income.*  Net income increased$1.7 million, or 42.5%, from $4.0 million for the six months endedJune 30, 2005 to $5.7 million for the six months ended June 30, 2006 as aresult of the factors described above.

**Liquidity and Capital Resources**

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

*Refinancing*. On February 18, 2004, weissued $120.0 million of 10% senior notes due in 2012, and paid the entireoutstanding balance of our old senior secured credit facility and terminatedthe related credit agreement.  Ourexisting $55.0 million credit facility, which was amended and restated inSeptember 2005, provides for revolving credit of up to $40.0 millionsubject to a borrowing base, $7.5 million nonamortizing term loan, and $7.5million nonamortizing capital expenditure loan to be drawn upon through June30, 2006.  As of June 30, 2006 thenonamortizing capital expenditure loan has expired.  Theoutstanding principal bears interest at a fluctuating rate equal to either thebase rate plus 2 3¤4% per annum or LIBOR plus3.0% per annum. As of June 30, 2006, the borrowing base allowed for fullavailability of the $40.0 million revolving credit.  Wehad no amount outstanding under our revolving credit as of June 30, 2006 orDecember 31, 2005.  As of June 30,2006 and December 31, 2005, we had $7.5 million outstanding under thenonamortizing term loan.  We must comply withcertain financial covenants under our credit facility including maintenance ofa minimum fixed charge coverage ratio, a maximum total leverage ratio and anEBITDA minimum. As of June 30, 2006 and December 31, 2005, we were incompliance with these covenants.  As ofJune 30, 2006, we had $1.6million of capital lease obligations, of which $0.6 million was current and asof December 31, 2005 we had $2.5 million of capital lease obligations, ofwhich $1.3 million was current.

The acquisition of substantially all of the assets of DMI, andassociated fees and expenses at closing were funded slightly more than one-halfby the sale of shares of the Company’s voting common stock to existingstockholders, and the remainder with operating cash and a

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drawdown on the Company’s senior secured credit facility.  In the first quarter of 2006, we paidan earn-out payment in the amount of $2.0 million to the DMI sellers as aresult of the operations of the DMI assets meeting agreed upon earningstargets.

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

*Cash flow from operating activities.*  As of June 30, 2006, we had $554,000 of cash andcash equivalents available for working capital purposes, compared to $2,000 asof June 30, 2005.  Cash providedby operating activities for the six months ended June 30, 2006 and 2005 was$6.8 million and $4.8 million, respectively. The increase is primarily driven by the increased net income andincreased noncash stock compensation expense for the six months ended June 30,2006, offset partially by the change in operating assets and liabilities.

*Cash flow from investingactivities.*  Net cash used in investing activities was$9.4 million for the six months ended June 30, 2006 and $4.5 million forthe six months ended June 30, 2005. Capital expenditures for the sixmonths ended June 30, 2006 were $9.5 million compared to $4.5 million forthe six months ended June 30, 2005.  Theincrease is primarily due to expenditures in 2006 for (i) the expansion of ourSt. Cloud door plant and (ii) the equipment for the roughmill facility inGreenville, Pennsylvania.

*Cash flow from financingactivities.*  Net cash used in financing activities for thesix months ended June 30, 2006 and June 30, 2005 totaled $0.8 million and$0.3 million, respectively, due to payments made on capital leases.

We anticipate that the funds generated by operationsand funds available under the senior secured credit facility will be sufficientto meet working capital requirements and to finance capital expenditures overthe next twelve months. We cannot provide assurances that our business willgenerate sufficient cash flow from operations, that anticipated net salesgrowth and operating improvements will be realized or that future borrowingswill be available under our senior secured credit facility in an amountsufficient to enable us to service our indebtedness, including the notes, or tofund our other liquidity needs. In addition, we cannot provide assurances thatwe will be able to refinance any of our indebtedness, including our seniorsecured credit facility and the notes, on commercially reasonable terms, if atall.  We are currently approachingour full manufacturing capacity.  Weintend to incur capital expenditures in order to continue to fulfill increasedmanufacturing demands, including without limitation, the current expansions atour roughmill facility in Pennsylvania and our St. Cloud door facility forwhich we have expended approximately $11.5 million as of June 30, 2006. Wecurrently believe that an additional amount between $4.5 million and $6.5million will be required to complete these expansions.  These expansion costs include the acquisitionof our Pennsylvania roughmill facility.

**Inflation**

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

**Seasonality**

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

### **Critical Accounting Policies**

In our Annual Report on Form 10-K for the year endedDecember 31, 2005, we identified the critical accounting policies which affectour more significant estimates and assumptions used in preparing ourconsolidated financial statements.  Wehave not changed these policies from those previously disclosed in our annualreport.

