**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM 10-Q**

 

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

 

**For the quarterly period endedSeptember 30, 2004**

 

**or**

 

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

 

**Commission file number:**

**333-115490**

 

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**WII COMPONENTS, INC.**

(Exact name of registrant as specified in itscharter)

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

 

**525 Lincoln Avenue, SE, St. Cloud, Minnesota56304**

(Address of principal executive offices) (ZipCode)

 

**(320) 252-1503**

(Registrant's telephone number, Includingarea code)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period thatthe registrant was required to file such reports) and (2) has been subjectto such filing requirements for the past 90 days.

 

Yes ý  No o.

 

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

 

Yes o  No ý.

 

As of November 8, 2004, 20,734,843 shares of voting common stock, $.01par value per share, were outstanding and 854,261 shares of non-voting commonstock, $.01 par value per share, were outstanding.

 

 

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**WII COMPONENTS, INC.**

 

**FORM 10-Q**

**Quarter Ended September 30, 2004**

 

**Table of Contents**

 
| **Part I—Financial Information**                                                                                                                                                          |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1. Financial Statements                                                                                                                                                                   |   |
| Condensed Consolidated Balance Sheets at  September 30, 2004 and December 31, 2003 (unaudited)                                                                                                 | 3      |
| Condensed Consolidated Statements of  Operations for the Three Months Ended September 30, 2004 and the Three Months  Ended September 30, 2003 (unaudited)                                 | 4      |
| Condensed Consolidated Statements of  Operations for the Nine Months Ended September 30, 2004, the Six Months Ended  September 30, 2003, and the Three Months Ended March 31, 2003 (unaudited) | 5      |
| Condensed Consolidated Statement of  Stockholders’ Equity for the Nine Months Ended September 30, 2004 (unaudited)                                                                        | 6      |
| Condensed Consolidated Statements of Cash  Flows for the Nine Months Ended September 30, 2004, the Six Months Ended  September 30, 2003, and the Three Months Ended March 31, 2003 (unaudited) | 7      |
| Notes to Condensed Consolidated Financial  Statements (unaudited)                                                                                                                              | 8      |
| Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                                                                            | 13     |
| Item 3. Quantitative and Qualitative  Disclosures about Market Risk                                                                                                                            | 20     |
| Item 4. Controls and Procedures                                                                                                                                                                | 20     |
|                                                                                                                                                                                           |   |
| **Part II-Other Information**                                                                                                                                                                  |   |
| Item 2. Unregistered Sales of Equity Securities  and Use of Proceeds                                                                                                                           | 21     |
| Item 6. Exhibits                                                                                                                                                                               | 21     |
| (a) Exhibits                                                                                                                                                                                   | 21     |
| Signatures                                                                                                                                                                                     | 22     |

 

2

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                                    | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| **ASSETS**                                    |       |                    |       |                   |       |
| Current Assets:                               |       |                    |       |                   |       |
| Cash                                          |       | $                       | 219        |                   | $          | 39 |   |
| Accounts receivable, net                      |       | 10,030                  |       | 9,158                  |       |
| Inventories                                   |       | 14,335                  |       | 13,327                 |       |
| Other current assets                          |       | 3,775                   |       | 4,848                  |       |
|                                          |       |                    |       |                   |       |
|                                          |       |                    |       |                   |       |
| Total current assets                          |       | 28,359                  |       | 27,372                 |       |
| Property, plant, and equipment, net           |       | 41,503                  |       | 37,023                 |       |
| Goodwill                                      |       | 107,811                 |       | 104,041                |       |
| Customer relationship                         |       | 7,544                   |       |                   |       |
| Noncompete agreements                         |       | 1,312                   |       | 1,617                  |       |
| Other assets                                  |       | 7,158                   |       | 3,872                  |       |
|                                          |       |                    |       |                   |       |
|                                          |       |                    |       |                   |       |
| TOTAL                                         |       | $                       | 193,687    |                   | $          | 173,925 |   |
| ** **                                    |       |                    |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY** |       |                    |       |                   |       |
| Current Liabilities:                          |       |                    |       |                   |       |
| Current maturities of long-term debt          |       | $                       |       |                   | $          | 24,627 |   |
| Accounts payable                              |       | 4,518                   |       | 6,071                  |       |
| Accrued payroll                               |       | 3,815                   |       | 2,626                  |       |
| Other current liabilities                     |       | 7,487                   |       | 8,180                  |       |
|                                          |       |                    |       |                   |       |
|                                          |       |                    |       |                   |       |
| Total current liabilities                     |       | 15,820                  |       | 41,504                 |       |
| Long-term debt, net of current maturities     |       | 123,500                 |       | 70,321                 |       |
| Other noncurrent liabilities                  |       | 7,375                   |       | 7,966                  |       |
| Stockholders’ Equity:                    |       |                    |       |                   |       |
| Common stock—voting                      |       | 206                     |       | 148                    |       |
| Common stock—nonvoting                   |       | 9                       |       | 10                     |       |
| Additional paid-in capital                    |       | 45,219                  |       | 47,283                 |       |
| Retained earnings                             |       | 1,558                   |       | 6,552                  |       |
| Accumulated other comprehensive income        |       |                    |       | 141                    |       |
|                                          |       |                    |       |                   |       |
|                                          |       |                    |       |                   |       |
| Total stockholders’ equity               |       | 46,992                  |       | 54,134                 |       |
|                                          |       |                    |       |                   |       |
|                                          |       |                    |       |                   |       |
| TOTAL                                         |       | $                       | 193,687    |                   | $          | 173,925 |   |
|                                          |       |                    |       |                   |       |   |   |

 

See notes to condensed consolidated financialstatements (unaudited).

 

3

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                               | ** ** | **Three Months  Ended  September 30, 2004** | ** ** | **Three Months  Ended  September 30, 2003** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| NET SALES                                |       | $                                           | 52,274     |                                        | $          | 43,958 |   |
| COST OF SALES                            |       | 42,981                                      |       | 35,434                                      |       |
|                                     |       |                                        |       |                                        |       |
|                                     |       |                                        |       |                                        |       |
| Gross profit                             |       | 9,293                                       |       | 8,524                                       |       |
| OPERATING EXPENSES:                      |       |                                        |       |                                        |       |
| General and administrative               |       | 2,450                                       |       | 2,099                                       |       |
| Selling and marketing                    |       | 743                                         |       | 727                                         |       |
| Stock compensation expense               |       | 261                                         |       |                                        |       |
| Loss on sale of assets                   |       | 10                                          |       |                                        |       |
|                                     |       |                                        |       |                                        |       |
|                                     |       |                                        |       |                                        |       |
| Total operating expenses                 |       | 3,464                                       |       | 2,826                                       |       |
|                                     |       |                                        |       |                                        |       |
|                                     |       |                                        |       |                                        |       |
| OPERATING INCOME                         |       | 5,829                                       |       | 5,698                                       |       |
| OTHER INCOME (EXPENSE):                  |       |                                        |       |                                        |       |
| Interest income                          |       | 9                                           |       | 20                                          |       |
| Interest expense                         |       | (3,477                                      | )          | (2,019                                      | )          |
| Other income                             |       | 1                                           |       | 13                                          |       |
|                                     |       |                                        |       |                                        |       |
|                                     |       |                                        |       |                                        |       |
| Total other expense                      |       | (3,467                                      | )          | (1,986                                      | )          |
|                                     |       |                                        |       |                                        |       |
|                                     |       |                                        |       |                                        |       |
| INCOME BEFORE PROVISION FOR INCOME TAXES |       | 2,362                                       |       | 3,712                                       |       |
| PROVISION FOR INCOME TAXES               |       | 858                                         |       | 1,388                                       |       |
|                                     |       |                                        |       |                                        |       |
|                                     |       |                                        |       |                                        |       |
| NET INCOME                               |       | $                                           | 1,504      |                                        | $          | 2,324 |   |
|                                     |       |                                        |       |                                        |       |   |   |

 

See notes to condensed consolidated financialstatements (unaudited).

