**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM 10-Q**

 

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

 

**For the quarterly period ended September 30, 2007**

 

**or**

 

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

 

**Commission file number:**

**333-115490**

 

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**WIICOMPONENTS, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                              | ** ** | **No. 73-1662631**                   |
|-----------------------------------------------------------|------------|--------------------------------------|
| (State of Incorporation)                                  |       | (I.R.S. Employer Identification No.) |
|                                                      |       |                                 |
| **525 Lincoln Avenue SE, St. Cloud, Minnesota 56304**     |
| (Address of principal executive offices) (Zip Code)       |
|                                                      |       |                                 |
| **(320) 252-1503**                                        |
| (Registrant’s telephone number, Including area code) |

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days.

 

Yes x  No o.

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.              (Checkone):

 

| Large Accelerated Filer o |   | Accelerated Filer o |   | Non-accelerated Filer  x. |
|--------------------------------|--------|---------------------|--------|--------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

 

Yes o  No ý.

 

Asof November 6, 2007, 100 shares of common stock, $.01 par value per share, wereoutstanding (all of which are owned by WII Holding, Inc.).

 

 

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**WII COMPONENTS, INC.**

 

**FORM 10-Q**

**Quarter Ended September 30, 2007**

 

**Table of Contents**

 
| **Part I—Financial Information**                                                                                                                     |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1. Financial Statements                                                                                                                              |   |
| Condensed  Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006  (unaudited)                                                        | 1      |
| Condensed  Consolidated Statements of Operations for the Three Months Ended September  30, 2007 and the Three Months Ended September 30, 2007 (unaudited) | 2      |
| Condensed  Consolidated Statements of Operations for the Nine Months Ended September 30,  2007 and the Nine Months Ended September 30, 2006 (unaudited)   | 3      |
| Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended September 30,  2007 and the Nine Months Ended September 30, 2006 (unaudited)   | 4      |
| Notes  to Condensed Consolidated Financial Statements (unaudited)                                                                                         | 5      |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                       | 9      |
| Item 3. Quantitative and Qualitative Disclosures about  Market Risk                                                                                       | 14     |
| Item 4. Controls and Procedures                                                                                                                           | 15     |
|                                                                                                                                                      |   |
| **Part II—Other Information**                                                                                                                        |   |
| Item  1. Legal Proceedings                                                                                                                                | 16     |
| Item 1A. Risk Factors                                                                                                                                     | 16     |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                                                                      | 16     |
| Item 3. Defaults Upon Senior Securities                                                                                                                   | 16     |
| Item 4. Submission of Matters to a Vote of Security  Holders                                                                                              | 16     |
| Item  5. Other Information                                                                                                                                | 16     |
| Item 6. Exhibits                                                                                                                                          | 16     |
| Signatures                                                                                                                                                | 17     |

 

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**WII COMPONENTS, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCESHEETS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                                    | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                    | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current Assets:                               |       |                         |       |                        |       |
| Cash                                          |       | $                            | 10,048     |                        | $          | 8,048 |   |
| Accounts receivable, net                      |       | 19,727                       |       | 11,322                      |       |
| Inventories                                   |       | 20,481                       |       | 21,500                      |       |
| Other current assets                          |       | 8,462                        |       | 1,908                       |       |
| Total current assets                          |       | 58,718                       |       | 42,778                      |       |
|                                          |       |                         |       |                        |       |
| Property, plant, and equipment, net           |       | 60,583                       |       | 59,876                      |       |
| Goodwill                                      |       | 112,748                      |       | 108,748                     |       |
| Customer relationship                         |       | 11,995                       |       | 13,239                      |       |
| Noncompete agreements                         |       | 108                          |       | 384                         |       |
| Other assets                                  |       | 6,910                        |       | 5,289                       |       |
| TOTAL                                         |       | $                            | 251,062    |                        | $          | 230,314 |   |
| ** **                                    | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY** | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current Liabilities:                          |       |                         |       |                        |       |
| Current maturities of long-term debt          |       | $                            | 2,020      |                        | $          | 581 |   |
| Accounts payable                              |       | 6,399                        |       | 4,937                       |       |
| Accrued payroll                               |       | 3,518                        |       | 3,826                       |       |
| Other current liabilities                     |       | 19,342                       |       | 12,101                      |       |
| Total current liabilities                     |       | 31,279                       |       | 21,445                      |       |
|                                          |       |                         |       |                        |       |
| Long-term debt, net of current maturities     |       | 127,681                      |       | 128,030                     |       |
| Deferred income tax liability                 |       | 5,505                        |       | 2,560                       |       |
| Other noncurrent liabilities                  |       | 2,419                        |       | 300                         |       |
|                                          |       |                         |       |                        |       |
| Stockholders’ Equity:                    |       |                         |       |                        |       |
| Common stock—voting                      |       | —                       |       | 217                         |       |
| Common stock—nonvoting                   |       | —                       |       | 9                           |       |
| Additional paid-in capital                    |       | 71,532                       |       | 56,244                      |       |
| Retained earnings                             |       | 12,646                       |       | 21,509                      |       |
| Total stockholders’ equity               |       | 84,178                       |       | 77,979                      |       |
| TOTAL                                         |       | $                            | 251,062    |                        | $          | 230,314 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

1

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**WII COMPONENTS, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                         | ** ** | **Three Months  Ended**          | ** ** | **Three Months  Ended**          | ** ** |
|------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **September 30, 2007** | ** ** | **September 30, 2006** | ** ** |
| NET SALES                          |       | $                                | 64,958     |                             | $          | 69,852 |   |
| COST OF SALES                      |       | 54,324                           |       | 57,894                           |       |
| Gross profit                       |       | 10,634                           |       | 11,958                           |       |
|                               |       |                             |       |                             |       |
| OPERATING EXPENSES:                |       |                             |       |                             |       |
| General and administrative         |       | 2,881                            |       | 3,748                            |       |
| Selling and marketing              |       | 869                              |       | 838                              |       |
| Gain on sale of assets             |       | —                           |       | (123                             | )          |
| Total operating expenses           |       | 3,750                            |       | 4,463                            |       |
|                               |       |                             |       |                             |       |
| OPERATING INCOME                   |       | 6,884                            |       | 7,495                            |       |
|                               |       |                             |       |                             |       |
| OTHER INCOME (EXPENSE):            |       |                             |       |                             |       |
| Interest income                    |       | 149                              |       | 10                               |       |
| Interest expense                   |       | (3,821                           | )          | (3,551                           | )          |
| Other (expense) income             |       | (1                               | )          | 2                                |       |
| Total other expense                |       | (3,673                           | )          | (3,539                           | )          |
|                               |       |                             |       |                             |       |
| INCOME BEFORE INCOME TAX PROVISION |       | 3,211                            |       | 3,956                            |       |
| INCOME TAX PROVISION               |       | 1,568                            |       | 1,405                            |       |
| NET INCOME                         |       | $                                | 1,643      |                             | $          | 2,551 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

