**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

----

 

**FORM 10-Q**

 

**ý****          ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2005**

 

**or**

 

**o****          ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Commission file number:**

**333-115490**

 

----

 

**WII COMPONENTS, INC.**

(Exact name 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**

(Address of principal executive offices) (Zip Code)

 

**(320) 252-1503**

(Registrant’s telephone number, Including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days.

 

Yes ý No o.

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act.)

 

Yes o No ý.

 

Asof July 15, 2005, 20,734,843 shares of voting common stock, $.01 par valueper share, were outstanding and 854,261 shares of non-voting common stock, $.01par value per share, were outstanding (all of which are privately owned and nottraded on a public market).

 

 

----

 

**WII COMPONENTS, INC.**

 

**FORM 10-Q**

**Quarter Ended June 30, 2005**

 

**Table of Contents**

 
| **Part I—Financial Information**                                                                                                                |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1. Financial Statements                                                                                                                              |   |
| Condensed  Consolidated Balance Sheets as of June 30, 2005 and December 31,  2004 (unaudited)                                                   | 3      |
| Condensed  Consolidated Statements of Operations for the Three Months Ended June 30,  2005 and the Three Months Ended June 30, 2004 (unaudited) | 4      |
| Condensed  Consolidated Statements of Operations for the Six Months Ended June 30,  2005 and the Six Months Ended June 30, 2004 (unaudited)     | 5      |
| Condensed  Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30,  2005 (unaudited)                                   | 6      |
| Condensed  Consolidated Statements of Cash Flows for the Six Months Ended June 30,  2005 and the Six Months Ended June 30, 2004 (unaudited)     | 7      |
| Notes  to Condensed Consolidated Financial Statements (unaudited)                                                                                         | 8      |
| Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations                                                      | 12     |
| Item  3. Quantitative and Qualitative Disclosures about Market Risk                                                                                       | 17     |
| Item 4.  Controls and Procedures                                                                                                                          | 17     |
|                                                                                                                                                      |   |
| **Part II-Other Information**                                                                                                                        |   |
| Item 1. Legal Proceedings                                                                                                                                 | 19     |
| Item 2. Unregistered Sales  of Equity Securities and Use of Proceeds                                                                                      | 19     |
| Item 3. Defaults Upon  Senior Securities                                                                                                                  | 19     |
| Item 4. Submission of  Matters to a Vote of Security Holders                                                                                              | 19     |
| Item 5. Other Information                                                                                                                                 | 19     |
| Item 6. Exhibits                                                                                                                                          | 19     |
| Signatures                                                                                                                                                | 20     |

 

2

----

 

**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                                    | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                    |       |                    |       |                        |       |
| Current Assets:                               |       |                    |       |                        |       |
| Cash                                          |       | $                       | 2          |                        | $          | 2 |   |
| Accounts receivable, net                      |       | 14,691                  |       | 9,564                       |       |
| Inventories                                   |       | 18,563                  |       | 16,742                      |       |
| Other current assets                          |       | 2,495                   |       | 3,381                       |       |
| Total current assets                          |       | 35,751                  |       | 29,689                      |       |
|                                          |       |                    |       |                        |       |
| Property, plant, and equipment, net           |       | 43,974                  |       | 42,252                      |       |
| Goodwill                                      |       | 107,601                 |       | 107,601                     |       |
| Customer relationship                         |       | 6,954                   |       | 7,347                       |       |
| Noncompete agreements                         |       | 979                     |       | 1,201                       |       |
| Other assets                                  |       | 6,428                   |       | 6,897                       |       |
| TOTAL                                         |       | $                       | 201,687    |                        | $          | 194,987 |   |
|                                          |       |                    |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY** |       |                    |       |                        |       |
| Current Liabilities:                          |       |                    |       |                        |       |
| Current maturities of long-term debt          |       | $                       | 943        |                        | $          | 928 |   |
| Accounts payable                              |       | 6,739                   |       | 5,808                       |       |
| Accrued payroll                               |       | 3,975                   |       | 3,207                       |       |
| Other current liabilities                     |       | 9,419                   |       | 9,107                       |       |
| Total current liabilities                     |       | 21,076                  |       | 19,050                      |       |
|                                          |       |                    |       |                        |       |
| Long-term debt, net of current maturities     |       | 120,000                 |       | 120,000                     |       |
| Other noncurrent liabilities                  |       | 6,375                   |       | 6,720                       |       |
|                                          |       |                    |       |                        |       |
| Stockholders’ Equity:                    |       |                    |       |                        |       |
| Common stock—voting                      |       | 207                     |       | 207                         |       |
| Common stock—nonvoting                   |       | 9                       |       | 9                           |       |
| Additional paid-in capital                    |       | 46,445                  |       | 45,410                      |       |
| Retained earnings                             |       | 7,575                   |       | 3,591                       |       |
| Total stockholders’ equity               |       | 54,236                  |       | 49,217                      |       |
| TOTAL                                         |       | $                       | 201,687    |                        | $          | 194,987 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

3

----

 

**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                               | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Three Months  Ended  June 30, 2004** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| NET SALES                                |       | $                                           | 66,306     |                                        | $          | 51,217 |   |
| COST OF SALES                            |       | 55,157                                      |       | 42,377                                      |       |
| Gross profit                             |       | 11,149                                      |       | 8,840                                       |       |
|                                     |       |                                        |       |                                        |       |
| OPERATING EXPENSES:                      |       |                                        |       |                                        |       |
| General and administrative               |       | 2,467                                       |       | 1,950                                       |       |
| Selling and marketing                    |       | 832                                         |       | 749                                         |       |
| Stock compensation expense               |       | 682                                         |       | 261                                         |       |
| Loss on sale of assets                   |       | 19                                          |       | —                                      |       |
| Total operating expenses                 |       | 4,000                                       |       | 2,960                                       |       |
|                                     |       |                                        |       |                                        |       |
| OPERATING INCOME                         |       | 7,149                                       |       | 5,880                                       |       |
|                                     |       |                                        |       |                                        |       |
| OTHER INCOME (EXPENSE):                  |       |                                        |       |                                        |       |
| Interest income                          |       | 4                                           |       | 8                                           |       |
| Interest expense                         |       | (3,364                                      | )          | (3,429                                      | )          |
| Other income                             |       | 3                                           |       | —                                      |       |
| Total other expense                      |       | (3,357                                      | )          | (3,421                                      | )          |
|                                     |       |                                        |       |                                        |       |
| INCOME BEFORE PROVISION FOR INCOME TAXES |       | 3,792                                       |       | 2,459                                       |       |
| INCOME TAX PROVISION                     |       | 1,409                                       |       | 901                                         |       |
| NET INCOME                               |       | $                                           | 2,383      |                                        | $          | 1,558 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

4

----

 