 

4

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**(SUCCESSOR), AND WOODCRAFT INDUSTRIES, INC.AND**

**SUBSIDIARIES (PREDECESSOR)**

**CONDENSED CONSOLIDATED STATEMENTS OF****OPERATIONS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                               | ** ** | **Successor**                              | ** ** | **Predecessor**                           | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                               | ** ** | **Nine Months  Ended  September 30, 2004** | ** ** | **Six Months  Ended  September 30, 2003** | ** ** | **Three Months  Ended  March 31, 2003** | ** ** |
| NET SALES                                |       | $                                          | 151,210    |                                      | $          | 89,138 |   | $ | 40,980 |   |
| COST OF SALES                            |       | 124,710                                    |       | 70,997                                    |       | 32,071 |   |
|                                     |       |                                       |       |                                      |       |   |   |
|                                     |       |                                       |       |                                      |       |   |   |
| Gross profit                             |       | 26,500                                     |       | 18,141                                    |       | 8,909 |   |
| OPERATING EXPENSES:                      |       |                                       |       |                                      |       |   |   |
| General and administrative               |       | 7,264                                      |       | 4,151                                     |       | 1,396 |   |
| Selling and marketing                    |       | 2,242                                      |       | 1,467                                     |       | 733 |   |
| Stock compensation expense               |       | 652                                        |       |                                      |       | 1,841 |   |
| Loss (Gain) on sale of assets            |       | 11                                         |       | (4                                        | )          | 218 |   |
|                                     |       |                                       |       |                                      |       |   |   |
|                                     |       |                                       |       |                                      |       |   |   |
| Total operating expenses                 |       | 10,169                                     |       | 5,614                                     |       | 4,188 |   |
|                                     |       |                                       |       |                                      |       |   |   |
|                                     |       |                                       |       |                                      |       |   |   |
| OPERATING INCOME                         |       | 16,331                                     |       | 12,527                                    |       | 4,721 |   |
| OTHER INCOME (EXPENSE):                  |       |                                       |       |                                      |       |   |   |
| Interest income                          |       | 28                                         |       | 40                                        |       | 22 |   |
| Interest expense                         |       | (9,394                                     | )          | (4,153                                    | )          | (835 | ) |
| Loss on modification of debt             |       | (3,454                                     | )          |                                      |       |   |   |
| Other income                             |       | 15                                         |       | 9                                         |       | 6 |   |
|                                     |       |                                       |       |                                      |       |   |   |
|                                     |       |                                       |       |                                      |       |   |   |
| Total other expense                      |       | (12,805                                    | )          | (4,104                                    | )          | (807 | ) |
|                                     |       |                                       |       |                                      |       |   |   |
|                                     |       |                                       |       |                                      |       |   |   |
| INCOME BEFORE PROVISION FOR INCOME TAXES |       | 3,526                                      |       | 8,423                                     |       | 3,914 |   |
| PROVISION FOR INCOME TAXES               |       | 1,280                                      |       | 3,149                                     |       | 1,404 |   |
|                                     |       |                                       |       |                                      |       |   |   |
|                                     |       |                                       |       |                                      |       |   |   |
| NET INCOME                               |       | $                                          | 2,246      |                                      | $          | 5,274 |   | $ | 2,510 |   |
|                                     |       |                                       |       |                                      |       |   |   |

 

See notes to condensed consolidated financialstatements (unaudited).

 

5

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ EQUITY**

**(UNAUDITED)**

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

 
| ** **                        | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|-----------------------------------------------|------------|-----------|------------|
| **Voting**                        | ** ** | **Nonvoting**     |
| **Shares**                        | ** ** | **Amount**        | **Shares** | ** **                       | **Amount** |
| BALANCE-December  31, 2003        |       | 14,813,827        |       | $                                | 148        |                   | 1,000,000  |                                          | $          | 10        |       | $ | 47,283 |   | $ | 6,552 |   | $ | 141 |   | $ | 54,134 |   |
| Conversion of  convertible note   |       | 6,950,000         |       | 69                               |       |                   |       |                                          |       | 20,781    |       |   |   |   |   | 20,850 |   |
| Repurchase of  common stock       |       | (3,171,841        | )          | (32                              | )          | (145,739               | )          | (1                                            | )          | (17,517   | )          |   |   |   |   | (17,550 | ) |
| Dividend  distribution            |       |              |       |                             |       |                   |       |                                          |       | (14,209   | )          | (7,240 | ) |   |   | (21,449 | ) |
| Stock  compensation expense       |       |              |       |                             |       |                   |       |                                          |       | 652       |       |   |   |   |   | 652 |   |
| Stock issued to  fund acquisition |       | 2,142,857         |       | 21                               |       |                   |       |                                          |       | 8,229     |       |   |   |   |   | 8,250 |   |
|                              |       |              |       |                             |       |                   |       |                                          |       |      |       |   |   |   |   |   |   |
| Net income                        |       |              |       |                             |       |                   |       |                                          |       |      |       | 2,246 |   |   |   | 2,246 |   |
| Derivative  instrument            |       |              |       |                             |       |                   |       |                                          |       |      |       |   |   | (141 | ) | (141 | ) |
|                              |       |              |       |                             |       |                   |       |                                          |       |      |       |   |   |   |   |   |   |
|                              |       |              |       |                             |       |                   |       |                                          |       |      |       |   |   |   |   |   |   |
| Total  comprehensive income       |       |              |       |                             |       |                   |       |                                          |       |      |       |   |   |   |   | 2,105 |   |
|                              |       |              |       |                             |       |                   |       |                                          |       |      |       |   |   |   |   |   |   |
|                              |       |              |       |                             |       |                   |       |                                          |       |      |       |   |   |   |   |   |   |
| BALANCE-September  30, 2004       |       | 20,734,843        |       | $                                | 206        |                   | 854,261    |                                          | $          | 9         |       | $ | 45,219 |   | $ | 1,558 |   | $ | — |   | $ | 46,992 |   |
|                              |       |              |       |                             |       |                   |       |                                          |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   |

 

See notes to condensed consolidated financialstatements (unaudited).

 

6

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**(SUCCESSOR), AND WOODCRAFT INDUSTRIES, INC.AND SUBSIDIARIES**

**(PREDECESSOR)CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                                                                         | ** ** | **Successor**                              | ** ** | **Predecessor**                           | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                         | ** ** | **Nine Months  Ended  September 30, 2004** | ** ** | **Six Months  Ended  September 30, 2003** | ** ** | **Three Months  Ended  March 31, 2003** | ** ** |
| OPERATING ACTIVITIES:                                                              |       |                                       |       |                                      |       |   |   |
| Net income                                                                         |       | $                                          | 2,246      |                                      | $          | 5,274 |   | $ | 2,510 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                       |       |                                      |       |   |   |
| Loss on modification of debt                                                       |       | 3,454                                      |       |                                      |       |   |   |
| Depreciation and amortization                                                      |       | 5,210                                      |       | 3,190                                     |       | 1,369 |   |
| Deferred income taxes                                                              |       |                                       |       | (471                                      | )          | 175 |   |
| Loss on sale of assets                                                             |       | 11                                         |       | (4                                        | )          | 218 |   |
| Stock compensation expense                                                         |       | 652                                        |       |                                      |       | 334 |   |
| Change in operating assets and liabilities:                                        |       |                                       |       |                                      |       |   |   |
| Accounts receivable                                                                |       | (657                                       | )          | 1,619                                     |       | (4,393 | ) |
| Inventories                                                                        |       | (856                                       | )          | 637                                       |       | (1,593 | ) |
| Other current assets                                                               |       | 1,081                                      |       | 5,799                                     |       | 37 |   |
| Accounts payable                                                                   |       | (2,101                                     | )          | 12                                        |       | 686 |   |
| Accrued payroll and other current  liabilities                                     |       | 1,208                                      |       | 320                                       |       | 1,646 |   |
|                                                                               |       |                                       |       |                                      |       |   |   |
|                                                                               |       |                                       |       |                                      |       |   |   |
| Net cash provided by operating activities                                          |       | 10,248                                     |       | 16,376                                    |       | 989 |   |
|                                                                               |       |                                       |       |                                      |       |   |   |
|                                                                               |       |                                       |       |                                      |       |   |   |
| INVESTING ACTIVITIES:                                                              |       |                                       |       |                                      |       |   |   |
| Purchases of property, plant, and equipment                                        |       | (3,729                                     | )          | (2,667                                    | )          | (533 | ) |
| Proceeds from sale of assets                                                       |       | 2                                          |       | 4                                         |       | 11 |   |
| Change in other assets                                                             |       | (161                                       | )          | (23                                       | )          | 79 |   |
| Grand Valley acquisition                                                           |       | (15,937                                    | )          |                                      |       |   |   |
|                                                                               |       |                                       |       |                                      |       |   |   |
|                                                                               |       |                                       |       |                                      |       |   |   |
| Net cash used in investing activities                                              |       | (19,825                                    | )          | (2,686                                    | )          | (443 | ) |
|                                                                               |       |                                       |       |                                      |       |   |   |
|                                                                               |       |                                       |       |                                      |       |   |   |
| FINANCING ACTIVITIES:                                                              |       |                                       |       |                                      |       |   |   |
| Principal payments under long-term  financing agreements                           |       | (87,943                                    | )          | (15,760                                   | )          | (6,737 | ) |
| Borrowings of long-term debt                                                       |       | 135,783                                    |       | 275                                       |       | 6,200 |   |
| 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                                         |       | 63                                        |       |   |   |
|                                                                               |       |                                       |       |                                      |       |   |   |
|                                                                               |       |                                       |       |                                      |       |   |   |
| Net cash (used in) provided by financing  activities                               |       | 9,757                                      |       | (15,422                                   | )          | (537 | ) |
|                                                                               |       |                                       |       |                                      |       |   |   |
|                                                                               |       |                                       |       |                                      |       |   |   |
| NET (DECREASE) INCREASE IN CASH                                                    |       | 180                                        |       | (1,732                                    | )          | 9 |   |
| CASH—Beginning of period                                                      |       | 39                                         |       | 1,888                                     |       | 2 |   |
|                                                                               |       |                                       |       |                                      |       |   |   |
|                                                                               |       |                                       |       |                                      |       |   |   |
| CASH—End of period                                                            |       | $                                          | 219        |                                      | $          | 156 |   | $ | 11 |   |
|                                                                               |       |                                       |       |                                      |       |   |   |   |   |   |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                                |       |                                       |       |                                      |       |   |   |
| Cash paid for interest                                                             |       | $                                          | 8,950      |                                      | $          | 2,493 |   | $ | 681 |   |
|                                                                               |       |                                       |       |                                      |       |   |   |   |   |   |
|                                                                               |       |                                       |       |                                      |       |   |   |   |   |   |
| Cash paid for income taxes—net                                                |       | $                                          | 323        |                                      | $          | 5,902 |   | $ | 411 |   |
|                                                                               |       |                                       |       |                                      |       |   |   |
| NONCASH ACTIVITY:                                                                  |       |                                       |       |                                      |       |   |   |
| Accrued redeemable preferred stock  cumulative dividends for Series A, B, and C    |       | $                                          |       |                                      | $          |   |   | $ | 1,184 |   |
|                                                                               |       |                                       |       |                                      |       |   |   |
|                                                                               |       |                                       |       |                                      |       |   |   |   |   |   |
| Conversion of subordinated convertible note  and accrued interest to common stock  |       | $                                          | 20,850     |                                      | $          |   |   | $ |   |   |
|                                                                               |       |                                       |       |                                      |       |   |   |