2

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**WII COMPONENTS, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                         | ** ** | **Nine Months  Ended**           | ** ** | **Nine Months  Ended**           | ** ** |
|------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **September 30, 2007** | ** ** | **September 30, 2006** | ** ** |
| NET SALES                          |       | $                                | 193,740    |                             | $          | 221,955 |   |
| COST OF SALES                      |       | 158,686                          |       | 184,211                          |       |
| Gross profit                       |       | 35,054                           |       | 37,744                           |       |
|                               |       |                             |       |                             |       |
| OPERATING EXPENSES:                |       |                             |       |                             |       |
| General and administrative         |       | 18,557                           |       | 11,323                           |       |
| Selling and marketing              |       | 2,521                            |       | 2,497                            |       |
| Loss (gain) on sale of assets      |       | 51                               |       | (129                             | )          |
| Total operating expenses           |       | 21,129                           |       | 13,691                           |       |
|                               |       |                             |       |                             |       |
| OPERATING INCOME                   |       | 13,925                           |       | 24,053                           |       |
|                               |       |                             |       |                             |       |
| OTHER INCOME (EXPENSE):            |       |                             |       |                             |       |
| Interest income                    |       | 298                              |       | 40                               |       |
| Interest expense                   |       | (11,677                          | )          | (10,519                          | )          |
| Other expense                      |       | (2                               | )          | —                           |       |
| Total other expense                |       | (11,381                          | )          | (10,479                          | )          |
|                               |       |                             |       |                             |       |
| INCOME BEFORE INCOME TAX PROVISION |       | 2,544                            |       | 13,574                           |       |
| INCOME TAX PROVISION               |       | 1,261                            |       | 5,301                            |       |
| NET INCOME                         |       | $                                | 1,283      |                             | $          | 8,273 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

3

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**WII COMPONENTS, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                                                                                | ** ** | **Nine Months  Ended**           | ** ** | **Nine Months  Ended**           | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                | ** ** | **September 30, 2007** | ** ** | **September 30, 2006** | ** ** |
| OPERATING ACTIVITIES:                                                                     |       |                             |       |                             |       |
| Net income                                                                                |       | $                                | 1,283      |                             | $          | 8,273 |   |
|                                                                                      |       |                             |       |                             |       |
| Adjustments to reconcile net (loss) income to net cash provided by  operating activities: |       |                             |       |                             |       |
| Depreciation and amortization                                                             |       | 6,550                            |       | 5,784                            |       |
| Loss (gain) on sale of assets                                                             |       | 51                               |       | (129                             | )          |
| Amortization of debt issue costs                                                          |       | 1,940                            |       | 807                              |       |
| Deferred income taxes                                                                     |       | (33                              | )          | —                           |       |
| Stock compensation expense                                                                |       | 1,420                            |       | 3,338                            |       |
| Current portion of tax benefit due to Seller                                              |       | (4,106                           | )          | —                           |       |
|                                                                                      |       |                             |       |                             |       |
| Change in operating assets and liabilities:                                               |       |                             |       |                             |       |
| Accounts receivable                                                                       |       | (8,405                           | )          | (1,196                           | )          |
| Inventories                                                                               |       | 1,019                            |       | (1,977                           | )          |
| Other current assets                                                                      |       | 3,995                            |       | 578                              |       |
| Accounts payable                                                                          |       | 1,533                            |       | 349                              |       |
| Accrued payroll and other current liabilities                                             |       | (3,167                           | )          | (5,529                           | )          |
| Other long-term liabilities                                                               |       | 114                              |       | —                           |       |
| Net cash provided by operating activities                                                 |       | 2,194                            |       | 10,298                           |       |
|                                                                                      |       |                             |       |                             |       |
| INVESTING ACTIVITIES:                                                                     |       |                             |       |                             |       |
| Purchases of property, plant, and equipment                                               |       | (5,897                           | )          | (13,337                          | )          |
| Proceeds from sale of assets                                                              |       | 38                               |       | 202                              |       |
| DMI earn-out payment                                                                      |       | (4,000                           | )          | —                           |       |
| Net cash used in investing activities                                                     |       | (9,859                           | )          | (13,135                          | )          |
|                                                                                      |       |                             |       |                             |       |
| FINANCING ACTIVITIES:                                                                     |       |                             |       |                             |       |
| Principal payments under long-term financing agreements                                   |       | (9,061                           | )          | (1,852                           | )          |
| Recapitalization — equity contribution                                               |       | 21,747                           |       | —                           |       |
| Debt issuance costs                                                                       |       | (3,616                           | )          | —                           |       |
| Recapitalization — repurchase of stock options                                       |       | (7,879                           | )          | —                           |       |
| Distribution on behalf of Parent                                                          |       | (1,678                           | )          | —                           |       |
| Issuance of Common Stock                                                                  |       | —                           |       | 23                               |       |
| Borrowings of long-term debt                                                              |       | 10,152                           |       | 900                              |       |
| Net cash provided by (used in) financing activities                                       |       | 9,665                            |       | (929                             | )          |
|                                                                                      |       |                             |       |                             |       |
| NET INCREASE (DECREASE) IN CASH                                                           |       | 2,000                            |       | (3,766                           | )          |
| CASH—Beginning of period                                                             |       | 8,048                            |       | 3,981                            |       |
|                                                                                      |       |                             |       |                             |       |
| CASH—End of period                                                                   |       | $                                | 10,048     |                             | $          | 215 |   |
|                                                                                      |       |                             |       |                             |       |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                                       |       |                             |       |                             |       |
| Cash paid for interest                                                                    |       | $                                | 12,772     |                             | $          | 12,600 |   |
|                                                                                      |       |                             |       |                             |       |
| Cash paid for income taxes                                                                |       | $                                | 626        |                             | $          | 6,360 |   |
| NONCASH ACTIVITY:                                                                         |       |                             |       |                             |       |
| Recapitalization — repurchase of common stock funded by the Parent                   |       | $                                | 226        |                             | $          | — |   |
|                                                                                      |       |                             |       |                             |       |
| Future tax benefit due to Seller in:                                                      |       |                             |       |                             |       |
| Other current assets                                                                      |       | $                                | (5,985     | )                                | $          | — |   |
| Other current liabilities                                                                 |       | $                                | 7,073      |                             | $          | — |   |
| Other long-term liabilities                                                               |       | $                                | 2,004      |                             | $          | — |   |
| Deferred income taxes — recapitalization                                             |       | $                                | 2,945      |                             | $          | — |   |
|                                                                                      |       |                             |       |                             |       |
| Capital expenditures in accounts payable                                                  |       | $                                | 348        |                             | $          | 500 |   |
|                                                                                      |       |                             |       |                             |       |
| Note receivable received in connection with the sale of property,  plant and equipment    |       | $                                | —     |                             | $          | 167 |   |
|                                                                                      |       |                             |       |                             |       |
| DMI earnout — contingent consideration                                               |       | $                                | —     |                             | $          | 1,000 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