**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                               | ** ** | **Six Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2004** | ** ** |
|------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| NET SALES                                |       | $                                         | 124,114    |                                      | $          | 98,936 |   |
| COST OF SALES                            |       | 103,751                                   |       | 81,729                                    |       |
| Gross profit                             |       | 20,363                                    |       | 17,207                                    |       |
|                                     |       |                                      |       |                                      |       |
| OPERATING EXPENSES:                      |       |                                      |       |                                      |       |
| General and administrative               |       | 4,772                                     |       | 4,814                                     |       |
| Selling and marketing                    |       | 1,616                                     |       | 1,499                                     |       |
| Stock compensation expense               |       | 1,035                                     |       | 391                                       |       |
| Loss on sale of assets                   |       | 19                                        |       | 1                                         |       |
| Total operating expenses                 |       | 7,442                                     |       | 6,705                                     |       |
|                                     |       |                                      |       |                                      |       |
| OPERATING INCOME                         |       | 12,921                                    |       | 10,502                                    |       |
|                                     |       |                                      |       |                                      |       |
| OTHER INCOME (EXPENSE):                  |       |                                      |       |                                      |       |
| Interest income                          |       | 7                                         |       | 20                                        |       |
| Interest expense                         |       | (6,560                                    | )          | (5,918                                    | )          |
| Loss on modification of debt             |       | —                                    |       | (3,454                                    | )          |
| Other income                             |       | 6                                         |       | 14                                        |       |
| Total other expense                      |       | (6,547                                    | )          | (9,338                                    | )          |
|                                     |       |                                      |       |                                      |       |
| INCOME BEFORE PROVISION FOR INCOME TAXES |       | 6,374                                     |       | 1,164                                     |       |
| INCOME TAX PROVISION                     |       | 2,390                                     |       | 422                                       |       |
| NET INCOME                               |       | $                                         | 3,984      |                                      | $          | 742 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

5

----

 

**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ EQUITY**

**(UNAUDITED)**

**(In thousands, except share amounts)**

 
| ** **                     | ** ** | **Common Stock** | ** ** | **Additional ** | ** ** | ** **  | ** ** | ** **   | ** ** |
|--------------------------------|------------|------------------|------------|----------------------|------------|-------------|------------|--------------|------------|
| ** **                     | ** ** | **Voting**       | ** ** | **Nonvoting**        | ** ** | **Paid-in** | ** ** | **Retained** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Shares**       | ** ** | **Amount**           | ** ** | **Shares**  | ** ** | **Amount**   | ** ** | **Capital** | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| BALANCE-December 31, 2004 |       | 20,734,843       |       | $                    | 207        |        | 854,261    |         | $          | 9 |   | $ | 45,410 |   | $ | 3,591 |   | $ | 49,217 |   |
| Stock compensation expense     |       |             |       |                 |       |        |       |         |       | 1,035 |   |   |   | 1,035 |   |
| Net income                     |       |             |       |                 |       |        |       |         |       |   |   | 3,984 |   | 3,984 |   |
| BALANCE-June 30, 2005     |       | 20,734,843       |       | $                    | 207        |        | 854,261    |         | $          | 9 |   | $ | 46,445 |   | $ | 7,575 |   | $ | 54,236 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

6

----

 

**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                                                                             | ** ** | **Six Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2004** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| OPERATING ACTIVITIES:                                                                  |       |                                      |       |                                      |       |
| Net income                                                                             |       | $                                         | 3,984      |                                      | $          | 742 |   |
|                                                                                   |       |                                      |       |                                      |       |
| Adjustments to reconcile net income to net  cash provided by operating activities:     |       |                                      |       |                                      |       |
| Loss on modification of debt                                                           |       | —                                    |       | 3,454                                     |       |
| Depreciation and amortization                                                          |       | 3,685                                     |       | 3,222                                     |       |
| Loss on sale of assets                                                                 |       | 19                                        |       | 1                                         |       |
| Stock compensation expense                                                             |       | 1,035                                     |       | 391                                       |       |
|                                                                                   |       |                                      |       |                                      |       |
| Change in operating assets and liabilities:                                            |       |                                      |       |                                      |       |
| Accounts receivable                                                                    |       | (4,977                                    | )          | (1,376                                    | )          |
| Inventories                                                                            |       | (1,820                                    | )          | (1,105                                    | )          |
| Other current assets                                                                   |       | 886                                       |       | 309                                       |       |
| Accounts payable                                                                       |       | 931                                       |       | (1,096                                    | )          |
| Accrued payroll and other current  liabilities                                         |       | 1,080                                     |       | 2,449                                     |       |
| Net cash provided by operating activities                                              |       | 4,823                                     |       | 6,991                                     |       |
|                                                                                   |       |                                      |       |                                      |       |
| INVESTING ACTIVITIES:                                                                  |       |                                      |       |                                      |       |
| Purchases of property, plant, and equipment                                            |       | (4,478                                    | )          | (2,489                                    | )          |
| Proceeds from sale of assets                                                           |       | 40                                        |       | 2                                         |       |
| Change in other assets                                                                 |       | (55                                       | )          | (45                                       | )          |
| Grand Valley acquisition                                                               |       | —                                    |       | (15,937                                   | )          |
| Net cash used in investing activities                                                  |       | (4,493                                    | )          | (18,469                                   | )          |
|                                                                                   |       |                                      |       |                                      |       |
| FINANCING ACTIVITIES:                                                                  |       |                                      |       |                                      |       |
| Principal payments under long-term  financing agreements                               |       | (7,330                                    | )          | (81,759                                   | )          |
| Borrowings of long-term debt                                                           |       | 7,000                                     |       | 131,283                                   |       |
| Dividend distribution                                                                  |       | —                                    |       | (21,450                                   | )          |
| Repurchase of common stock                                                             |       | —                                    |       | (17,550                                   | )          |
| Issuance of common stock                                                               |       | —                                    |       | 8,250                                     |       |
| Debt issue costs                                                                       |       | —                                    |       | (7,385                                    | )          |
| Termination of interest rate collar                                                    |       | —                                    |       | 52                                        |       |
| Net cash provided by (used in) financing  activities                                   |       | (330                                      | )          | 11,441                                    |       |
|                                                                                   |       |                                      |       |                                      |       |
| NET INCREASE (DECREASE) IN CASH                                                        |       | 0                                         |       | (37                                       | )          |
| CASH—Beginning of period                                                          |       | 2                                         |       | 39                                        |       |
|                                                                                   |       |                                      |       |                                      |       |
| CASH—End of period                                                                |       | $                                         | 2          |                                      | $          | 2 |   |
|                                                                                   |       |                                      |       |                                      |       |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                                    |       |                                      |       |                                      |       |
| Cash paid for interest                                                                 |       | $                                         | 6,189      |                                      | $          | 2,928 |   |
|                                                                                   |       |                                      |       |                                      |       |
| Cash paid for income taxes—net                                                    |       | $                                         | 694        |                                      | $          | 86 |   |
| NONCASH ACTIVITY:                                                                      |       |                                      |       |                                      |       |
| Conversion of subordinated convertible note  and accrued interest to common stock      |       | $                                         | —     |                                      | $          | 20,850 |   |
| Note receivable received in connection with  the sale of property, plant and equipment |       | $                                         | 150        |                                      | $          | — |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

7

----

 

**WII COMPONENTS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED**

**CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1. NATURE OF BUSINESS**

 

***Company Background***—WII Components, Inc. (formerly WIIHoldings, Inc. and referred to herein as the “Company”), a Delawarecorporation, was formed to acquire 100% of the common stock of WoodcraftIndustries, Inc. and its Subsidiaries in a buyout (the “Acquisition”) fromthe former owners. On April 9, 2003, pursuant to a sale agreement betweenthe Company and the former owners, the Company acquired the common stock ofWoodcraft Industries, Inc. for a total of approximately$145 million.  The Company has noindependent assets or operations separate from its consolidated subsidiaries.