**New Accounting Standards**

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

### **Item 3. Quantitative and Qualitative Disclosures about MarketRisk**

We are subject to various market risks such as fluctuating lumber pricesand interest rates.

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

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*Interest rate risk.*  We areexposed to market risk relating to changes in interest rates in respect of aportion of our long-term debt and a portion of our capital leases. As of June 30, 2006, we had $7.5 millionoutstanding under the nonamortizing term loan issued under our senior securedcredit facility, which bears interest at variable rates.  Inaddition, as of that date, we had approximately $0.8 million of capitalleases that bear interest at variable rates. We believe that a one percent (1%)increase in the interest rates currently in effect would not have a materialadverse effect on our financial condition or results of operations.

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

(a)           Evaluation of disclosure controls and procedures.

As required by Rule 13a-15 under the SecuritiesExchange Act of 1934, we carried out an evaluation under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, of the effectiveness of our disclosure controlsand procedures as of June 30, 2006. In designing and evaluating our disclosurecontrols and procedures, we and our management recognize that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, and ourmanagement necessarily was required to apply its judgment in evaluating andimplementing possible controls and procedures. Based upon that evaluation, ourChief Executive Officer and Chief Financial Officer have concluded that theybelieve that, as of June 30, 2006, our disclosure controls and procedures werereasonably effective to ensure that information required to be disclosed by usin the reports we file or submit under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in the Securitiesand Exchange Commission’s rules and forms. We will continue to review anddocument our disclosure controls and procedures on an ongoing basis, and mayfrom time to time make changes aimed at enhancing their effectiveness and toensure that our systems evolve with our business.

(b)           Changes in internal controls over financial reporting.

                None.

 

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**PART II—OTHER INFORMATION**

**Item 1. Legal Proceedings**

None.

**Item 1A. Risk Factors**

The Company has included inits Annual Report on Form 10-K for the year ended December 31, 2005, adescription of certain risks and uncertainties that could affect the Company’sbusiness, future performance or financial condition (the “Risk Factors”).  The Risk Factors are hereby incorporated inPart II, Item IA of this Form 10-Q. Investors should consider the Risk Factors prior to making an investmentdecision with respect to the Company’s securities.

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

Information previously disclosed on Current Report onForm 8-K filed on June 2, 2006.

**Item 3. Defaults Upon SeniorSecurities**

None.

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

On June 8, 2006, the holders of the Company’s VotingCommon Stock took action by written consent approving an amendment of theCompany’s 2003 Stock Option and Grant Plan (“2003 Plan”) to authorize anadditional 500,000 shares to be issued there under.  On June 8, 2006, the holders of the Company’sVoting Common Stock took action by written consent approving a bonusarrangement with the Company’s Chief Executive Officer which is more fullydescribed in the Company’s Current Report on Form 8-K, filed in June 2, 2006.

**Item 5. Other Information**

### None.

### **Item 6. Exhibits**

| 10.1  |   | Bonus Letter Agreement between the Company and John  Fitzpatrick, dated May 31, 2006                                                                                                                                |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2  |   | Option Agreement dated May 31, 2006, between the  Company and John Fitzpatrick                                                                                                                                      |
| 10.3  |   | Option Agreement dated May 31, 2006, between the  Company and John Fitzpatrick                                                                                                                                      |
| 31.1  |   | Certification of Vice President, Treasurer and  Secretary of WII Components, Inc., pursuant to Rules 13a-14(a) and  15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 |
| 31.2  |   | Certification of Chief Executive Officer of WII  Components, Inc., pursuant to Rules 13a-14(a) and 15d-14(a), as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                  |
| 32.1* |   | Certification of Vice President, Treasurer and  Secretary of WII Components, Inc., pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002        |
| 32.2* |   | Certification of Chief Executive Officer of WII  Components, Inc., pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                         |

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*This certification shall not be deemed “filed” for purposes ofSection 18 of the Securities Exchange Act of 1934, or otherwise subject tothe liability of that section, nor shall it be deemed to be incorporated byreference into any filing under the Securities Act of 1933 or the SecuritiesExchange Act of 1934.

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                    | WII  COMPONENTS, INC. |
|-------------------------|-----------------------|
|                    |                  |
| Dated:  August 14, 2006 | By:                   |
|                    |                  |  /s/ John Fitzpatrick |
|                    |                  | John  Fitzpatrick |
|                    |                  | Chief  Executive Officer |
|                    |                  | (Principal  Executive Officer) |
| Dated:  August 14, 2006 |                  |   |
|                    |                  | /s/  Dale B. Herbst |
|                    |                  | Dale  B. Herbst |
|                    |                  | Vice  President, Treasurer and Secretary |
|                    |                  | (Principal  Financial and Accounting Officer) |

 

 

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