4

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**WII COMPONENTS, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED**

**CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.  BASIS OFPRESENTATION**

***Company Background-***  WII Components, Inc., a Delawarecorporation (the “Company”), was formed in April 2003 to acquire 100% of the common stock of WoodcraftIndustries, Inc. and Subsidiaries in a leveraged acquisition.

On January 9, 2007, theCompany was acquired by WII Holding, Inc. (“Parent”), a newly formed investmententity controlled by Olympus Growth Fund IV, L.P. (“Olympus”).  Theacquisition was consummated through a merger of WII Merger Corporation (“MergerCo”),a wholly owned subsidiary of Parent, with and into the Company with the Companybeing the surviving corporation in the merger (the “Merger”) pursuant to anAmended and Restated Agreement and Plan of Merger, dated as of January 5, 2007,by and among Parent, MergerCo, the Company, and Behrman Capital III L.P.  Theaggregate purchase price paid by Parent for all of the shares of capital stockof the Company and options to purchase shares of capital stock of the Companyin the Merger was approximately $295.5 million, less indebtedness and certainexpenses, and subject to customary adjustments. The aggregate purchase price and related fees and expenses were fundedby new credit facilities and private offerings of debt and equity securities byParent and the Company.  The Merger hasbeen accounted for as a recapitalization in the Company’s financial statements,with no adjustments to the historical basis of the Company’s assets andliabilities.  The Company did not pushdown the basis because of the significance of the publicly traded debtoutstanding, which hinders the Parent’s ability to control the form of ownershipof the Company.

 

TheCompany prepared the accompanying unaudited condensed consolidated financialstatements following the requirements of the Securities and Exchange Commissionfor interim reporting. As permitted under those rules, certain notes or otherfinancial information normally required by accounting principles generallyaccepted in the United States of America have been condensed or omitted.Therefore, the Company suggests that these financial statements be read inconjunction with the consolidated financial statements and accompanying notesfor the year ended December 31, 2006 included in its Form 10-K as filedwith the Securities and Exchange Commission on March 28, 2007. The condensedconsolidated balance sheet as of December 31, 2006 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, theaccompanying unaudited condensed consolidated financial statements include alladjustments (consisting of normal recurring items) considered necessary topresent fairly, when read in conjunction with the consolidated financialstatements and accompanying notes for the period ended December 31, 2006included in our 10-K as filed with the Securities and Exchange Commission onMarch 28, 2007, our financial position, results of operations and cash flowsfor the periods presented.

 

Theunaudited condensed consolidated financial statements include the accounts ofthe Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in thepreparation of the consolidated financial statements.

 

**2.  SIGNIFICANT ACCOUNTINGPOLICIES**

 

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

 

| ** **      | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------|------------|-------------------------|------------|------------------------|------------|
| Raw materials   |       | $                       | 11,461     |                   | $          | 12,270 |   |
| Work in process |       | 5,077                   |       | 4,768                  |       |
| Finished goods  |       | 4,088                   |       | 5,037                  |       |
| LIFO adjustment |       | (145                    | )          | (575                   | )          |
|            |       | $                       | 20,481     |                   | $          | 21,500 |   |

 

Themajority of inventory is valued at the lower of last-in, first-out (“LIFO”)cost or market. The remainder of the inventory is valued under the first-in,first-out method (“FIFO”). As of September 30, 2007 and December 31, 2006,inventory on the LIFO method represented 62% and 61%, respectively, ofconsolidated inventories.

 

***Goodwill***—In 2002, the Company adopted and accounts forgoodwill in accordance with Statement of Financial Accounting Standards (“SFAS”)No. 142, *Goodwill and Other IntangibleAssets*. In part, SFAS No. 142 states that companies are nolonger required to amortize goodwill but instead must evaluate goodwill forimpairment at least annually.  TheCompany has elected to perform its annual tests for goodwill impairment as ofDecember 31 of each year. Fair value is measured using a market multiplevaluation method.  The carrying amount ofgoodwill increased from $108.7 million at December 31, 2006 to $112.7 millionat September 30, 2007 due to an accelerated Dimension Moldings, Inc. earn-outpayment as a result of the change in control caused by the Merger.