 

TheAcquisition was accounted for using the purchase method of accounting.Accordingly, the assets acquired and the liabilities assumed by the Companywere recorded at fair value as of the date of the Acquisition. The excess ofthe purchase price over the fair value of the assets acquired and liabilitiesassumed totaling approximately $104.0 million was recorded as goodwill.

 

InFebruary 2004, the Company completed an equity restructuring using theproceeds from its $120 million 10% senior notes offering (Note 5) topay off the outstanding term loans and revolving line of credit, to pay adividend of approximately $21.5 million, to repurchase approximately$17.5 million of the Company’s outstanding common stock, and to payfinancing costs of approximately $7.4 million.

 

TheCompany acquired a cabinet door manufacturer operating under the name GrandValley Door Co. (“Grand Valley”) on April 30, 2004 (Note 4).

 

***Description of Business***—The Company is a leading manufacturer of woodcabinet doors, hardwood components, and engineered wood products in the UnitedStates. Its products are sold principally to leading national and regionalkitchen and bathroom cabinet manufacturers. Its reputation for high quality andreliable performance has enabled the Company to establish strong, long-standingrelationships with its customers. Its customers, in turn, distribute productsthrough various sales channels, including specialty kitchen and bathroomcabinetry dealers, home center retailers, and homebuilders.

 

***Basis of Presentation***—The Company prepared the accompanyingunaudited condensed consolidated financial statements following therequirements of the Securities and Exchange Commission for interim reporting.As permitted under those rules, certain notes or other financial informationnormally required by accounting principles generally accepted in the UnitedStates of America have been condensed or omitted. Therefore, the Companysuggests that these financial statements be read in conjunction with theconsolidated financial statements and accompanying notes for the year ended December 31,2004 included in its Form 10-K as filed with the Securities and ExchangeCommission on March 31, 2005. The condensed consolidated balance sheet asof December 31, 2004 has been derived from the audited consolidatedfinancial statements at that date, but does not include all the information andnotes required by accounting principles generally accepted in the United Statesof America for complete presentation.

 

In our 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, 2004included in our Form 10-K as filed with the Securities and ExchangeCommission on March 31, 2005, our financial position, results ofoperations and cash flows for the periods presented.

 

***Principles of Consolidation***—The unaudited condensed consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries. On April 9, 2003, the Company completed the acquisition ofWoodcraft Industries, Inc. and its wholly owned subsidiaries, PrimeWood, Inc.(“PrimeWood”) and Brentwood Acquisition, Corp. (“Brentwood”), and on April 30,2004 the Company completed the acquisition of Grand Valley (Note 4). Allintercompany accounts and transactions have been eliminated in the preparationof the consolidated financial statements.

 

**2. SIGNIFICANT ACCOUNTING POLICIES**

 

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

 
| ** **      | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                       | 11,127     |                        | $          | 9,995 |   |
| Work in process |       | 5,556                   |       | 4,796                       |       |
| Finished goods  |       | 2,788                   |       | 2,901                       |       |
| LIFO adjustment |       | (908                    | )          | (950                        | )          |
|            |       | $                       | 18,563     |                        | $          | 16,742 |   |

 

8

----

 

The majority of inventory is valued at the lower of last-in, first-out (“LIFO”)cost or market. The remainder of the inventory is valued under the first-in,first-out method (“FIFO”). As of June 30, 2005 and December 31, 2004,inventory on the LIFO method represented 57% and 60%, respectively, ofconsolidated 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. Previously, goodwill was amortized over its estimated useful life.The Company has elected to perform its annual tests for goodwill impairment asof December 31 of each year. Fair value is measured using the presentvalue of expected future cash flows.

 

***Customer Relationship—***Customer Relationship relates to an intangibleasset recorded through the purchase price allocation of the Grand Valleyacquisition (Note 4) for a relationship with a significant customer. The $7.9million intangible asset is being amortized over the estimated life of 10years. Amortization for the six-month period ended June 30, 2005 was$394,000.  As of June 30, 2005, thenet Customer Relationship intangible asset was $7.0 million.  Expected amortization is as follows for theyears ending December 31 (in thousands):

 
| 2005      |   | $     | 787    |   |
|-----------|--------|-------|--------|--------|
| 2006      |   | 787   |   |
| 2007      |   | 787   |   |
| 2008      |   | 787   |   |
| 2009      |   | 787   |   |
| 2010-2014 |   | 3,412 |   |

 

***Noncompete Agreement***—Noncompete agreements primarily relate toagreements with the former owners of Brentwood and Grand Valley. Noncompeterights are being amortized over the applicable terms of the agreements(5 years and 7 years, respectively), and are expected to be fullyamortized by July 2007 and April 2011, respectively. Amortization forthe six-month period ended June 30, 2005 was $222,000.  As of June 30, 2005 the net noncompeteagreement intangible asset was $1.0 million. Expected amortization is as follows for the years ending December 31(in thousands):

 
| 2005      |   | $   | 444    |   |
|-----------|--------|-----|--------|--------|
| 2006      |   | 444 |   |
| 2007      |   | 265 |   |
| 2008      |   | 14  |   |
| 2009      |   | 14  |   |
| 2010-2011 |   | 19  |   |

 

***Stock Options*****—**In April 2003, the 2003 Stock Option andGrant Plan (“2003 Plan”) was approved by the stockholders of the Company. The2003 Plan allows the granting of both incentive stock options and nonqualifiedstock options. Under the terms of the 2003 Plan, a maximum of 2,500,000 sharesof stock, subject to adjustment, were made available for awards to officers,employees, directors, consultants, and other key persons of the Company. Awardsmay include, but are not limited to, stock options, restricted stock,unrestricted stock awards, and substitute performance awards.

 

In May 2003,1,617,000 options were granted with terms of 10 years from the date ofgrant, and at an exercise price of $3.00 per share under the 2003 Plan.  Issued options vest in equal annualinstallments over four years.  The fairvalue of options granted during the nine months ended December 31, 2003was estimated on the date of the grant using the Black-Scholes option-pricingmodel with the following assumptions: a risk-free interest rate of 3.0%, anexpected life of six years, and no volatility. During 2004, 100,000 options were cancelled.  As a part of the February 2004 equityrestructuring (Note 5), the Company repriced the outstanding stockoptions. The Company has adopted variable plan accounting for these optionsfrom the date of the repricing.  TheCompany recorded $1,035,000 and $391,000 of noncash compensation expense forthese repriced options during the six month periods ended June 30, 2005and June 30, 2004, respectively.  Asof December 31, 2004, the 1,517,000 options had an exercise price of $1.78per share and a weighted average remaining contractual life of eight andone-half years.

 

InApril and November 2004, the Company granted 489,000 and 50,000options, respectively, under the 2003 Plan. The fair value of these options wasestimated on the date of the grant using the Black-Scholes option-pricing modelwith the following assumptions: a risk-free interest rate in April and November of3.9% and 4.2%, respectively, an expected life of six years, and no volatility.