 

See notes to condensed consolidated financialstatements (unaudited).

 

7

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**(SUCCESSOR), AND WOODCRAFT INDUSTRIES, INC.AND SUBSIDIARIES**

**(PREDECESSOR) NOTES TO CONDENSED**

**CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1. NATURE OF BUSINESS**

 

***Company Background***—WIIComponents, Inc. (formerly WII Holdings, Inc. and referred to hereinas the “Successor” or the “Company”), a Delaware corporation, was formed toacquire 100% of the common stock of Woodcraft Industries, Inc. andSubsidiaries (the “Predecessor” or the “Company”) in a buyout (the “Acquisition”)from the former owners. On April 9, 2003, pursuant to a sale agreementbetween WII Components, Inc. and the former owners, WIIComponents, Inc. acquired the common stock of WoodcraftIndustries, Inc. for a total of approximately $145 million. Foraccounting purposes, the acquisition date is considered to be April 1,2003. WII Components, Inc. has no independent assets or operationsseparate from its consolidated subsidiaries.

 

The Acquisition was accounted for using the purchase method ofaccounting. Accordingly, the assets acquired and the liabilities assumed by WIIComponents, Inc. were recorded at fair value as of the date of theAcquisition. The excess of the purchase price over the fair value of the assetsacquired and liabilities assumed totaling $104,040,961 was recorded asgoodwill.

 

In February 2004, the Successor completed an equity restructuringusing the proceeds from its $120 million 10% senior notes offering(Note 5) to pay off the outstanding term loans and revolving line ofcredit, to pay a dividend of approximately $21.5 million, to repurchaseapproximately $17.5 million of the Successor’s outstanding common stock,and to pay financing costs of approximately $7.4 million.

 

The Company acquired a cabinet door manufacturer operating under thename Grand Valley Door Co. (“Grand Valley”) on April 30, 2004(Note 4).

 

***Description ofBusiness***—The Company is one of the leadingmanufacturers of wood cabinet doors, hardwood components, and engineered woodproducts in the United States. Its products are sold principally to leadingnational and regional kitchen and bathroom cabinet manufacturers. Itsreputation for high quality and reliable performance has enabled the Company toestablish strong, long-standing relationships with its customers. Itscustomers, in turn, distribute products through various sales channels,including specialty kitchen and bathroom cabinetry dealers, home centerretailers, and homebuilders.

 

***Basis ofPresentation***—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 nine monthperiod ended December 31, 2003 included in its Form S-4 as filed withthe Securities and Exchange Commission on July 21, 2004. The condensedconsolidated balance sheet as of December 31, 2003 has been derived fromthe audited consolidated financial statements at that date, but does notinclude all the information and notes required by accounting principlesgenerally accepted in the United States of America for complete presentation.

 

In our opinion, the accompanying unaudited condensed consolidatedfinancial statements include all adjustments (consisting of normal recurringitems) considered necessary to present fairly, when read in conjunction withthe consolidated financial statements and accompanying notes for the periodended December 31, 2003 included in our Form S-4 as filed with theSecurities and Exchange Commission on July 21, 2004, our financialposition, results of operations and cash flows for the periods presented.

 

***Principles ofConsolidation***—The consolidated financialstatements include the accounts of the Company and its wholly ownedsubsidiaries. As described more fully in Note 4, the Company completed theacquisition of Woodcraft Industries, Inc. and its wholly ownedsubsidiaries, PrimeWood, Inc. (“PrimeWood”) and Brentwood Acquisition,Corp. (“Brentwood”) on April 9, 2003, and completed the acquisition ofGrand Valley on April 30, 2004. All intercompany accounts and transactionshave been eliminated in the preparation of the consolidated financialstatements.

 

8

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**2. SIGNIFICANT ACCOUNTING POLICIES**

 

***Inventories***—Inventoriesconsisted of the following (in thousands):

 
| ** **      | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------|------------|-------------------------|------------|------------------------|------------|
| Raw materials   |       | $                       | 9,440      |                   | $          | 8,315 |   |
| Work in process |       | 3,645                   |       | 3,116                  |       |
| Finished goods  |       | 1,980                   |       | 2,039                  |       |
| LIFO adjustment |       | (730                    | )          | (143                   | )          |
|            |       |                    |       |                   |       |
|            |       |                    |       |                   |       |
|            |       | $                       | 14,335     |                   | $          | 13,327 |   |
|            |       |                    |       |                   |       |

 

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 thefirst-in, first-out method (“FIFO”). As of Sepember 30, 2004 andDecember 31, 2003, inventory on the LIFO method represented 53% and 61%,respectively, of consolidated inventories.

 

***Goodwill***—Asdiscussed in Note 3, in 2002, the Company adopted and accounts forgoodwill in accordance with Statement of Financial Accounting Standards (“SFAS”)No. 142, *Goodwill and Other IntangibleAssets*. In part, SFAS No. 142 states that companies are nolonger required to amortize goodwill but instead must evaluate goodwill forimpairment at least annually. Previously, goodwill was amortized over itsestimated useful life. The Company has elected to perform its annual tests forgoodwill impairment as of December 31 of each year. Fair value is measuredusing the present value of expected future cash flows.

 

***CustomerRelationship—***Customer Relationship relates to anintangible asset recorded through the purchase price allocation of the GrandValley acquisition (Note 4). The $7,872,000 intangible asset is being amortizedover the estimated life of 10 years. Amortization for both the three-monthperiod ended September 30, 2004 and the nine-month period ended September 30,2004 was $328,000.  Expected amortizationis as follows for the years ended December 31 (in thousands):

 
| 2004      |   | $     | 525    |   |
|-----------|--------|-------|--------|--------|
| 2005      |   | 787   |   |
| 2006      |   | 787   |   |
| 2007      |   | 787   |   |
| 2008      |   | 787   |   |
| 2009-2014 |   | 4,199 |   |

 

***Noncompete Agreement***—Noncompeteagreements primarily relate to agreements with the former owners of PrimeWood,Brentwood, and Grand Valley. Noncompete rights are being amortized over theapplicable terms of the agreements (6 years, 5 years, and7 years, respectively), and are expected to be fully amortized byJune 2004, July 2007, and April 2011, respectively. Amortizationfor the three-month period ended September 30, 2004, the three-month periodended September 30, 2003, the nine-month period ended September 30, 2004, thesix-month period ended September 30, 2003, and the three-month period endedMarch 31, 2003 was $113,000, $149,000, $404,000, $298,000 and $150,000,respectively. Expected amortization is as follows for the years endedDecember 31 (in thousands):

 
| 2004      |   | $   | 516    |   |
|-----------|--------|-----|--------|--------|
| 2005      |   | 444 |   |
| 2006      |   | 444 |   |
| 2007      |   | 265 |   |
| 2008      |   | 14  |   |
| 2009-2011 |   | 33  |   |

 

***Stock Options*—**The Predecessor had a stockoption plan that provided for the granting of up to 150,881 nonqualified stockoptions on the Predecessor’s common stock. Certain officers, directors, and keyemployees were granted options to purchase common stock of the Predecessorunder these plans. There were 29,501 options that were canceled and reissuedduring 2001, resulting in the need to adopt variable accounting over theremaining vesting period of the repriced options. As of December 31, 2002,of the remaining options 6,250 shares were vested. The Predecessor recordedcompensation expense related to options of $334,000 for the three-month periodended March 31, 2003.