 

5

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***CustomerRelationship—***Customer relationships relate to intangible assetsrecorded in the Grand Valley and Dimension Moldings, Inc. acquisition forrelationships with a significant customer. The original cost of thesecustomer relationships is $16.6 million, and the related accumulatedamortization as of September 30, 2007 is $4.6 million.  The intangible assets are beingamortized over the estimated life of 10 years. Amortization for the nine-monthperiod ended September 30, 2007 was $1,243,000. Expected annual amortization is as follows for the years ending December31 (in thousands):

 

| 2007      |   | $     | 1,658  |   |
|-----------|--------|-------|--------|--------|
| 2008      |   | 1,657 |   |
| 2009      |   | 1,658 |   |
| 2010      |   | 1,657 |   |
| 2011      |   | 1,658 |   |
| 2012-2015 |   | 4,951 |   |

 

***Noncompete Agreement***—Noncompeteagreements primarily relate to agreements with the former owners of Brentwood,Grand Valley, and Dimension Moldings, Inc. The original cost of thesenoncompete agreements is $2.4 million, and the related accumulated amortizationas of September 30, 2007 is $2.3 million. Noncompete rights are being amortized over the applicable terms of theagreements (5 years, 7 years, and 5 years respectively), and areexpected to be fully amortized by July 2007, April 2011, and July2010 respectively. Amortization for the nine-month period ended September 30,2007 was $277,000.  Expected annualamortization is as follows for the years ending December 31 (inthousands):

 

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

 

***UncertainTax Positions*****-** TheCompany adopted the provisions of Financial Accounting Standards Board (“FASB”)Interpretation No. 48 *Accounting for Uncertaintyin Income Taxes-an interpretation of FASB Statement No. 109* (“FIN 48”),on January 1, 2007.  FIN 48 clarifies theaccounting for uncertainty in income taxes by defining criteria that a taxposition on an individual matter must meet before that position is recognizedin the financial statements.  Additionally,FIN 48 provides guidance for measurement, derecognition, classification,interest and penalties, accounting for interim periods, disclosures andtransition.

 

As a result of the implementation of FIN 48, theCompany recognized a $1.4 million decrease in the liability for uncertain taxpositions which, as required, was accounted for as an increase to the January1, 2007 balance of retained earnings. The decrease is the result of the derecognition of certain tax positionstaken in prior years that mgmt feels are sustainable based on auditresults.  In addition, the followinginformation required by FIN 48 is provided:

 
| • |   | Unrecognized tax  benefits were approximately $113,000 and $114,000 as of January 1, 2007 and  September 30, 2007, respectively. If these unrecognized tax benefits were  recognized approximately $114,000 would impact the effective tax rate. While  it is expected that the amount of unrecognized tax benefits will change in  the next 12 months, we do not expect the change to have a significant impact  on the results of operations or the financial position of the Company. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| • |   | The Company recognizes  interest expense and penalties related to the above unrecognized tax benefit  within income tax expense. The Company had accrued interest and penalties of  approximately $22,000 and $23,000 as of January 1, 2007 and September 30,  2007, respectively.                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| • |   | The Company is  currently open to an audit under the statute of limitations by the Internal  Revenue Service for the years ending December 31, 2003 through 2006. The  Company files in numerous state jurisdictions with varying statutes of  limitation. The Company’s unrecognized state tax benefits are related to  state returns open from 2002 through 2006 depending on each state’s statute  of limitations.                                                          |

 

***Stock Options*****—**In April 2003, the 2003Stock Option and Grant Plan (“2003 Plan”) was approved by the stockholders ofthe Company. The 2003 Plan allowed the granting of both incentive stock optionsand nonqualified stock options. Under the terms of the 2003 Plan, a maximum of2,500,000 shares of stock, subject to adjustment, were made available forawards to officers, employees, directors, consultants, and other key persons ofthe Company. Awards included, but were not limited to, stock options,restricted stock, unrestricted stock awards, and substitute performanceawards.  Option awards were generallygranted with an exercise price equal to the calculated fair market value of thecompany’s stock.  Options generallyvested over four years and had 10-year contractual terms.  On May 31, 2006, the 2003 Plan was amended bythe Board to provide for the issuance of an additional 500,000 options for atotal of 3,000,000 options.  The stockholdersapproved the amendment on June 8, 2006. As a result of the Merger, the 2003 Plan was terminated on January 9,2007.  In addition, all of the options,which were outstanding at the time of the Merger were deemed to be fully vestedand then terminated on January 9, 2007.

 

6

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***New Accounting Pronouncements***—In September 2006, the FASB issued SFASNo. 157, *Fair Value Measurements*.SFAS No. 157 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles and expands disclosures aboutfair value measurements. This Statement applies under other accountingpronouncements that require or permit fair value measurements, the FASB havingpreviously concluded in those accounting pronouncements that fair value is therelevant measurement attribute. Accordingly, this Statement does not requireany new fair value measurements. SFAS No. 157 is effective for fiscal yearsbeginning after December 15, 2007. We plan to adopt SFAS No. 157 beginning inthe first quarter of fiscal 2008. We are currently evaluating the impact, ifany, the adoption of SFAS No. 157 will have on our operating income or netearnings.

In February 2007, FASB Issued SFAS No. 159, *Establishing the Fair Value Option for FinancialAssets and Liabilities —Including an Amendment of FASB Statement No. 115 *(SFAS 159), which becomeseffective for fiscal periods beginning after November 15, 2007, the Company’sfiscal year 2008.  Under SFAS No. 159,companies may elect to measure specified financial instruments and warranty andinsurance contracts at fair value on a contract-by-contract basis, with changesin fair value recognized in earnings each reporting period.  The Company has not determined the impact, ifany, the adoption of this statement will have on its financial condition or resultsof operations.

**3. ACQUISITIONS**

 

On July 28, 2005, theCompany acquired substantially all of the assets of a moldings manufacturingcompany operating under the name of DMI. The Company paid a cash purchase price at closing of $9.3 million.  In addition, the Company was required to payup to an aggregate of $7.0 million if certain earnings targets are met at theend of each calendar year from 2005 to 2010, which may be accelerated uponcertain events.  The Company paid $2.0million of the earn-out consideration in the first quarter 2006.  As a result of the change in control caused by the Merger, the remaining$5.0 million potential earn-out obligation was accelerated and paid on January9, 2007, which included the $1.0 million accrued on June 30, 2006.  As a result of the additional earn-outconsideration paid, the total purchase price, including earn-out oracceleration obligations, resulted in goodwill of $5.1 million due to thepurchase price in excess of the net assets acquired.  The acquired assets of DMI are nowoperated and owned by Woodcraft Industries, Inc., the Company’s subsidiary.