 

TheCompany accounts for the options under Accounting Principles Board Opinion No. 25,*Accounting for Stock Issued to Employees*,under which no compensation cost has been recognized as of the original grantdate. Had compensation cost for the options been determined consistent withSFAS No. 123, *Accounting forStock-Based Compensation*, the Company’s net income would have beenthe following pro forma amounts for the indicated periods (in thousands):

 
| ** **  | ** ** | **Six Months Ended  June 30, 2005** | ** ** | **Three Months Ended  June 30, 2005** | ** ** | **Six Months Ended  June 30, 2004** | ** ** | **Three Months Ended  June 30, 2004** | ** ** |
|-------------|------------|------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|--------------------------------------------|------------|
| Net income  |       |                                     |       |                                       |       |                                     |       |                                       |       |
| As reported |       | $                                        | 3,984      |                                       | $          | 2,383                                    |       | $                                          | 742        |   | $ | 1,558 |   |
| Pro forma   |       | 3,930                                    |       | 2,356                                      |       | 699                                      |       | 1,540                                      |       |
|             |            |                                          |            |                                            |            |                                          |            |                                            |            |  |  |  |  |

 

9

----

 

***New Accounting Pronouncements***—In December 2004, the FASB revised SFAS No. 123and issued SFAS No. 123(R).  ThisStatement supersedes APB No. 25, which resulted in no stock-based employeecompensation cost related to stock options if the options granted had anexercise price equal to the market value of the underlying common stock on thedate of grant. SFAS No. 123(R) requires recognition of employee servicesprovided in exchange for a share-based payment based on the grant date fairmarket value.  In April 2005, theSEC delayed the effective date of SFAS No. 123(R) to fiscal yearsbeginning after June 15, 2005.  As aresult, the Company is required to adopt SFAS No. 123(R) as of January 1,2006.  As of the effective date, thisStatement applies to all new awards issued as well as awards modified,repurchased, or cancelled.  Additionally,for stock-based awards issued prior to the effective date, compensation costattributable to future services will be recognized as the remaining service isrendered.  The Company may also elect torestate prior periods by applying a modified retrospective method to periodsprior to the effective date.  The Companyis in the process of determining which method of adoption it will elect (see “StockOptions” above for SFAS No. 123 required disclosures).

 

**3. GOODWILL**

 

EffectiveJanuary 1, 2002, the Company adopted and began accounting for goodwill inaccordance with SFAS No. 142 which states that companies are no longerrequired to amortize goodwill but instead must evaluate goodwill for impairmentannually, if not more frequently. The Company has elected to perform its annualtests for goodwill impairment as of December 31 of each year. Previously,goodwill was amortized over its estimated useful life. Based on the impairmenttests performed on December 31, 2004, the Company’s fair value exceeds thecarrying value, resulting in no goodwill impairment.

 

Therewere no changes in the carrying amount of goodwill between December 31,2004 and June 30, 2005.

 

**4. ACQUISITIONS**

 

On April 30, 2004, theCompany acquired a cabinet door manufacturer operating under the name of GrandValley Door Co. The acquisition was accomplished through the acquisition ofsubstantially all of the assets of Ohio Door Company and certain land andimprovements from Grand Valley Investment LLC. The Company paid a cash purchaseprice at closing of $16 million and, if the business acquired achievescertain sales and profit margin targets, an additional $1.0 million willbe payable prior to June 30, 2006. Approximately half of the purchaseprice was funded with borrowings under the senior secured revolving creditfacility and the remainder was funded from the proceeds of an equitycontribution from existing stockholders. The acquired company is a 100% ownedsubsidiary of the Company and, on June 25, 2004, agreed to fully andunconditionally guarantee the senior notes on a joint and several basis withthe Company’s existing subsidiary guarantors.

 

TheAcquisition of Grand Valley was accounted for using the purchase method ofaccounting. Accordingly, the assets acquired and the liabilities assumed by theCompany were recorded at fair value as of the date of the Acquisition. Theexcess of the purchase price over the fair value of the assets acquired andliabilities assumed totaling $3.8 million was recorded as goodwill. Based uponthe Company’s final purchase price allocation, $7.9 million of the purchaseprice was recorded as another intangible asset, Customer Relationship (Note 2).The pro forma effects of this transaction are not material to the Company’sresults of operations. The components of the purchase price allocation are asfollows (in thousands):

 
| Current assets                 |   | $      | 386    |   |
|--------------------------------|--------|--------|--------|--------|
| Property, plant, and equipment |   | 4,491  |   |
| Other assets                   |   | 125    |   |
| Goodwill                       |   | 3,770  |   |
| Customer Relationship          |   | 7,872  |   |
| Noncompete agreement           |   | 100    |   |
| Assets acquired                |   | 16,744 |   |
| Liabilities assumed            |   | 807    |   |
| Net assets acquired            |   | $      | 15,937 |   |

 

**5. FINANCING ARRANGEMENTS**

 

Long-termdebt consists of the following (in thousands):

 
| ** **                                                                                 | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Senior notes (10%) due 2012                                                                |       | $                       | 120,000    |                        | $          | 120,000 |   |
| Revolver (6.99% and 5.37% at June 30,  2005 and December 31, 2004, respectively) |       | —                  |       | —                      |       |
| Total debt                                                                                 |       | 120,000                 |       | 120,000                     |       |
| Less current maturities                                                                    |       | —                  |       | —                      |       |
|                                                                                       |       | $                       | 120,000    |                        | $          | 120,000 |   |

 

***Capital Leases***—The Company has outstanding capitalleases relating to manufacturing equipment. As of June 30, 2005 the Company had $2.8 million of capital leaseobligations, of which $0.9 million was current and as of December 31, 2004 theCompany had $3.1 million of capital lease obligations, of which $0.9 millionwas current.

 

10

----

 

***Senior Notes***—On February 18, 2004, the Companycompleted the offering of $120 million of 10% senior notes due 2012. Thenet proceeds of the offering of the senior notes were used to pay off theoutstanding term loans and revolving line of credit, to pay a dividend ofapproximately $21.5 million, to repurchase approximately $17.5 millionof the Company’s outstanding common stock, and to pay financing costs of$7.4 million. Additionally in February 2004, the Company entered intoa new $25 million revolving line of credit.

 

TheCompany’s existing senior secured revolving credit facility and the indenturefor the notes imposes certain restrictions on it, including restrictions on itsability to incur indebtedness, pay dividends, make investments, grant liens,sell our assets and engage in certain other activities.  The Company must comply with certainfinancial covenants under the credit facility including maintenance of aminimum fixed charge coverage ratio, a maximum total leverage ratio and anEBITDA minimum.  As of December 31,2004 and June 30, 2005, the Company was in compliance with thesecovenants.  Indebtedness under itsexisting senior secured revolving credit facility is secured by substantiallyall of its assets, including real and personal property, inventory, accountsreceivable, intellectual property and other intangibles.

 

Eachof the Company’s subsidiaries, which are all 100% owned subsidiaries of theCompany, have fully and unconditionally guaranteed the senior notes on a jointand several basis. The Company has no independent assets or operations. As aresult, the Company has not presented separate financial statements of thesubsidiary guarantors.

 

***Subordinated Convertible Debt***—The Company issued approximately$20 million of 5% Convertible Subordinated Notes due April 9, 2004 inApril 2003. These notes were convertible at any time prior to maturity,unless previously redeemed, at the option of the holders into shares of theCompany’s common stock at a conversion price of $3.00 per share, subject tocertain adjustments. The notes are subordinated to the Company’s senior indebtedness.The notes were not subordinated to the Company’s trade payables or othergeneral creditors of the Company. On February 9, 2004, these notes, alongwith approximately $0.9 million of related accrued interest, wereconverted into approximately 7.0 million shares of the Company’s $0.01 parvalue common stock.