 

In April 2003, the 2003 Stock Option and Grant Plan (“2003 Plan”)was approved by the stockholders of the Successor. The 2003 Plan allows thegranting of both incentive stock options and nonqualified stock options. The2003 Plan serves as the successor to the plans implemented by the Predecessor.Under the terms of the 2003 Plan, a maximum of 2,500,000 shares of stock,subject to adjustment, were made available for awards to officers, employees,directors, consultants, and other key persons of the Company. Awards mayinclude, but are not limited to, stock options, restricted stock, unrestrictedstock awards, and substitute performance awards.

 

At December 31, 2003, 1,617,000 options were outstanding withterms of 10 years from the date of grant, and 883,000 shares wereavailable for future grants under the 2003 Plan. Issued options vest in equalannual installments over four years. All options outstanding atDecember 31, 2003 had an exercise price of $3.00 per share and a weightedaverage remaining contractual life of nine years. The fair value of optionsgranted during the nine months ended December 31, 2003 was estimated onthe date of the grant using the Black-Scholes option-pricing model with thefollowing assumptions: a risk-free interest rate of 3.0%, an expected life ofsix years, and no volatility.

 

9

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As a part of the February 2004 equity restructuring (Note 5),the Successor repriced the outstanding stock options. The Successor has adoptedvariable plan accounting for these options from the date of the repricing.Based on the fair value of the options as of the date of the repricing, theSuccessor will record approximately $3.4 million of compensation expense overthe remaining vesting period of approximately three years. The Company recorded$261,000 and $652,000 of noncash compensation expense during the three and ninemonth periods ended September 30, 2004, respectively.

 

In April 2004, the Company granted 489,000 options under the 2003Plan. The fair value of these options was estimated on the date of the grantusing the Black-Scholes option-pricing model with the following assumptions: arisk-free interest rate of 3.9%, an expected life of six years, and no volatility.

 

The Company accounts for the options under Accounting Principles BoardOpinion No. 25, *Accounting for StockIssued to Employees*, under which no compensation cost has beenrecognized as of the original grant date. Had compensation cost for the optionsbeen determined consistent with SFAS No. 123, *Accounting for Stock-Based Compensation*, the Company’s netincome would have been the following pro forma amounts for the indicatedperiods (in thousands):

 
| ** **  | ** ** | **Successor**                               | ** ** | **Predecessor**                             | ** ** |
|-------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **  | ** ** | **Nine Months  Ended  September 30,  2004** | ** ** | **Three Months Ended  September 30,  2004** | ** ** | **Three Months Ended  September 30,  2003** | ** ** | **Six Months Ended  September 30,  2003** | ** ** | **Three Months Ended  March 31,  2003** | ** ** |
| Net income  |       |                                        |       |                                        |       |   |   |   |   |   |   |
| As reported |       | $                                           | 2,246      |                                        | $          | 1,504 |   | $ | 2,324 |   | $ | 5,274 |   | $ | 2,510 |   |
| Pro forma   |       | 2,176                                       |       | 1,477                                       |       | 2,275 |   | $ | 5,192 |   | 2,510 |   |
|             |            |                                             |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |

 

**3. GOODWILL**

 

Effective January 1, 2002, the Company adopted and beganaccounting for goodwill in accordance with SFAS No. 142 which states thatcompanies are no longer required to amortize goodwill but instead must evaluategoodwill for impairment annually, if not more frequently. The Company haselected to perform its annual tests for goodwill impairment as ofDecember 31 of each year. Previously, goodwill was amortized over itsestimated useful life. Based on the impairment tests performed onDecember 31, 2003, the Company’s fair value exceeds the carrying value,resulting in no goodwill impairment.

 

The change in the carrying amount of goodwill was as follows (inthousands):

 
| Balance at December 31, 2003  |   | $      | 104,041 |   |
|-------------------------------|--------|--------|---------|--------|
| Goodwill acquired (Note 4)    |   | 3,770  |    |
|                          |   |   |    |
|                          |   |   |    |
| Balance at September 30, 2004 |   | $      | 107,811 |   |
|                          |   |   |    |

 

**4. ACQUISITIONS**

 

As stated in Note 1, the Successor was formed to acquire 100% ofthe common stock of the Predecessor in a buyout from the former owners. OnApril 9, 2003, pursuant to a sale agreement between the Successor and theformer owners, the Successor acquired the common stock of the Predecessor for atotal of approximately $145 million. For accounting purposes, the acquisitiondate is considered to be April 1, 2003. The Successor has no independentassets or operations separate from its consolidated subsidiaries.

 

The Acquisition was accounted for using the purchase method ofaccounting. Accordingly, the assets acquired and the liabilities assumed by theSuccessor 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 $104,041,000 was recorded as goodwill.

 

The components of the purchase price allocation are as follows (inthousands):

 
| Current assets                 |   | $       | 34,531 |   |
|--------------------------------|--------|---------|--------|--------|
| Property, plant, and equipment |   | 35,622  |   |
| Other assets                   |   | 4,280   |   |
| Noncompete agreements          |   | 2,065   |   |
| Goodwill                       |   | 104,041 |   |
|                           |   |    |   |
|                           |   |    |   |
| Assets acquired                |   | 180,539 |   |
| Liabilities assumed            |   | 133,098 |   |
|                           |   |    |   |
|                           |   |    |   |
| Net assets acquired            |   | $       | 47,441 |   |
|                           |   |    |   |

 

10

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The Company obtained various forms of debt totaling approximately$97,559,000 at the date of acquisition to fund the acquisitions and futureoperations.

 

Pro forma operating results of the Predecessor, assuming theacquisition of Woodcraft occurred on January 1, 2003, are as follows (inthousands):

 
| ** ** | ** ** | **Three Months Ended  March 31,  2003** | ** ** |
|------------|------------|-----------------------------------------|------------|
| Net sales  |       | $                                       | 40,980     |   |
| Net income |       | 1,660                                   |       |
|            |            |                                         |            |  |

 

Pro forma financial information is provided for informational purposesonly and is not necessarily indicative of the Company’s operating results thatwould have occurred had the acquisitions been consummated on the dates forwhich the consummation of the acquisitions are being given effect, nor is itnecessarily indicative of the Company’s future operating results. The pro formaamounts do not reflect any operating efficiencies and cost savings that theCompany believes are achievable.

 

On April 30, 2004, the Company acquired a cabinet doormanufacturer operating under the name of Grand Valley Door Co. The acquisitionwas accomplished through the acquisition of substantially all of the assets ofOhio Door Company and certain land and improvements from Grand ValleyInvestment LLC. The Company paid a cash purchase price at closing of$16 million and, if the business acquired achieves certain sales andprofit margin targets, an additional $1 million will be payable prior toJune 30, 2006. Approximately half of the purchase price was funded withborrowings under the senior secured revolving credit facility and the remainderwas funded from the proceeds of an equity contribution from existingstockholders. The acquired company is a 100% owned subsidiary of the Successorand, on June 25, 2004, agreed to fully and unconditionally guarantee thesenior notes on a joint and several basis with the Successor’s existingsubsidiary guarantors.