 

On January 9, 2007, the Company was acquired byParent, a newly formed investment entity controlled by Olympus, in theMerger.  The aggregate purchase pricepaid by Parent for all of the shares of capital stock of the Company andoptions to purchase shares of capital stock of the Company in the Merger wasapproximately $295.5 million, less indebtedness and certain expenses, andsubject to customary adjustments.  Theaggregate purchase price and related fees and expenses were funded by newcredit facilities and private offerings of debt and equity securities by Parentand the Company.  The Merger has beenaccounted for as a recapitalization in the Company’s financial statements, withno adjustments to the historical basis of the Company’s assets and liabilities.

 

In conjunction with the Merger, the Company enteredinto a new senior credit facility (the “New Senior Credit Facility”), withCredit Suisse, Cayman Islands Branch, which provided for (i) a senior securedfirst lien term loan facility in an aggregate principal amount of $150.0million (the “First Lien Term Facility”) and (ii) a senior secured first lienrevolving credit facility in an aggregate principal amount up to $25.0 million,subject to certain conditions, (the “Revolving Facility” and, together with theFirst Lien Term Facility, the “First Lien Facilities”) of which $10.0 millionis available through a subfacility in the form of letters of credit.  Subject to certain conditions, the First LienTerm Facility may be increased by up to $30.0 million during the life of theFirst Lien Term Facility at the request of the Company with the consent fromthose lenders that agree to participate in such increase.  Subject to the foregoing which was, effectiveas of April 30, 2007, no additional borrowings are available under the FirstLien Term Facility beyond the $9.8 million outstanding at March 31, 2007.  As of September 30, 2007, the maximum amountof borrowings available to the Company under the Revolving Facility was $12.5million.  As of September 30, 2007borrowings of $9.4 million were outstanding under the First Lien TermFacility., and nothing was outstanding under the Revolving Facility.  The outstanding principal of suchindebtedness bears interest at a fluctuating rate equal to either the base rateplus an applicable margin per annum or LIBOR plus an applicable margin.  The New Senior Credit Facility is scheduledto mature January 2013.

 

In conjunction with the Merger, the Parent entered into Note PurchaseAgreements with OCM Mezzanine Fund II, L.P. and Olympus Growth Fund IV,L.P.  The Note Purchase Agreement withOCM Mezzanine Fund II, L.P. consisted of $43.0 million senior pay-in-kind noteswith no required principal amortization. The Note Purchase Agreement with Olympus Growth Fund IV, L.P. consistedof $43.0 million junior pay-in-kind notes with no required principalamortization.  These notes (the “ParentNotes”) are scheduled to mature in April 2012. During the term of the Parent Notes, Parent is able at its option to payinterest on the Parent Notes through the issuance of additional notes. TheCompany is not liable for, and has not otherwise guaranteed, any of theobligations of Parent with respect to the Parent Notes.  The Company is, however, subject to a numberof restrictive covenants under the Note Purchase Agreements. In addition, theCompany is limited in its ability to pay dividends or otherwise make distributionsto Parent under the New Senior Credit Facility and the indenture governing the$120.0 million of 10% Senior Notes due 2012 (the “10% Senior Notes due 2012”).  The Parent Notes are not reflected in the Company’sconsolidated balance sheet due to the significance of the public debt holders’influence on the Company’s ability to control the form of ownership.  Effective as of June 13, 2007, the Parentissued an additional $20.0 million of Parent Notes to Olympus Growth Fund IV,L.P., and purchased $20.0 million of Parent Notes from OCM Mezzanine Fund II,L.P.

 

7

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In conjunction with the Merger, Parent issued equity securities ofapproximately $86.2 million (including rollover equity from management) to fundthe equity necessary for the acquisition, consisting of $81.0 million ofpreferred equity securities and $5.2 million of common equity securities.  Preferred dividends accrue and accumulate onthe outstanding preferred equity securities at the rate of 10% per annum,compounding quarterly, on the sum of its liquidation value per share ($1,000)plus all accumulated and unpaid dividends thereon.  Dividends are payable as and when declared byParent’s board of directors out of funds legally available for the payment ofdividends.  Such dividends accrue,whether or not they have been declared and whether or not there are profits,surplus or other funds of Parent legally available for the payment ofdividends, until such time as such dividends are actually paid by Parent.  The holders of a majority of the outstandingpreferred equity securities at any time and from time to time may demand thatParent redeem all or any portion of the outstanding preferred equity securitiesby delivering to the holder(s) thereof (i) an amount of cash per share equal tothe sum of its liquidation value per share ($1,000) plus all accumulated andunpaid dividends thereon and (ii) a number of shares of Parent’s common equitysecurities as determined in accordance with the redemption procedures containedin Parent’s certificate of incorporation. If Parent doesnot have funds legally available for any particular redemption, Parent isobligated to use those funds that are legally available for the redemption ofsuch securities to redeem the maximum possible number of preferred equitysecurities which would otherwise be redeemed in connection with suchredemption.  Thereafter, when additionalfunds of Parent are legally available for redemption of such securities, Parentis obligated to redeem the balance of such securities.  Parent is prohibited fromredeeming any preferred equity securities if any such redemption is prohibitedunder any credit facility or indenture to which Parent or any of itssubsidiaries is a party or is otherwise bound. The Company is not liable for, and has not otherwise guaranteed, any ofthese obligations of Parent with respect to the equity securities issued byParent.  These equity securities are not reflected in the Company’sconsolidated balance sheet due to the significance of the public debt holders’influence on the Company’s ability to control the form of ownership.

 

OnDecember 11, 2006, Parent and MergerCo, in anticipationof the consummation of the Merger, entered into an employment agreement withMr. John Fitzpatrick, as Chief Executive Officer of MergerCo (the “NewFitzpatrick Employment Agreement”). Pursuant to the New Fitzpatrick Employment Agreement, upon consummationof the Merger, the New Fitzpatrick Employment Agreement superceded andpreempted Mr. Fitzpatrick’s prior employment agreement with the Company. OnJanuary 9, 2007, by operation of law upon consummation of the Merger, the NewFitzpatrick Employment Agreement was assigned by MergerCo to the Company.  Under the New Fitzpatrick EmploymentAgreement, in the event (i) Mr. Fitzpatrick resigns for retirement purposesfrom the employment of the Company and its subsidiaries after December 31, 2009(or such earlier date as the Company’s board of directors and Mr. Fitzpatrickmutually agree upon) and (ii) Mr. Fitzpatrick provided at least twelve months’prior written notice to the Company and Parent of such resignation, then Mr.Fitzpatrick may elect to have Parent repurchase up to 50% of the common equitysecurities and 50% of the preferred equity securities acquired by Mr. Fitzpatrickon January 9, 2007 in connection with the Merger at their respective fairmarket values.  Any such repurchase byParent shall be subject to applicable restrictions contained in the DelawareGeneral Corporation Law and in Parent’s and its subsidiaries’ debt financingagreements with unaffiliated third parties. If any such restrictions prohibit any such repurchase which Parent isotherwise required to make, the repurchase obligation is suspended until suchtime as Parent may make such repurchase under such restrictions.