 

**6. RELATED-PARTY TRANSACTIONS**

 

The Company has a managementservices agreement with an affiliate of the primary investor whereby theCompany pays a transaction fee to the affiliate for services provided for eachfinancing, refinancing, acquisition, or similar nonrecurring transaction. TheCompany paid $1.7 million to this affiliate for services related to theAcquisition which is recorded as goodwill, and $1.2 million for financingservices which was recorded in other assets as deferred financing costs.  The deferred financing costs weresubsequently written off in conjunction with the February 2004 financingtransaction as discussed in Note 1. In addition, the Company paid $2.4million to this affiliate related to the February 2004 financingtransaction, which is recorded in other assets as deferred financing costs. TheCompany paid $320,000 to this affiliate for services related to the acquisitionof Grand Valley, $224,000 of which is recorded as goodwill and $96,000 of whichis recorded in other assets as financing costs.

 

TheCompany entered into a noncompete agreement on April 30, 2004 with theformer owners of Grand Valley (Notes 2 and 4).

 

**7. SUBSEQUENT EVENT**

 

On July 28, 2005, Woodcraft Industries, Inc., a wholly-ownedsubsidiary of the issuer, acquired substantially all of the assets of DimensionMoldings, Inc. (DMI), an Ohio corporation in the business of manufacturinghardwood component moldings.  Thefinancial terms of the deal included a purchase price of approximately $8.8 millionat closing, and up to an aggregate of $7.0 million to be paid if certainearnings targets are met at the end of each calendar year from 2005 to2010.  Management believes that theacquisition of DMI could lead to an expanded relationship with the Kraftmaiddivision of Masco Corporation, one of the Company’s most significantcustomers.  The acquisition of the assets of DMI andassociated fees and expenses were funded one-half by the sale of shares of theCompany’s voting common stock to existing stockholders, and the remainder withoperating cash and a draw down on the Company’s senior secured creditfacility.  The Company intends to fundany earn-out payments due to the seller equally through raising additionalequity, and with funds from its senior secured credit facility.  The acquisition will be accounted forusing the purchase method of accounting and, accordingly, the assets acquiredand liabilities assumed will be recorded at fair value as of the date of acquisition,with the excess purchase price recorded as goodwill. The Company has not yetcompleted the preliminary purchase price allocation associated with theacquisition.

 

11

----

 

### **Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

###  

**FORWARD-LOOKING STATEMENTS**

 

Certainstatements in this report are “forward-looking statements” within the meaningof the Private Securities Litigation Reform Act of 1995. Statements that arepredictive in nature, that depend upon or refer to future events or conditionsor that include words such as “believe,” “anticipate,” “expect,” “estimate,” “may,”“will,” “should,” “continue,” “plans,” “intends,” “likely” or other similarexpressions 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.

 

Withoutlimiting the generality of the preceding statement, all statements in thisreport providing estimates and projections concerning or relating to thefollowing matters are forward-looking statements:

 

•      financial results and conditions;

 

•      margins, costs and expenditures;

 

•      cash flows and growth rates;

 

•      demand for our products;

 

•      industry trends;

 

•      new product and customer initiatives and future relationships;

 

•      our current plans for capital expenditures;

 

•      manufacturing and other cost-saving initiatives; and

 

•      our liquidity and capital resources.

 

Inaddition, we, through our senior management, from time to time makeforward-looking public statements concerning our expected future operations andperformance 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 thatother factors will not affect the accuracy of these forward-looking statementsor that our actual results will not differ materially from the resultsanticipated in such forward-looking statements. Although we believe that theseforward-looking statements are based on reasonable assumptions, you should beaware that many factors could affect our actual financial results or results ofoperations and could cause actual results to differ materially from thoseexpressed in the forward-looking statements. Those factors include, among otherthings:

 

•      our high degree of leverage and significant debt service obligations;

 

•      our ability to integrate acquired businesses;

 

•      our need for additional manufacturing capacity;

 

•      restrictions under the indenture governing the notes and our seniorsecured revolving credit facility;

 

•      changes in interest rates and general economic, homebuilding industry orhome repair and remodeling industry conditions;

 

•      changes in the price of raw materials;

 

•      interruptions in deliveries of raw materials or finished goods;

 

•      the highly competitive nature of our industry; and

 

•      increases in the cost of labor.

 

12

----

 

**Overview**

 

We are one of the leadingmanufacturers of hardwood cabinet doors and components and engineered woodproducts in the United States. Our products include (1) hardwood cabinetdoor components, face frames 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 93% 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 ten facilitieslocated in Minnesota, North Dakota, Oregon, Ohio, West Virginia, Kansas, andKentucky that allow us to distribute our products nationwide.

 

We consummated four strategicacquisitions that have substantially enhanced our market position, productbreadth and geographic reach. In June 1998, we acquired our PrimeWoodsubsidiary, or PrimeWood, a manufacturer of RTF, VRP and profile-wrappedengineered wood products based in North Dakota. In July 2002, we acquiredour Brentwood subsidiary, or Brentwood, a manufacturer of solid wood and RTF cabinetdoors located in Oregon. In April 2004, we acquired our Grand Valleysubsidiary, or Grand Valley, a manufacturer of cabinet doors located in Ohio.  In July 2005, we acquired substantiallyall of the assets of Dimension Moldings, Inc. (DMI), an Ohio corporationin the business of manufacturing hardwood component moldings.  Management believes that the acquisition ofDMI could lead to an expanded relationship with the Kraftmaid division of MascoCorporation, one of the Company’s most significant customers.

 

WII Components, Inc.(formerly known as WII Holdings, Inc.), a Delaware corporation, which werefer to as the Company, was formed to acquire Woodcraft Industries, Inc.and its subsidiaries, through a stock purchase on April 9, 2003, which werefer to as the Acquisition. For accounting purposes, the Acquisition wasrecorded with an effective date of April 1, 2003. The Acquisition wasaccounted for using the purchase method of accounting. Accordingly, the assetsacquired and the liabilities assumed by the Company were recorded at fair valueas of April 1, 2003 and included $104.0 million for goodwill.

 

InFebruary 2004, we entered into a new senior secured revolving creditfacility and used the proceeds from the sale of our 10% Senior Notes due 2012to pay off the term loans and revolving line of credit under our old seniorcredit facility, pay a dividend of approximately $21.5 million, torepurchase an aggregate of 3,317,580 shares of our voting and non-voting commonstock from all of our existing stockholders on a proportionate basis for anaggregate purchase price of approximately $17.5 million or $5.29 per shareand to pay financing costs of $7.4 million.