 

The Acquisition of Grand Valley was accounted for using the purchasemethod of accounting. Accordingly, the assets acquired and the liabilitiesassumed by the Successor were recorded at fair value as of the date of theAcquisition. The excess of the purchase price over the fair value of the assetsacquired and liabilities assumed totaling $3,770,000 was recorded as goodwill. Basedupon the Company's final purchase price allocation, $7,872,000 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 preliminary purchase priceallocation are as follows (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            |   | 808    |   |
|                           |   |   |   |
|                           |   |   |   |
| Net assets acquired            |   | $      | 15,936 |   |
|                           |   |   |   |

 

11

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**5. FINANCING ARRANGEMENTS**

 

Long-term debt consists of the following (in thousands):

 
| ** **                                                                                                                                             | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Senior notes (10%) due 2012                                                                                                                            |       | $                       | 120,000    |                   | $          |   |   |
| Revolver (5.15% and 6.63% at September 30,  2004 and December 31, 2003, respectively)                                                                  |       | 3,500                   |       | 1,800                  |       |
| Subordinated convertible notes, due April  2004, 5% interest payable                                                                                   |       |                    |       | 20,000                 |       |
| Senior term loan A, interest at LIBOR plus  3.88% (5.01% at December 31, 2003) due in varying installments through March  31, 2008                     |       |                    |       | 33,150                 |       |
| Senior term loan B, interest at LIBOR plus  4.25% (5.36% at December 31, 2003) interest-only payments until June 2008  with balance due September 2009 |       |                    |       | 20,500                 |       |
| Senior term loan C, interest at 15%,  interest-only payments until December 2009, balance due March 2010                                               |       |                    |       | 19,421                 |       |
| Other due 2004                                                                                                                                         |       |                    |       | 77                     |       |
|                                                                                                                                                   |       |                    |       |                   |       |
|                                                                                                                                                   |       |                    |       |                   |       |
| Total debt                                                                                                                                             |       | 123,500                 |       | 94,948                 |       |
| Less current maturities                                                                                                                                |       |                    |       | 24,627                 |       |
|                                                                                                                                                   |       |                    |       |                   |       |
|                                                                                                                                                   |       |                    |       |                   |       |
|                                                                                                                                                   |       | $                       | 123,500    |                   | $          | 70,321 |   |
|                                                                                                                                                   |       |                    |       |                   |       |

 

***Senior Notes***—OnFebruary 18, 2004, the Company completed the offering of $120 millionof 10% senior notes due 2012. The net proceeds of the offering of the seniornotes were used to pay off the outstanding term loans and revolving line ofcredit, to pay a dividend of approximately $21.5 million, to repurchaseapproximately $17.5 million of the Company’s outstanding common stock, andto pay financing costs of $7.4 million. Additionally inFebruary 2004, the Company entered into a new $25 million revolvingline of credit.

 

Each of the Company’s subsidiaries, which are all 100% ownedsubsidiaries of the Company, have fully and unconditionally guaranteed thesenior notes on a joint and several basis. The Company has no independentassets or operations. As a result, the Company has not presented separatefinancial statements of the subsidiary guarantors.

 

***SubordinatedConvertible 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 the Company’scommon stock at a conversion price of $3.00 per share, subject to certainadjustments. 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 management services agreement with an affiliate ofthe primary investor whereby the Company pays a transaction fee to theaffiliate for services provided for each financing, refinancing, acquisition,or similar nonrecurring transaction. The Company paid $1,740,000 to thisaffiliate for services related to the Acquisition which is recorded as goodwilland $1,160,000 for financing services which was recorded in other assets asdeferred financing costs and was written off as discussed in Note 2. Inaddition, the Company paid $2,400,000 to this affiliate related to the Februaryfinancing transaction, which is recorded in other assets as deferred financingcosts. The Company paid $320,000 to this affiliate for services related to theacquisition of Grand Valley, $224,000 of which is recorded as goodwill and$96,000 of which is recorded in other assets as financing costs.

 

The Predecessor had a management services agreement with an affiliateof its former primary investor, whereby the Predecessor paid an annual base feeof $300,000 plus a percentage fee based on annual net operating cash flow. Thetotal fee was $81,370 for the three-month period ended March 31, 2003.

 

The Predecessor entered into a noncompete agreement on July 31,2002 with the former majority stockholder of Brentwood (Note 2).

 

The Predecessor entered into consulting and noncompete agreements onJune 16, 1998 with the former majority stockholder of PrimeWood. Theagreements require aggregate payments of approximately $4,600,000 in equalannual installments over a six-year period. The fee under these agreements was$0 and $191,750 for each of the three-month periods ended September 30,2004 and September 30, 2003, respectively (Note 2).

 

The Company entered into a noncompete agreement on April 30, 2004with the former owners of Grand Valley (Notes 2 and 4).

 

12

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations

 

**FORWARD-LOOKING STATEMENTS**

 

Certain statements in this prospectus are “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995.Statements that are predictive in nature, that depend upon or refer to futureevents 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 these forward-lookingstatements.

 

Without limiting the generality of the preceding statement, allstatements in this prospectus providing estimates and projections concerning orrelating to the following matters are forward-looking statements:

 

•      financialresults and conditions;

 

•      margins, costsand expenditures;

 

•      cash flows andgrowth rates;

 

•      demand for ourproducts;

 

•      industry trends;

 

•      new product andcustomer initiatives;

 

•      manufacturingand other cost-saving initiatives; and

 

•      our liquidityand capital resources.

 

In addition, 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 those expressedin the forward-looking statements. Those factors include, among other things:

 

•      our high degreeof leverage and significant debt service obligations;

 

•      restrictionsunder the indenture governing the notes and our senior secured revolving creditfacility;

 

•      changes ininterest rates and general economic, homebuilding industry or home repair andremodeling industry conditions;

 

•      changes in theprice of raw materials;

 

•      interruptions indeliveries of raw materials or finished goods;

 

•      the highlycompetitive nature of our industry; and

 

•      increases in thecost of labor.

 

13

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**Overview**

 

We are one of the leading manufacturers of hardwood cabinet doors andcomponents and engineered wood products in the United States. Our productsinclude (1) hardwood cabinet door components, face frames and drawerfronts, (2) fully assembled hardwood cabinet doors, (3) rigidthermofoil, or RTF, cabinet doors and components, (4) veneer raised panels,or VRPs, and (5) a variety of laminated and profile-wrapped components. Wegenerate approximately 90% of our sales from the kitchen and bath cabinetmanufacturing industry. Our customers, in turn, distribute their productsthrough various sales channels, including specialty kitchen and bath cabinetdealers, home center retailers and homebuilders. We conduct all of ouroperations through our Woodcraft, PrimeWood, Grand Valley and Brentwoodsubsidiaries and we operate seven manufacturing facilities located inMinnesota, North Dakota, Oregon, Ohio and Kentucky that allow us to distributeour products nationwide.

 

We consummated three strategic acquisitions that have substantiallyenhanced our market position, product breadth and geographic reach. InJune 1998, we acquired our PrimeWood subsidiary, or PrimeWood, amanufacturer of RTF, VRP and profile-wrapped engineered wood products based inNorth Dakota. In July 2002, we acquired our Brentwood subsidiary, orBrentwood, a manufacturer of solid wood and RTF cabinet doors located in Oregon.In April 2004, we acquired our Grand Valley subsidiary, or Grand Valley, amanufacturer of cabinet doors located in Ohio.

 

WII Components, Inc. (formerly known as WII Holdings, Inc.),a Delaware corporation, which we refer to as the Company, was formed to acquireWoodcraft Industries, Inc. and its subsidiaries, or the Predecessor,through a stock purchase on April 9, 2003, which we refer to as theAcquisition. For accounting purposes, the Acquisition was recorded with aneffective date of April 1, 2003. The Acquisition was accounted for usingthe purchase method of accounting. Accordingly, the assets acquired and theliabilities assumed by WII Components, Inc. were recorded at fair value asof April 1, 2003 and included $104.0 million for goodwill. Thefinancial information for periods after April 1, 2003 may not becomparable to financial information for periods prior to April 1, 2003.

 

In February 2004, we entered into a new senior secured revolvingcredit facility and used the proceeds from the sale of our 10% Senior Notes due2012 to pay off the term loans and revolving line of credit under our oldsenior credit 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 EndedSeptember 30, 2004 Compared to the Three Months Ended September 30,2003***

 