 

In conjunction with the Merger, the previous stockholders of theCompany will receive the benefit of certain negotiated transaction related taxdeductions whenever such deductions are realized. Due to this agreement, therewas $7.2 million reduction to stockholders equity.

 

The Companyrecorded expenses of $10.0 million in the nine months ended September 30, 2007related to the Merger.  These expensescomprised $1.0 million of compensation expense related to accelerated vestingof stock options, $0.2 million of employer related payroll taxes for theaccelerated vesting of stock options, $1.3 million of transaction incentiveexpenses, $7.0 million of transaction costs and $0.5 million of financing costsrelated to refinanced indebtedness.  Inaddition to these amounts, the Company capitalized $4.0 million of transactioncosts into goodwill related to the accelerated earn-out, and $3.6 million ofdeferred financing costs relating to the New Senior Credit Facility.  Parent made a capital contribution of $21.7million to the Company in connection with these transaction costs.

 

  **4.RELATED-PARTY TRANSACTIONS**

 

TheCompany has noncompete agreements with the former owners of Brentwood, GrandValley, and Dimension Moldings, Inc.

 

Parenthas a management services agreement with an affiliate of the Parent’s largeststockholder, Olympus Partners.  Parent isobligated to pay a transaction fee to the affiliate for services provided foreach financing, refinancing, acquisition, or similar nonrecurring transaction.  Parent paid approximately $3.0 million tothis affiliate for services related to the Merger, of which, $0.7 million wasrecorded as deferred financing fees on the Company’s financial statements,while the remaining $2.3 million was recorded on the Parent’s financialstatements.  In addition, the affiliatewill be paid $0.6 million annually by Parent for ongoing services provided tothe Parent and Company.

 

Parentissued Restricted Stock Agreements on August 31, 2007 and September 14, 2007 tocertain Company management personnel totaling 56,060 shares of Parent commonstock. The fair value of the Parents common stock was approximately $403,000 onthe date of the grant. The restricted stock becomes fully vested after sevenyears unless certain milestones, as defined, are met.

 

8

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

 

As used in this Management’sDiscussion and Analysis of Financial Condition and Results of Operations, theterms “we,” “us” or “our” refer to WII Components, Inc. and its consolidatedsubsidiaries and their respective predecessors.

 

**Forward-Looking Statements**

 

Certainstatements in this report are “forward-looking statements” within the meaningof the Private Securities Litigation Reform Act of 1995. Statements that arepredictive in nature, that depend upon or refer to future events or conditionsor that include words such as “believe,” “anticipate,” “expect,” “estimate,” “may,”“will,” “should,” “continue,” “plans,” “intends,” “likely” or other similarexpressions are forward-looking statements. We caution you that forward-lookingstatements involve unknown risks, uncertainties and other factors that maycause our actual results and performance to differ materially from any futureresults or performance expressed or implied by these forward-lookingstatements.  Please also see ourdiscussion of risk factors contained in Item 1A. Part II of this Report on Form10-Q.

 

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

 

•                  financial results andconditions;

 

•                  margins, costs andexpenditures;

 

•                  cash flows and growthrates;

 

•                  demand for our products;

 

•                  industry trends;

 

•                  new product and customerinitiatives;

 

•                  our current plans for capital expenditures;

 

•                  manufacturing and othercost-saving initiatives; and

 

•                  our liquidity and capital resources.

 

Inaddition, we, through our senior management, from time to time makeforward-looking public statements concerning our expected future operations andperformance and other developments. Such forward-looking statements arenecessarily estimates reflecting our judgment based upon current informationand involve a number of risks and uncertainties. There can be no assurance thatother factors will not affect the accuracy of these forward-looking statementsor that our actual results will not differ materially from the resultsanticipated in such forward-looking statements. Although we believe that theseforward-looking statements are based on reasonable assumptions, you should beaware that many factors could affect our actual financial results or results ofoperations and could cause actual results to differ materially from thoseexpressed in the forward-looking statements. Those factors include, among otherthings:

 

•                  our high degree of leverageand significant debt service obligations;

 

•                  our ability to integrate acquired businesses;

 

•                  our need for additional manufacturing capacity;

 

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

 

•                  changes in interest ratesand general economic conditions;

 

•                  a downturn in thehomebuilding or home repair and remodeling industry;

 

•                  changes in the price of rawmaterials;

 

•                  interruptions in deliveriesof raw materials or finished goods;

 

•                  the highly competitivenature of our industry; and

 

•                  increases in the cost of labor.

 

9

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**Overview**

 

We believethat we are one of the leading manufacturers of hardwood doors, hardwoodcomponents and engineered wood products for the kitchen and bath cabinet marketin the United States. Our products include (1) hardwood cabinet doorcomponents, face frames and drawer fronts, (2) fully assembled hardwoodcabinet doors, (3) rigid thermofoil, or RTF, cabinet doors and components,(4) veneer raised panels, or VRPs, and (5) a variety of laminated andprofile-wrapped components. We generate approximately 94% of our sales from thekitchen and bath cabinet manufacturing industry. Our customers, in turn,distribute their products through various sales channels, including specialtykitchen and bath cabinet dealers, home center retailers and homebuilders. Weconduct all of our operations through our Woodcraft, PrimeWood and Brentwoodsubsidiaries and we operate eleven manufacturing facilities located inMinnesota, North Dakota, Oregon, Ohio, Kansas, Pennsylvania, Utah and Kentuckythat allow us to distribute our products nationwide.