 

**Results of Operations**

 

***Three Months Ended June 30, 2005Compared to the Three Months Ended June 30, 2004***

 

Thefollowing table outlines, for the three months ended June 30, 2005 and forthe three months ended June 30, 2004, selected operating data derived fromour consolidated statements of operations and presents this information as apercentage of net sales:

 
| ** **               | ** ** | **Three Months Ended  June 30, 2005** | ** ** | **Three Months Ended  June 30, 2004** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **(dollars in thousands)**                 | ** ** |
| Net sales                |       | $                                          | 66,306     |                                       | $          | 51,217 |   |
| *% of net sales*         | * *   | *100.0*                                    | *%*        | *100.0*                                    | *%*        |
| Cost of sales            |       | 55,157                                     |       | 42,377                                     |       |
| *% of net sales*         | * *   | *83.2*                                     | *%*        | *82.7*                                     | *%*        |
| * *                 | * *   | * *                                   | * *   | * *                                   | * *   |
| Gross profit             |       | 11,149                                     |       | 8,840                                      |       |
| *% of net sales*         | * *   | *16.8*                                     | *%*        | *17.3*                                     | *%*        |
| Operating expenses       |       | 4,000                                      |       | 2,960                                      |       |
| *% of net sales*         | * *   | *6.0*                                      | *%*        | *5.8*                                      | *%*        |
| * *                 | * *   | * *                                   | * *   | * *                                   | * *   |
| Operating income         |       | 7,149                                      |       | 5,880                                      |       |
| *% of net sales*         | * *   | *10.8*                                     | *%*        | *11.5*                                     | *%*        |
| Other expenses (income): |       |                                       |       |                                       |       |
| Interest expense         |       | 3,364                                      |       | 3,429                                      |       |
| *% of net sales*         | * *   | *5.1*                                      | *%*        | *6.7*                                      | *%*        |
| Other income, net        |       | (7                                         | )          | (8                                         | )          |
| *% of net sales*         | * *   | *0.0*                                      | *%*        | *0.0*                                      | *%*        |
| Income tax provision     |       | 1,409                                      |       | 901                                        |       |
| *% of net sales*         | * *   | *2.1*                                      | *%*        | *1.8*                                      | *%*        |
| * *                 | * *   | * *                                   | * *   | * *                                   | * *   |
| Net income               |       | 2,383                                      |       | 1,558                                      |       |
| *% of net sales*         | * *   | *3.6*                                      | *%*        | *3.0*                                      | *%*        |
|                          |            |                                            |            |                                            |            |  |  |

 

13

----

 

*Net sales.*  Netsales increased $15.1 million, or 29.5%, from $51.2 million for thethree months ended June 30, 2004 to $66.3 million for the threemonths ended June 30, 2005.  Salesin our hardwood product line increased $13.6 million attributable to acombination of (i) increases in volume due to overall industry growth andmarket share gain, (ii) increases in volume due to the acquisition of GrandValley in April 2004, and (iii) upward price adjustments made in responseto increases in raw material costs. The remaining $1.5 million increase insales relates to our engineered wood products line and is attributable toincreases in volume due to overall industry growth and market share gain.

 

*Cost of sales.*  Cost of sales increased $12.7 million,or 30.0%, from $42.4 million for the three months ended June 30, 2004to $55.1 million for the three months ended June 30, 2005. Thisincrease in cost of sales is attributable to (i) increased material, laborand overhead costs related to volume growth, (ii) inflation, primarily inrespect to hardwood raw material costs, and (iii) higher material andlabor costs due to operational inefficiencies at our Grand Valley operatingfacility. These costs were offset in part by the spreading of our fixed costsover a larger sales base and higher operating efficiencies at our otherfacilities.

 

*Gross profit.*  Gross profit increased $2.4 million,or 27.3%, from $8.8 million for the three months ended June 30, 2004to $11.2 million for the same period in 2005 as a result of the factorsdescribed above. As a percentage of net sales, our gross profit decreased 50basis points from 17.3% for the three months ended June 30, 2004 to 16.8%for the same period in 2005. This decrease reflects higher material and laborcosts due to operational inefficiencies at our Grand Valley operating facility,offset in part by the spreading of our fixed costs over a larger sales base andimproved operating efficiencies at our other facilities.

 

*Operating expenses.*  Operating expenses increased $1.0 million,or 33.3%, from $3.0 million for the three months ended June 30, 2004to $4.0 million for the same period in 2005. The increase consists of (i) $0.4million for additional stock compensation expense in 2005, (ii) $0.4 milliondue to the inclusion of three full months of operations of Grand Valley in2005, which includes $0.2 million of amortization for a Customer Relationshipintangible asset, and (iii) $0.1 million of higher professional fees.  The increase is partially offset by adecrease of $0.1 million of consulting and noncompete expense in 2004 for theprevious owner of a subsidiary of Woodcraft Industries, Inc.

 

*Operating income.*  Operating income increased by$1.4 million, or 24.1%, from $5.8 million for the three months ended June 30,2004 to $7.2 million for the three months ended June 30, 2005 as aresult of the net effect of the factors described above.

 

*Interest expense.*  Interest expense remainedconsistent at $3.4 million for the three months ended June 30, 2004 andJune 30, 2005.

 

*Other income.*  Other income decreased from$8,000 of other income for the three months ended June 30, 2004 to $7,000for the three months ended June 30, 2005.

 

*Income tax provision.*  Incometax expense increased $0.5 million, or 55.6% from $0.9 million forthe three months ended June 30, 2004 to $1.4 million for the threemonths ended June 30, 2005 as a result of higher earnings. The effectivetax rate increased 60 basis points from 36.6% in 2004 to 37.2% in 2005 due topermanent differences.

 

*Net income.*  Net income increased $0.9 million,or 60.0%, from $1.5 million for the three months ended June 30, 2004to $2.4 million for the three months ended June 30, 2005 as a resultof the factors described above.

 

***Six Months Ended June 30, 2005 Comparedto the Six Months Ended June 30, 2004***

 

Thefollowing table outlines, for the six months ended June 30, 2005 and forthe six months ended June 30, 2004, selected operating data derived fromour consolidated statements of operations and presents this information as apercentage of net sales:

 
| ** **               | ** ** | **Six Months Ended  June 30, 2005** | ** ** | **Six Months Ended  June 30, 2004** | ** ** |
|--------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
|                     |       | **(dollars in thousands)**               |       |
| Net sales                |       | $                                        | 124,114    |                                     | $          | 98,936 |   |
| *% of net sales*         | * *   | *100.0*                                  | *%*        | *100.0*                                  | *%*        |
| Cost of sales            |       | 103,751                                  |       | 81,729                                   |       |
| *% of net sales*         | * *   | *83.6*                                   | *%*        | *82.6*                                   | *%*        |
| * *                 | * *   | * *                                 | * *   | * *                                 | * *   |
| Gross profit             |       | 20,363                                   |       | 17,207                                   |       |
| *% of net sales*         | * *   | *16.4*                                   | *%*        | *17.4*                                   | *%*        |
| Operating expenses       |       | 7,442                                    |       | 6,705                                    |       |
| *% of net sales*         | * *   | *6.0*                                    | *%*        | *6.8*                                    | *%*        |
| * *                 | * *   | * *                                 | * *   | * *                                 | * *   |
| Operating income         |       | 12,921                                   |       | 10,502                                   |       |
| *% of net sales*         | * *   | *10.4*                                   | *%*        | *10.6*                                   | *%*        |
| Other expenses (income): |       |                                     |       |                                     |       |
| Interest expense         |       | 6,560                                    |       | 5,918                                    |       |
| *% of net sales*         | * *   | *5.3*                                    | *%*        | *6.0*                                    | *%*        |
| Other loss (income), net |       | (13                                      | )          | 3,420                                    |       |
| *% of net sales*         | * *   | *0.0*                                    | *%*        | *3.5*                                    | *%*        |
| Income tax provision     |       | 2,390                                    |       | 422                                      |       |
| *% of net sales*         | * *   | *1.9*                                    | *%*        | *0.4*                                    | *%*        |
| * *                 | * *   | * *                                 | * *   | * *                                 | * *   |
| Net income               |       | 3,984                                    |       | 742                                      |       |
| *% of net sales*         | * *   | *3.2*                                    | *%*        | *0.7*                                    | *%*        |
|                          |            |                                          |            |                                          |            |  |  |

 

14

----

 

*Net sales.*  Net sales increased $25.2 million,or 25.5%, from $98.9 million for the six months ended June 30, 2004to $124.1 million for the six months ended June 30, 2005.  Sales in our hardwood product line increased$22.0 million attributable to a combination of (i) increases involume due to overall industry growth and market share gain, (ii) increases involume due to the acquisition of Grand Valley in April 2004, and (iii) upwardprice adjustments made in response to increases in raw material costs. Theremaining $3.2 million increase in sales relates to our engineered woodproducts line and is attributable to increases in volume due to overallindustry growth and market share gain.