The following table outlines, for the three months endedSeptember 30, 2004 and for the three months ended September 30, 2003,selected operating data derived from our consolidated statements of operationsand presents this information as a percentage of net sales:

 
| ** **         | ** ** | **WII Components, Inc.**                       | ** ** |
|--------------------|------------|------------------------------------------------|------------|
| ** **         | ** ** | **Three Months Ended September 30, 2004** | ** ** | **Three Months Ended September 30, 2003** | ** ** |
| ** **         | ** ** | **(dollars in thousands)**                     | ** ** |
| Net sales          |       | $                                              | 52,274     |   | $ | 43,958 |   |
| *% of net sales*   | * *   | *100.0*                                        | *%*        | *100.0* | *%* |
| Cost of sales      |       | 42,981                                         |       | 35,434 |   |
| *% of net sales*   | * *   | *82.2*                                         | *%*        | *80.6* | *%* |
| * *           | * *   | * *                                       | * *   | * * | * * |
| * *           | * *   | * *                                       | * *   | * * | * * |
| Gross profit       |       | 9,293                                          |       | 8,524 |   |
| *% of net sales*   | * *   | *17.8*                                         | *%*        | *19.4* | *%* |
| Operating expenses |       | 3,464                                          |       | 2,826 |   |
| *% of net sales*   | * *   | *6.6*                                          | *%*        | *6.4* | *%* |
| * *           | * *   | * *                                       | * *   | * * | * * |
| * *           | * *   | * *                                       | * *   | * * | * * |
| Operating income   |       | 5,829                                          |       | 5,698 |   |
| *% of net sales*   | * *   | *11.2*                                         | *%*        | *13.0* | *%* |
| Other expenses:    |       |                                           |       |   |   |
| Interest expense   |       | 3,477                                          |       | 2,019 |   |
| *% of net sales*   | * *   | *6.7*                                          | *%*        | *4.6* | *%* |
| Other income, net  |       | (10                                            | )          | (33 | ) |
| *% of net sales*   | * *   | *0.0*                                          | *%*        | *-0.1* | *%* |
| Income taxes       |       | 858                                            |       | 1,388 |   |
| *% of net sales*   | * *   | *1.6*                                          | *%*        | *3.2* | *%* |
| * *           | * *   | * *                                       | * *   | * * | * * |
| * *           | * *   | * *                                       | * *   | * * | * * |
| Net income         |       | 1,504                                          |       | 2,324 |   |
| *% of net sales*   | * *   | *2.9*                                          | *%*        | *5.3* | *%* |
| * *           | * *   | * *                                       | * *   | * * | * * |
|                    |            |                                                |            |  |  |  |  |

 

14

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*Net sales.*  Net sales increased $8.3 million, or18.9%, from $44.0 million for the three months ended September 30,2003 to $52.3 million for the three months ended September 30, 2004.Sales in our hardwood product line increased $8.6 million attributable toa combination of (i) increases in volume due in part to overall industrygrowth and in part to market share gain, and (ii) price adjustments madein response to increases in raw material costs. This increase is offset by a$0.3 million decrease in sales in our engineered wood products line due toa partial loss of market share by some of our customers and a softening in thismarket sector.

 

*Cost of sales.*  Cost of sales increased $7.5 million, or21.1%, from $35.5 million for the three months ended September 30,2003 to $43.0 million for the three months ended September 30, 2004.This increase in cost of sales is attributable to (i) increased material,labor and overhead costs related to volume growth, (ii) inflation,primarily in respect of raw material costs, related to both our hardwood andengineered wood product lines, and (iii) operating inefficiencies experienceddue to the expansion of our Brentwood facility. These costs were offset in partby the spreading of our fixed costs over a larger sales base.

 

*Gross profit.*  Gross profit increased $0.8 million, or9.4%, from $8.5 million for the three months ended September 30, 2003to $9.3 million for the same period in 2004 as a result of the factorsdescribed above. As a percentage of net sales, our gross profit decreased 160basis points from 19.4% for the three months ended September 30, 2003 to17.8% for the same period in 2004. This decrease reflects (i) increases inour raw material costs compared to the same period in 2003 and(ii) operating inefficiencies in our Brentwood facility, offset in part bythe spreading of our fixed costs over a larger sales base.

 

*Operating expenses.*  Operating expenses increased$0.7 million, or 25.0%, from $2.8 million for the three months endedSeptember 30, 2003 to $3.5 million for the same period in 2004. Thisincrease is primarily attributable to the inclusion of three full months ofoperations of Grand Valley in 2004, including the amortization of the Customer Relationshipintangible asset.

 

*Operating income.*  Operating income increased by$0.1 million, or 1.8%, from $5.7 million for the three months endedSeptember 30, 2003 to $5.8 million for the three months endedSeptember 30, 2004 as a result of the net effect of the factors describedabove.

 

*Interest expense.*  Interest expense increased $1.4 million,or 70.0%, from $2.0 million for the three months ended September 30,2003 to $3.4 million for the three months ended September 30, 2004.This increase relates to a higher level of debt and the higher interest rate inconnection with the issuance of $120.0 million senior notes inFebruary 2004.

 

*Other income.*  Other income decreased from $33,000 for thethree months ended September 30, 2003 to $10,000 for the three monthsended September 30, 2004.

 

*Income tax expense.*  Income tax expense decreased$0.5 million, or 35.7% from $1.4 million for the three months endedSeptember 30, 2003 to $0.9 million for the three months endedSeptember 30, 2004 as a result of lower earnings. The effective tax ratedecreased 110 basis points from 37.4% in 2003 to 36.3% in 2004 due to permanentdifferences.

 

*Net income.*  Net income decreased $0.8 million, or34.8%, from $2.3 million for the three months ended September 30,2003 to $1.5 million for the three months ended September 30, 2004 asa result of the factors described above.

 

***Nine Months EndedSeptember 30, 2004 Compared to the Nine Months Ended September 30,2003***

 

For purposes of the discussion of the results of operations for thenine months ended September 30, 2004 and nine months endedSeptember 30, 2003, the results of operations for the company for the six-monthperiod ended September 30, 2003 and the results of operations for thepredecessor for the three-month period ended March 31, 2003 have beencombined in the table below. The following table sets forth selected operatingdata derived from our consolidated statements of operations and presents this informationas a percentage of net sales.

 

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| ** **               | ** ** | **WII Components, Inc.**                    | ** ** | **Combined**                                | ** ** | **Predecessor**                          | ** ** | **WII Components, Inc.**                   | ** ** |
|--------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|------------------------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **Nine Months  Ended  September 30,  2004** | ** ** | **Nine Months  Ended  September 30,  2003** | ** ** | **Three Months  Ended  March 31,  2003** | ** ** | **Six Months  Ended  September 30,  2003** | ** ** |
| Net sales                |       | $                                           | 151,210    |                                        | $          | 130,118                                  |       | $                                          | 40,980     |   | $ | 89,138 |   |
| *% of net sales*         | * *   | *100.0*                                     | *%*        | *100.0*                                     | *%*        | *100.0*                                  | *%*        | *100.0*                                    | %          |
| Cost of sales            |       | 124,710                                     |       | 103,068                                     |       | 32,071                                   |       | 70,997                                     |       |
| *% of net sales*         | * *   | *82.5*                                      | *%*        | *79.2*                                      | *%*        | *78.3*                                   | *%*        | *79.6*                                     | %          |
| * *                 | * *   | * *                                    | * *   | * *                                    | * *   | * *                                 | * *   | * *                                   |       |
| * *                 | * *   | * *                                    | * *   | * *                                    | * *   | * *                                 | * *   | * *                                   |       |
| Gross profit             |       | 26,500                                      |       | 27,050                                      |       | 8,909                                    |       | 18,141                                     |       |
| *% of net sales*         | * *   | *17.5*                                      | *%*        | *20.8*                                      | *%*        | *21.7*                                   | *%*        | *20.4*                                     | %          |
| Operating expenses       |       | 10,169                                      |       | 9,802                                       |       | 4,188                                    |       | 5,614                                      |       |
| *% of net sales*         | * *   | *6.7*                                       | *%*        | *7.5*                                       | *%*        | *10.2*                                   | *%*        | *6.3*                                      | %          |
| * *                 | * *   | * *                                    | * *   | * *                                    | * *   | * *                                 | * *   | * *                                   |       |
| * *                 | * *   | * *                                    | * *   | * *                                    | * *   | * *                                 | * *   | * *                                   |       |
| Operating income         |       | 16,331                                      |       | 17,248                                      |       | 4,721                                    |       | 12,527                                     |       |
| *% of net sales*         | * *   | *10.8*                                      | *%*        | *13.3*                                      | *%*        | *11.5*                                   | *%*        | *14.1*                                     | %          |
| Other expenses:          |       |                                        |       |                                        |       |                                     |       |                                       |       |
| Interest expense         |       | 9,394                                       |       | 4,987                                       |       | 835                                      |       | 4,152                                      |       |
| *% of net sales*         | * *   | *6.2*                                       | *%*        | *3.8*                                       | *%*        | *2.0*                                    | *%*        | *4.7*                                      | %          |
| Other loss (income), net |       | 3,411                                       |       | (76                                         | )          | (28                                      | )          | (48                                        | )          |
| *% of net sales*         | * *   | *2.3*                                       | *%*        | *-0.1*                                      | *%*        | *-0.1*                                   | *%*        | *-0.1*                                     | %          |
| Income tax expense       |       | 1,280                                       |       | 4,553                                       |       | 1,404                                    |       | 3,149                                      |       |
| *% of net sales*         | * *   | *0.8*                                       | *%*        | *3.5*                                       | *%*        | *3.4*                                    | *%*        | *3.5*                                      | %          |
| * *                 | * *   | * *                                    | * *   | * *                                    | * *   | * *                                 | * *   | * *                                   |       |
| * *                 | * *   | * *                                    | * *   | * *                                    | * *   | * *                                 | * *   | * *                                   |       |
| Net income               |       | 2,246                                       |       | 7,784                                       |       | 2,510                                    |       | 5,274                                      |       |
| *% of net sales*         | * *   | *1.5*                                       | *%*        | *6.0*                                       | *%*        | *6.1*                                    | *%*        | *5.9*                                      | *%*        |
| * *                 | * *   | * *                                    | * *   | * *                                    | * *   | * *                                 | * *   | * *                                   | * *   |
|                          |            |                                             |            |                                             |            |                                          |            |                                            |            |  |  |  |  |

 

*Net sales.*  Net sales increased $21.1 million, or16.2%, from $130.1 million for the nine months ended September 30,2003 to $151.2 million for the nine months ended September 30, 2004.Our hardwood product line increased $21.9 million and is attributable to acombination of (i) increases in volume due in part to overall industrygrowth and in part to market share gain, and (ii) price adjustments due toincreases in raw material costs. This increase is partially offset by a $0.8million decrease in sales in our engineered wood products line due to a partialloss of market share by some of our customers and a softening in this marketsector.