 

Inthe past nine years, we have consummated four strategic acquisitions that haveenhanced our market position, product breadth and geographic reach. InJune 1998, we acquired PrimeWood, a manufacturer of RTF, VRP andprofile-wrapped engineered wood products based in North Dakota. InJuly 2002, we acquired Brentwood, a manufacturer of solid wood and RTFcabinet doors located in Oregon. In April 2004, we acquired Grand Valley,a manufacturer of solid wood cabinet doors located in Ohio.  On December 31, 2006, Grand Valley was mergedwith and into Woodcraft.  In July 2005,we acquired substantially all of the assets of Dimension Moldings, Inc. (DMI),an Ohio corporation, which was in the business of manufacturing hardwoodcomponent moldings at a facility located in Middlefield, Ohio.  Following the acquisition, our Woodcraftsubsidiary manufactures hardwood component moldings at the Middlefield facilityfor sale to one of our major customers.

 

The Merger was completed on January 9, 2007.  The aggregate purchase price paid by Parentfor all of the shares of capital stock of the Company and options to purchaseshares of capital stock of the Company in the Merger was approximately $295.5million, less indebtedness and certain expenses, and subject to customaryadjustments.  The Merger has beenaccounted for as a recapitalization in the Company’s financial statements, withno adjustments to the historical basis of the Company’s assets andliabilities.  The Company did not pushdown the basis because of the significance of the publicly traded debtoutstanding, which hinders the Parent’s ability to control the form ofownership of the Company.

 

Parentissued Restricted Stock Agreements on August 31, 2007 and September 14, 2007 tocertain Company management personnel totaling 56,060 shares of Parent commonstock. The fair value of the Parents common stock was approximately $403,000 onthe date of the grant. The restricted stock becomes fully vested after sevenyears unless certain milestones, as defined, are met.

 

**Results of Operations**

 

***Three Months Ended September 30, 2007Compared to the Three Months Ended September 30, 2006***

 

Thefollowing table outlines, for the three months ended September 30, 2007 and forthe three months ended September 30, 2006, selected operating data derived fromour condensed consolidated statements of operations and presents thisinformation as a percentage of net sales:

 
| ** **               | ** ** | **WII Components, Inc.**                        | ** ** |
|--------------------------|------------|-------------------------------------------------|------------|
| ** **               | ** ** | **Three Months Ended  September 30, 2007** | ** ** | **Three Months Ended  September 30, 2006** | ** ** |
| ** **               | ** ** | **(dollars in thousands)**                      | ** ** |
| Net sales                |       | $                                               | 64,958     |   | $ | 69,852 |   |
| *% of net sales*         | * *   | *100.0*                                         | *%*        | *100.0* | *%* |
| Cost of sales            |       | 54,324                                          |       | 57,894 |   |
| *% of net sales*         | * *   | *83.6*                                          | *%*        | *82.9* | *%* |
| * *                 | * *   |                                            |       |   |   |
| Gross profit             |       | 10,634                                          |       | 11,958 |   |
| *% of net sales*         | * *   | *16.4*                                          | *%*        | *17.1* | *%* |
| Operating expenses       |       | 3,750                                           |       | 4,463 |   |
| *% of net sales*         | * *   | *5.8*                                           | *%*        | *6.4* | *%* |
| * *                 | * *   |                                            |       |   |   |
| Operating income         |       | 6,884                                           |       | 7,495 |   |
| *% of net sales*         | * *   | *10.6*                                          | *%*        | *10.7* | *%* |
| Other expenses (income): |       |                                            |       |   |   |
| Interest expense         |       | 3,821                                           |       | 3,551 |   |
| *% of net sales*         | * *   | *5.9*                                           | *%*        | *5.1* | *%* |
| Other income, net        |       | (148                                            | )          | (12 | ) |
| *% of net sales*         | * *   | *(.02*                                          | *)%*       | *0.0* | *%* |
| Income tax provision     |       | 1,568                                           |       | 1,405 |   |
| *% of net sales*         | * *   | *2.4*                                           | *%*        | *2.0* | *%* |
| * *                 | * *   |                                            |       |   |   |
| Net income               |       | 1,643                                           |       | 2,551 |   |
| *% of net sales*         | * *   | *2.5*                                           | *%*        | *3.7* | *%* |
|                          |            |                                                 |            |  |  |  |  |

 

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*Net sales.*  Net sales decreased $5.0 million, or7.2%, from $69.9 million for the three months ended September 30, 2006 to$64.9 million for the three months ended September 30, 2007.  Sales in our hardwood and engineered woodproduct line decreased $2.3 million and $2.7 million, respectively.  These decreases are attributable to acombination of (i) an overall slowdown in the market that began in the thirdquarter 2006, (ii) lower selling prices in conjunction with lower materialcosts, and (iii) a reduction due to the loss of market share on a hardwood doorprogram in 2007.

 

*Cost of sales.*  Cost of sales decreased $3.6 million, or6.2%, from $57.9 million for the three months ended September 30, 2006 to$54.3 million for the three months ended September 30, 2007.  This decrease in cost of sales is primarilyattributable to lower material, labor and overhead costs as a result of lowervolume of sales, but other factors include (i) lower stock compensation expenseand (ii) lower hardwood material costs. These were partially offset by (i)unfavorable LIFO cost of material adjustment in 2007, and (ii) increasedmedical and worker’s compensation costs in 2007.

 

*Gross profit.*  Gross profit decreased $1.4 million, or11.7%, from $12.0 million for the three months ended September 30, 2006 to$10.6 million for the same period in 2007. As a percentage of net sales, ourgross profit decreased 70 basis points from 17.1% for the three months endedSeptember 30, 2006 to 16.4% for the same period in 2007.  This decrease reflects (i) higher fixed costspercentage due to lower sales volume, (ii) price adjustments related tomaterial cost movements being more favorable in 2006 versus 2007, (iii)unfavorable LIFO cost of material adjustment in 2007, and (iv) increasedmedical and worker’s compensation costs in 2007.

 

*Operating expenses.*  Operating expenses decreased$0.8 million, or 17.8%, from $4.5 million for the three months endedSeptember 30, 2006 to $3.7 million for the same period in 2007.  The decrease consists of (i) lower salariesdue to eliminated positions, (ii) lower stock compensation expense, (iii) lowerprofessional fees, and (iv) lower incentive expense.   The decrease was partially offset by anincrease in management fees associated with the current private equity sponsor.