 

*Cost of sales.*  Cost of sales increased $22.0 million,or 26.9%, from $81.7 million for the six months ended June 30, 2004to $103.7 million for the six months ended June 30, 2005. Thisincrease in cost of sales is attributable to (i) increased material, laborand overhead costs related to volume growth, (ii) inflation, primarily inrespect to hardwood raw material costs, (iii) higher quality and scrapcosts due to the rollout of a new door program, and (iv) higher materialand labor costs due to operatonal inefficiencies at our Grand Valley operatingfacility. These costs were offset in part by the spreading of our fixed costsover a larger sales base and higher operating efficiencies at our otherfacilities.

 

*Gross profit.*  Gross profit increased $3.2 million,or 18.6%, from $17.2 million for the six months ended June 30, 2004to $20.4 million for the same period in 2005 as a result of the factorsdescribed above. As a percentage of net sales, our gross profit decreased 100basis points from 17.4% for the six months ended June 30, 2004 to 16.4%for the same period in 2005. This decrease reflects (i) increases in ourraw material costs compared to the same period in 2004, (ii) higherquality and scrap costs due to the rollout of a new door program, and (iii) highermaterial and labor costs due to operational inefficiencies at our Grand Valleyoperating facility; offset in part by the spreading of our fixed costs over alarger sales base and improved operating efficiencies at our other facilities.

 

*Operating expenses.*  Operating expenses increased $0.7 million,or 10.4%, from $6.7 million for the six months ended June 30, 2004 to$7.4 million for the same period in 2005. The increase consists of (i) $0.6million for additional stock compensation expense in 2005, (ii) $0.9 milliondue to the inclusion of six full months of operations of Grand Valley in 2005,which includes $0.4 million of amortization for a Customer Relationshipintangible asset, and (iii) $0.1 million for additional professionalfees.  This increase is partially offsetby (i) $0.8 million of additional incentive compensation paid tocertain key employees in February 2004 in recognition of our improvedfinancial performance and the successful completion of the offering of thesenior notes, and (ii) $0.4 million of consulting and noncompete expensein 2004 for the previous owner of a subsidiary of Woodcraft Industries, Inc.  As a percentage of sales, operating expensesdeclined from 6.8% for the six months ended June 30, 2004 to 6.0% for the same periodin 2005, reflecting the scale benefits of a higher sales base in 2005.

 

*Operating income.*  Operating income increased by $2.5 million,or 23.8%, from $10.5 million for the six months ended June 30, 2004to $12.9 million for the six months ended June 30, 2005 as a resultof the net effect of the factors described above.

 

*Interest expense.*  Interest expense increased $0.7 million,or 11.9%, from $5.9 million for the six months ended June 30, 2004 to$6.6 million for the six months ended June 30, 2005. This increaserelates to the increase in debt and the higher interest rate in connection withthe issuance of the $120.0 million senior notes in February 2004.

 

*Other loss (income).*  Otherincome increased from $3.4 million of other loss for the six months ended June 30,2004 to $13,000 of other income for the six months ended June 30,2005.  This increase relates to the $3.4million write-off of financing fees related to the senior credit facility from April 2003,which was subsequently paid-off in February 2004.

 

*Income tax provision.*  Incometax expense increased $2.0 million, or 500.0% from $0.4 million forthe six months ended June 30, 2004 to $2.4 million for the six monthsended June 30, 2005 as a result of higher earnings. The effective tax rateincreased 120 basis points from 36.3% in 2004 to 37.5% in 2005 due to permanentdifferences.

 

*Net income.*  Net income increased $3.2 million,or 400.0%, from $0.8 million for the six months ended June 30, 2004to $4.0 million for the six months ended June 30, 2005 as a result ofthe factors described above.

 

**Liquidity and Capital Resources**

 

Our primary cash needs areworking capital, capital expenditures and debt service. We have historicallyfinanced these cash requirements through internally generated cash flow andfunds borrowed under our existing senior secured credit facilities.

 

*Refinancing*. On February 18, 2004, we issued $120 million of 10% senior notesdue in 2012, and paid the entire outstanding balance of our old senior securedcredit facility and terminated the related credit agreement. Under that creditfacility, we had three outstanding term loans and a $15.0 millionrevolving credit facility. Our existing credit facility provides for revolvingcredit of up to $25.0 million subject to a borrowing base and outstandingprincipal bears interest at a fluctuating rate equal to, at our option, eitherthe base rate plus 2 1¤4% per annum or LIBOR plus 3 1¤2% per annum for the first twelve months the facility is in place andthereafter either the base rate plus 2% per annum or LIBOR plus 3 1¤4% per

 

15

----

 

annumwhen the ratio of total debt to trailing twelve month EBITDA is less than 4.0to 1.0. As of June 30, 2005 the borrowing base allowed for full availability ofthe $25.0 million revolving credit.  Asof June 30, 2005 and December 31, 2004 we had nothing outstandingunder our credit facility. We must comply with certain financial covenantsunder our credit facility including maintenance of a minimum fixed chargecoverage ratio, a maximum total leverage ratio and an EBITDA minimum. As of December 31,2004 and June 30, 2005 we were in compliance with these covenants.  As of December 31, 2004 we had$3.1 million of capital lease obligations, of which $0.9 million wascurrent and as of June 30, 2005 we had $2.8 million of capital leaseobligations, of which $0.9 million was current.

 

Theacquisition of the assets of DMI and associated fees and expenses were fundedone-half by the sale of shares of the Company’s voting common stock to existingstockholders, and the remainder with operating cash and a draw down on theCompany’s senior secured credit facility. The Company intends to fund any earn-out payments due to the sellerequally through raising additional equity, and with funds from its seniorsecured credit facility.

 

Ourexisting senior secured revolving credit facility and the indenture for thesenior notes imposes certain restrictions on us, including restrictions on ourability to incur indebtedness, pay dividends, make investments, grant liens,sell our assets and engage in certain other activities. Indebtedness under ourexisting senior secured revolving credit facility is secured by substantiallyall of our assets, including our real and personal property, inventory,accounts receivable, intellectual property and other intangibles.

 

*Cash flow from operating activities.*  As of December 31,2004 and June 30, 2005, we had $2,000 of cash and cash equivalentsavailable for working capital purposes. Cash provided by operating activities for the six months ended June 30,2005 and 2004 was $4.8 million and $7.0 million, respectively.

 

*Cash flow from investing activities.*  Netcash used in investing activities was $4.5 million for the six monthsended June 30, 2005 and $18.5 million for the six months ended June 30,2004. Capital expenditures were $4.5 million for the six months ended June 30,2005 compared to $2.5 million for the same period in 2004.  Net cash used in investing activitiesincludes $15.9 million for the six months ended June 30, 2004 due to theacquisition of Grand Valley.