 

*Cost of sales.*  Cost of sales increased $21.6 million,or 21.0%, from $103.1 million for the nine months ended September 30, 2003to $124.7 million for the nine months ended September 30, 2004. Thisincrease in cost of sales is attributable to (i) increased material, laborand overhead costs related to volume growth, (ii) inflation, primarily inrespect of raw material costs, in each case related to both our hardwood andengineered wood product lines, and (iii) inefficiencies in material andlabor utilization in the hardwood product line due to the increased demand andthe importance of on-time deliveries to our customers. These costs werepartially offset by gains in operational efficiency in the engineered woodproduct line and by spreading our fixed costs over a larger sales base.

 

*Gross profit.*  Gross profit decreased $0.5 million, or1.9%, from $27.0 million for the nine months ended September 30, 2003to $26.5 million for the same period in 2004 as a result of the factorsdescribed above. As a percentage of net sales, our gross profit decreased 330basis points from 20.8% for the nine months ended September 30, 2003 to17.5% for the same period in 2004. This decrease reflects (i) increases inour raw material costs compared to the same period in 2003 and(ii) inefficiencies in material and labor utilization in the hardwoodproduct line, offset in part by (iii) the spreading of our fixed costsover a larger sales base.

 

*Operating expenses.*  Operating expenses increased $0.4 million, or4.1%, from $9.8 million for the nine month period ended September 30, 2003 to$10.2 million for the same period in 2004. The increase consists of (i) $0.8 million of additional incentivecompensation paid to certain key employees in February 2004 in recognitionof our improved financial performance and the successful completion of theoffering of the old notes, (ii) a $0.5 million increase in bad debtexpense due to a reversal of an allowance for doubtful account reserve in 2003,(iii) $0.8 million due to the inclusion of five full months of operationsof Grand Valley in 2004, and ( iv) approximately $0.4 million of inflationon wages, insurance and additional headcount needed to support salesgrowth.  This increase was offsetpartially by (i) $0.2 million in lower stock compensation expense,(ii) $1.5 million in cash payments to holders of the

 

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predecessors capital stock for certain tax liabilities incurred uponthe sale of capital stock in April 2003, (iii) $0.2 millionwrite-down of an impaired asset in 2003, (iv) $0.1 million ofperiodic fees paid to the private equity firm which managed the equity fundthat owned the predecessor and (v) $0.1 million of professional fees.

 

*Operating income.*  Operating income decreased by$0.9 million, or 5.2%, from $17.2 million for the nine months endedSeptember 30, 2003 to $16.3 million for the nine months endedSeptember 30, 2004 as a result of the net effect of the factors describedabove.

 

*Interest expense.*  Interest expense increased $4.4 million,or 88.0%, from $5.0 million for the nine months ended September 30,2003 to $9.4 million for the nine months ended September 30, 2004.Amortization of deferred financing fees accounted for $0.2 million of theincrease. The remaining increase related to the increase in debt and the higherinterest rate on the senior credit facility established in connection with theAcquisition in April 2003 and the issuance of $120.0 million seniornotes in February 2004.

 

*Other loss (income).*  Other loss (income) changed from $76,000 ofother income for the nine months ended September 30, 2003 to$3.4 million of other loss for the nine months ended September 30,2004 resulting from the write-off of financing fees related to the seniorcredit facility from April 2003 which was subsequently paid-off inFebruary 2004.

 

*Income tax expense.*  Income tax expense decreased $3.2 million,or 71.1% from $4.5 million for the nine months ended September 30,2003 to $1.3 million for the nine months ended September 30, 2004 asa result of lower earnings. The effective tax rate decreased 60 basis pointsfrom 36.9% in 2003 to 36.3% in 2004 due to permanent differences.

 

*Net income.*  Net income decreased $5.6 million, or71.8%, from $7.8 million for the nine months ended September 30, 2003to $2.2 million for the nine months ended September 30, 2004 as aresult of the factors described above.

 

**Liquidity and Capital Resources**

 

Our primary cash needs are working capital, capital expenditures anddebt service. We have historically financed these cash requirements throughinternally generated cash flow and funds borrowed under our prior and existingsenior secured credit facilities.

 

*Refinancing*. On February 18, 2004, we repaid the entire outstanding balanceof our old senior secured credit facility and terminated the related creditagreement. Under that credit facility, we had three outstanding term loans anda $15.0 million revolving credit facility. As of December 31, 2003,we had a $1.8 million outstanding balance under the revolving creditfacility and $73.1 million outstanding under our term loans. Two of ourterm loans, Term Loan A and Term Loan B, accrued interest at variable rates andour third term loan, Term Loan C, accrued interest at the fixed rates of 12%cash interest and 3% payment in kind, or PIK, interest. The interest rates onTerm Loan A, Term Loan B and Term Loan C were 5.0%, 5.4% and 15.0% (including3.0% PIK interest), respectively, as of December 31, 2003. Borrowingsunder our old credit facility were secured by substantially all of our assets.Under our old credit facility we were required to comply with certain financialcovenants, including maintenance of financial ratios and limitations on some ofour business transactions. As of December 31, 2003, we were in compliancewith these covenants. On February 18, 2004 we replaced our old creditfacility with a new senior secured revolving credit facility. Our existingcredit facility provides for revolving credit of up to $25.0 millionsubject to a borrowing base and outstanding principal bears interest at afluctuating rate equal to, at our option, either the base rate plus 2 1¤4% per annum or LIBOR plus 3 1¤2% per annum for the first twelve months thefacility is in place and thereafter either the base rate plus 2% per annum orLIBOR plus 3 1¤4% per annum when the ratio of total debt totrailing twelve month EBITDA is less than 4.0 to 1.0. As of September 30,2004, we had $3.5 million outstanding under our credit facility. We mustcomply with certain financial covenants under our credit facility including maintenanceof a minimum fixed charge coverage ratio, a maximum total leverage ratio and anEBITDA minimum. As of December 31, 2003, we also had $4.4 million ofcapital lease debt obligations unrelated to the credit facility, of which$0.9 million was current and as of September 30, 2004 we had$3.8 million of capital lease obligations, of which $0.8 million wascurrent.

 

In April 2003, in connection with the Acquisition, we issuedapproximately $20 million of our Convertible Subordinated Notes dueApril 9, 2004, which bore PIK interest at the rate of 5%. The notes, alongwith any accrued and unpaid interest, were convertible, at the option of theholders, at any time prior to maturity, unless previously redeemed, into sharesof our voting common stock at a conversion price of $3.00 per share, subject tocertain adjustments. The notes were subordinated to our senior indebtedness. OnFebruary 9, 2004, the notes were converted into 6,950,000 shares of ourcommon stock.

 

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In July 2003, we entered into an interest rate collar transactionwith respect to the variable interest rates on a portion of the debt describedabove for an approximate notional amount of $55.6 million in order to fixthe LIBOR index rate between 1.2% and 6.0%. To the extent that the index ratewas below the 1.2% floor, we were required to pay the difference between thefloor and the actual rate. To the extent that the index rate was above the 6.0%cap, we were entitled to receive the difference between the cap and the actualrate. The index rate at December 31, 2003 was 1.16% and we accrued anassociated liability. At December 31, 2003, the value of the asset relatedto the interest rate collar was approximately $148,000. The related asset isclassified in other assets. We discontinued this interest rate hedge in connectionwith the repayment of our old credit facility as described above.

 

Our existing senior secured revolving credit facility and the indenturefor the 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, 2003, we hadapproximately $40,000 of cash and cash equivalents available for workingcapital purposes. As of September 30, 2004, we had approximately $0.2million of cash and cash equivalents available for working capital purposes.Cash provided by operating activities for the nine months endedSeptember 30, 2004 was $10.2 million compared to $17.4 millionfor the same period in 2003.

 

*Cash flow from investing activities.*  Net cash used in investing activities was$19.8 million for the first nine months of 2004 compared to$3.1 million used in the same period in 2003. Capital expenditures were$3.7 million for the nine months ended September 30, 2004 compared to$3.2 million for the same period in 2003. Cash flow from investingactivities includes $15.9 million for our Grand Valley acquisition for thenine month period ended September 30, 2004.

 

*Cash flow from financing activities.*  Net cash provided by financing activities forthe nine months ended September 30, 2004 totaled $9.8 million andincludes cash inflows for the $120.0 million offering of senior notes, anincrease in the new credit facility of $1.2 million in conjunction withthe offering of our 10% senior notes, issuance of common stock of$8.3 million in conjunction with the Grand Valley acquisition, and anincrease in the revolver of approximately $1.7 million. Net cash used byfinancing activities for the nine months ended September 30, 2004 includesthe payment to extinguish the old credit facility of $75.0 million, adividend distribution of $21.5 million, a repurchase of common stock of$17.5 million and $7.4 million of debt issuance cost in connection withthe offering of $120.0 million of our 10% senior notes due 2012.

 

Net cash used by financing activities in the nine month period endedSeptember 30, 2003 totaled $16.0 million and consisted primarily ofrequired principal payments on fixed term debt obligations, payment of$6.9 million to satisfy the full obligation under the Industrial RevenueBonds and a reduction in the revolver.

 

*Dividends.*  In the three months ended March 31,2003, the predecessor paid a dividend in the amount of $11.4 million to itspreferred shareholders. We are limited by our current debt covenants regardingthe payment of dividends. On February 24, 2004, we used $39.0 millionof the net proceeds from the offering of the old notes to make payments to ourstockholders through a combination of dividends and redemptions of commonstock. The payment of the dividend and the stock redemption could result inimpairment of goodwill on the balance sheet. The goodwill impairment wouldaffect net income and may result in negative net worth on the balance sheet. Asof September 30, 2004, there was no goodwill impairment charge associatedwith these payments.

 

We anticipate that the funds generated by operations and fundsavailable under the senior secured revolving 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 revolving credit facility in anamount sufficient to enable us to service our indebtedness, including thenotes, or to fund our other liquidity needs. In addition, we cannot provideassurances that we will be able to refinance any of our indebtedness, includingour senior secured revolving credit facility and the notes, on commerciallyreasonable terms, if at all.

 

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**Inflation**

 

Our cost of sales is subject to inflationary pressures on labor costs,prices of the raw materials we use and various overhead costs. We generallyhave been able over time to offset the effects of inflation and pricefluctuations through a combination of sales price increases and operationalefficiencies.

 

**Seasonality**

 

Our sales historically have been moderately seasonal, reflecting thetemporary slow down in consumer purchasing activity during the winter holidayseason and the summer months.

 

**Critical Accounting Policies**

 

The preparation of financial statements in conformity with GAAPrequires management to make estimates, assumptions and judgments that affectthe reported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Because of theuncertainty inherent in these matters, actual results could differ from thoseestimates. We believe that the estimates, assumptions and judgments involved inthe accounting policies below have the greatest potential impact on ourfinancial statements.

 

*Revenue recognition.*  We recognize revenues and related cost ofsales when title passes, which is usually upon shipment of product under FOBshipping point terms. Returns are estimated and provided for at the time ofsale based on historical experience and current trends.

 

*Allowance for doubtful accounts.*  We make estimates of potentiallyuncollectible accounts receivable. Our reserves are based on an analysis ofcustomers’ accounts and historical write-off experience. Our analysis includesthe age of the receivable, customer creditworthiness and general economicconditions. We believe the results could be materially different if historicaltrends do not reflect actual results or if economic conditions worsened.

 

*Goodwill.*  We adopted Statement of Financial AccountingStandards, or SFAS, No. 142, Goodwill and Other Intangible Assets, andaccordingly have discontinued the amortization of goodwill. We evaluategoodwill for impairment annually or whenever an indicator of impairment occurs.If events or circumstances change, including reductions in anticipated cashflows generated by operations, goodwill could become impaired and result in acharge to earnings.

 

*Impairment of long-lived assets.*  We evaluate the carrying value of long-livedassets, such as property, plant and equipment, for impairment when events orchanges in circumstances indicate that the carrying amount of an asset or groupof assets may not be recoverable. Assets are grouped and evaluated forimpairment at the lowest level for which there are identifiable cash flows. Ifimpairment indicators are present and the estimated future undiscounted cash flowsare less than the carrying value of the asset or group of assets, the carryingvalue is reduced to its estimated fair value. Fair value is estimated based onthe best information available, including prices for similar assets or resultsof valuation techniques such as discounting estimated future cash flows.

 

*Insurance benefit accruals.*  Each accounting period, we estimate an amountto accrue for medical costs incurred but not yet reported under our self-fundedemployee medical and workers compensation insurance plans. We base ourdetermination on an evaluation of past rates of claim payouts and trends in theamount of payouts. This determination requires significant judgment and assumespast patterns are representative of future payment patterns. A significantshift in usage and payment patterns within these plans could necessitatesignificant adjustments to these accruals in future accounting periods.

 

*Purchase accounting.*  We accounted for our acquisitions under thepurchase method of accounting and, accordingly, the acquired assets andliabilities assumed are recorded at their respective fair values. The recordedvalues of assets and liabilities are based on third-party estimates andvaluations when available. The remaining values are based on management’sjudgments and estimates. Our financial position and results from operations maybe affected by changes in estimates and judgments.

 

*Income taxes.*  As part of the process of preparing ourconsolidated financial statements, we are required to estimate our income ineach of the jurisdictions in which we operate. This process involves estimatingour actual current tax exposure along with assessing temporary differencesresulting from differing treatment of items, such as capital assets, for taxand accounting purposes. These differences result in deferred tax assets andliabilities, which are included within our consolidated balance sheets. We alsomust assess the likelihood that our deferred tax asset will be recovered fromtaxable income and, to the extent we believe recovery is not likely, we mustestablish a valuation allowance.

 

19

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Item 3.Quantitative and Qualitative Disclosures about Market Risk

 

We are subject to various market risks such as fluctuating lumberprices and interest rates.

 

*Commodity price risk.*  Hardwood lumber accounts for the largestportion of our material costs. Our profitability is therefore affected by theprices of lumber which may fluctuate based on a number of factors beyond ourcontrol, including, among others, changes in supply and demand, generaleconomic conditions, labor costs, competition and, in some cases, governmentregulation. Though we are not dependent on any single supplier for our rawmaterials, we have no long-term supply contracts and thus, are subject tochanges in the prices charged by our suppliers. The prices for the primaryhardwood species we use in the production of our hardwood doors and componentsare subject to some volatility.

 

*Interest rate risk.*  We are exposed to market risk relating tochanges in interest rates in respect of a portion of our long-term debt and aportion of our capital leases. As of September 30, 2004, we had$3.5 million outstanding under our senior secured revolving creditfacility, all of which will bear interest at variable rates. In addition, as ofthat date, we had approximately $1.2 million of capital leases that bearinterest at variable rates. We believe that a one percent (1%) increase in theinterest rates currently in effect would not have a material adverse effect onour financial condition or results of operations.

 

Item 4.Controls and Procedures

 

(a)           Evaluation ofdisclosure controls and procedures.

 

As required by Rule 13a-15 under the Securities Exchange Act of1934, within the 90 days prior to the date of this report, we carried outan evaluation under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of our disclosure controls andprocedures. In designing and evaluating our disclosure controls and procedures,we and 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 believe that, as of the date ofcompletion of the evaluation, 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 internalcontrols.

 

None.

 

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**PART II—OTHER INFORMATION**

 

**Item2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

None.

 

Item 6.Exhibits

 

**(a)****           Exhibits**

 

31.1         Certificationof Chief Financial Officer of WII Components, Inc., pursuant toRules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 ofthe Sarbanes-Oxley Act of 2002

31.2         Certificationof Chief Executive Officer of WII Components, Inc., pursuant toRules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 ofthe Sarbanes-Oxley Act of 2002

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

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

 

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

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                     | WII COMPONENTS, INC. |
|--------------------------|----------------------|
|                     |                 |
| Dated: November 12, 2004 | By:                  |
|                     |                 | /s/ John Fitzpatrick |
|                     |                 | John Fitzpatrick |
|                     |                 | Chief Executive Officer |
|                     |                 | (Principal Executive Officer) |
| Dated: November 12, 2004 |                 |   |
|                     |                 | /s/ Dale B. Herbst |
|                     |                 | Dale B. Herbst |
|                     |                 | Chief Financial Officer |
|                     |                 | (Principal Financial and Accounting Officer) |

 

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