 

*Cash flow from financing activities.*  Netcash used in financing activities for the six months ended June 30, 2005totaled $0.3 million due payments on our capital leases.  Net cash provided by financing activities inthe six month period ended June 30, 2004 totaled $11.4 million.

 

*Dividends.*  We are limited by our currentdebt covenants regarding the payment of dividends. On February 24, 2004,we used $39.0 million of the net proceeds from the offering of the oldnotes to make payments to our stockholders through a combination of dividendsand redemptions of common stock.

 

Weanticipate that the funds generated by operations and funds available under thesenior secured revolving credit facility will be sufficient to meet workingcapital requirements and to finance capital expenditures over the next twelvemonths. We cannot provide assurances that our business will generate sufficientcash flow from operations, that anticipated net sales growth and operatingimprovements will be realized or that future borrowings will be available underour senior secured revolving credit facility in an amount sufficient to enableus to service our indebtedness, including the notes, or to fund our other liquidityneeds. We are currently approaching our full manufacturing capacity.  We may need to incur significant capitalexpenditures in order to continue to fulfill increased manufacturing demands.  In addition, we cannot provide assurancesthat we will be able to refinance any of our indebtedness, including our seniorsecured revolving credit facility and the notes, on commercially reasonableterms, if at all.

 

**Inflation**

 

Ourcost of sales is subject to inflationary pressures on labor costs, prices ofthe raw materials we use and various overhead costs. We generally have beenable over time to offset the effects of inflation and price fluctuationsthrough a combination of sales price increases and operational efficiencies.

 

**Seasonality**

 

Oursales historically have been moderately seasonal, reflecting the temporary slowdown in consumer purchasing activity during the winter holiday season and thesummer months.

 

### **Critical Accounting Policies**

###  

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates, assumptions and judgments that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Because of the uncertainty inherentin these matters, actual results could differ from those estimates. We believethat the estimates, assumptions and judgments involved in the accountingpolicies below have the greatest potential impact on our financial statements.

 

*Revenue recognition.*  Werecognize revenues and related cost of sales when title passes, which isusually upon shipment of product under FOB shipping point terms. Returns areestimated and provided for at the time of sale based on historical experienceand current trends.

 

*Allowance for doubtful accounts.*  Wemake estimates of potentially uncollectible accounts receivable. Our reservesare based on an analysis of customers’ accounts and historical write-off experience.Our analysis includes the age of the receivable, customer creditworthiness and

 

16

----

 

generaleconomic conditions. We believe the results could be materially different ifhistorical trends do not reflect actual results or if economic conditionsworsened.

 

*Goodwill.*  We adopted Statement ofFinancial Accounting Standards, or SFAS No. 142, *Goodwill andOther Intangible Assets*, and accordingly have discontinued theamortization of goodwill. We evaluate goodwill for impairment annually orwhenever an indicator of impairment occurs. If events or circumstances change,including reductions in anticipated cash flows generated by operations,goodwill could become impaired and result in a charge to earnings.

 

*Impairment of long-lived assets.*  Weevaluate the carrying value of long-lived assets, such as property, plant andequipment, for impairment when events or changes in circumstances indicate thatthe carrying amount of an asset or group of assets may not be recoverable.Assets are grouped and evaluated for impairment at the lowest level for whichthere are identifiable cash flows. If impairment indicators are present and theestimated future undiscounted cash flows are less than the carrying value ofthe asset or group of assets, the carrying value is reduced to its estimatedfair value. Fair value is estimated based on the best information available,including prices for similar assets or results of valuation techniques such asdiscounting estimated future cash flows.

 

*Insurance benefit accruals.*  Eachaccounting period, we estimate an amount to accrue for medical costs incurredbut not yet reported under our self-funded employee medical and workerscompensation insurance plans. We base our determination on an evaluation ofpast rates of claim payouts and trends in the amount of payouts. Thisdetermination requires significant judgment and assumes past patterns arerepresentative of future payment patterns. A significant shift in usage andpayment patterns within these plans could necessitate significant adjustmentsto these accruals in future accounting periods.

 

*Purchase accounting.*  Weaccounted for our acquisitions under the purchase method of accounting and,accordingly, the acquired assets and liabilities assumed are recorded at theirrespective fair values. The recorded values of assets and liabilities are basedon third-party estimates and valuations when available. The remaining valuesare based on management’s judgments and estimates. Our financial position andresults from operations may be affected by changes in estimates and judgments.

 

*Income taxes.*  As part of the process ofpreparing our consolidated financial statements, we are required to estimateour income in each of the jurisdictions in which we operate. This processinvolves estimating our actual current tax exposure along with assessingtemporary differences resulting from differing treatment of items, such ascapital assets, for tax and accounting purposes. These differences result indeferred tax assets and liabilities, which are included within our consolidatedbalance sheets. We also must assess the likelihood that our deferred tax assetwill be recovered from taxable income and, to the extent we believe recovery isnot likely, we must establish a valuation allowance.

 

**New Accounting Standards**

 

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

 

### **Item 3. Quantitative and QualitativeDisclosures about Market Risk**

###  

Weare subject to various market risks such as fluctuating lumber prices andinterest 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.

 

*Interest rate risk.*  We are exposed to market riskrelating to changes in interest rates in respect of a portion of our long-termdebt and a portion of our capital leases. As of June 30, 2005, we hadnothing outstanding under our senior secured revolving credit facility. Inaddition, as of that date, we had approximately $1.0 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. Controlsand Procedures**

###  

(a)           Evaluation of disclosure controls andprocedures.

 

Asrequired by Rule 13a-15 under the Securities Exchange Act of 1934, wecarried out an evaluation under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of our disclosure controls and procedures as of June 30,2005. In designing and evaluating our disclosure controls and procedures, weand our management recognize that any controls and procedures, no matter howwell designed and operated, can provide only reasonable assurance of achievingthe desired control objectives, and our management necessarily was required toapply its judgment in evaluating and implementing possible controls andprocedures. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that they

 

17

----

 

believethat, as of June 30, 2005, 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 financialreporting.

 

None.

 

18

----

 

**PART II—OTHERINFORMATION**

 

**Item 1.Legal Proceedings**

 

None.

 

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

 

None.

 

**Item 3.Defaults Upon Senior Securities**

 

None.

 

**Item 4.Submission of Matters to a Vote of Security Holders**

 

None.

 

**Item 5.Other Information**

 

None.

### ** **

### **Item 6.Exhibits**

 

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

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

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

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

 

----

*              This certification shall not be deemed “filed”for purposes of Section 18 of the Securities Exchange Act of 1934, orotherwise subject to the liability of that section, nor shall it be deemed tobe incorporated by reference into any filing under the Securities Act of 1933or the Securities Exchange Act of 1934.

 

19

----

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                         | WII  COMPONENTS, INC. |
|------------------------------|-----------------------|
|                         |                  |
| Dated:  August 15, 2005 | By:                   |
|                         |                  | /s/  John Fitzpatrick |
|                         |                  | John  Fitzpatrick |
|                         |                  | Chief  Executive Officer |
|                         |                  | (Principal  Executive Officer) |
| Dated:  August 15, 2005 |                  |   |
|                         |                  | /s/  Dale B. Herbst |
|                         |                  | Dale  B. Herbst |
|                         |                  | Vice  President, Treasurer and Secretary |
|                         |                  | (Principal  Financial and Accounting Officer) |

 

20

----