 

*Operating income.*  Operating income decreased by$0.6 million, or 8.0%, from $7.5 million for the three months endedSeptember 30, 2006 to $6.9 million for the three months ended September30, 2007 as a result of the net effect of the factors described above.

 

*Interest expense.*  Interest expense increased $0.3 million,or 8.6%, from $3.5 million for the three months ended September 30, 2006to $3.8 million for the three months ended September 30, 2007. Thisincrease relates to increased costs of deferred financing fees in connectionwith the Merger.

 

*Other income.*  Other income was $12,000 and $148,000 for thethree months ended September 30, 2006 and September 30, 2007,respectively.  This income is frominterest received from our interest bearing accounts.

 

*Income tax provision.*  Income tax expense increased $0.2 million, or14.3%, from an income tax expense of $1.4 for the three months ended September30, 2006 to an income tax expense of $1.6 for the three months ended September30, 2007 due to a higher effective tax rate. The effective tax rate increased1330 basis points from 35.5% in 2006 to 48.8% in 2007 due to permanentdifferences associated with the Merger.

 

*Net income.*  Net income decreased $1.0 million, or38.5%, from net income of $2.6 million for the three months endedSeptember 30, 2006 to $1.6 million for the three months ended September 30,2007 as a result of the factors described above.

 

**Results of Operations**

 

***Nine Months Ended September 30, 2007Compared to the Nine Months Ended September 30, 2006***

 

Thefollowing table outlines, for the nine months ended September 30, 2007 and forthe nine months ended September 30, 2006, selected operating data derived fromour condensed consolidated statements of operations and presents thisinformation as a percentage of net sales:

 
| ** **                     | ** ** | **WII Components, Inc.**                       | ** ** |
|--------------------------------|------------|------------------------------------------------|------------|
| ** **                     | ** ** | **Nine Months Ended  September 30, 2007** | ** ** | **Nine Months Ended  September 30, 2006** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**                     | ** ** |
| Net sales                      |       | $                                              | 193,740    |   | $ | 221,955 |   |
| *% of net sales*               | * *   | *100.0*                                        | *%*        | *100.0* | *%* |
| Cost of sales                  |       | 158,686                                        |       | 184,211 |   |
| *% of net sales*               | * *   | *81.9*                                         | *%*        | *83.0* | *%* |
| * *                       | * *   |                                           |       |   |   |
| Gross profit                   |       | 35,054                                         |       | 37,744 |   |
| *% of net sales*               | * *   | *18.1*                                         | *%*        | *17.0* | *%* |
| Operating expenses             |       | 21,129                                         |       | 13,691 |   |
| *% of net sales*               | * *   | *10.9*                                         | *%*        | *6.2* | *%* |
| * *                       | * *   |                                           |       |   |   |
| Operating income               |       | 13,925                                         |       | 24,053 |   |
| *% of net sales*               | * *   | *7.2*                                          | *%*        | *10.8* | *%* |
| Other expenses (income):       |       |                                           |       |   |   |
| Interest expense               |       | 11,677                                         |       | 10,519 |   |
| *% of net sales*               | * *   | *6.0*                                          | *%*        | *4.7* | *%* |
| Other income, net              |       | (296                                           | )          | (40 | ) |
| *% of net sales*               | * *   | *(0.2*                                         | *)%*       | *0.0* | *%* |
| Income tax (benefit) provision |       | 1,261                                          |       | 5,301 |   |
| *% of net sales*               | * *   | *0.7*                                          | *%*        | *2.4* | *%* |
| * *                       | * *   |                                           |       |   |   |
| Net (loss) income              |       | 1,283                                          |       | 8,273 |   |
| *% of net sales*               | * *   | *0.7*                                          | *%*        | *3.7* | *%* |
|                                |            |                                                |            |  |  |  |  |

 

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*Net sales.*  Net sales decreased $28.2 million, or12.7%, from $221.9 million for the nine months ended September 30, 2006 to$193.7 million for the nine months ended September 30, 2007.  Sales in our hardwood and engineered woodproduct line decreased $19.8 million and $8.4 million, respectively.  These decreases are attributable to acombination of (i) an overall slowdown in the market that began in the thirdquarter 2006, (ii) a greater effect due to the seasonality in first quarter2007 as our customers were not operating above their capacities as they were in2006, (iii) lower selling prices in conjunction with lower material costs, and(iv) to a lesser extent, a reduction due to the loss of market share on ahardwood door program in 2007.

 

*Cost of sales.*  Cost of sales decreased $25.5 million,or 13.8%, from $184.2 million for the nine months ended September 30, 2006to $158.7 million for the nine months ended September 30, 2007.  This decrease in cost of sales is primarilyattributable to lower material, labor and overhead costs as a result of lowervolume of sales, but other factors include; (i) improved operationalperformance related to yield and labor productivities, (ii) lower stockcompensation expense, (iii) favorable LIFO cost of material adjustment in 2007,and (iv) lower hardwood material costs. These were partially offset by (i)increased multi-density fiber board and particle board costs related to ourengineered wood products line and (ii) transaction incentives incurred inconnection with the Merger.

 

*Gross profit.*  Gross profit decreased $2.7 million, or7.2%, from $37.7 million for the nine months ended September 30, 2006 to$35.0 million for the same period in 2007. As a percentage of net sales,our gross profit increased 110 basis points from 17.0% for the nine monthsended September 30, 2006 to 18.1% for the same period in 2007.  This increase reflects (i) improvedoperational performance, (ii) lower stock compensation expense, (iii) favorableLIFO cost of material adjustment in 2007, and (iv) lower hardwood materialcosts.  This increase was partially offsetwith (i) board cost increases related to our engineered wood product line and(ii) transaction incentive costs incurred in connection with the Merger.

 

*Operating expenses.*  Operating expenses increased$7.4 million, or 54.0%, from $13.7 million for the nine months endedSeptember 30, 2006 to $21.1 million for the same period in 2007.  The increase consists of approximately (i)$7.2 million of transaction expenses related to the Merger, (ii) $0.5 millionrelated to efforts to refinance a portion of the outstanding debt, and (iii)$1.0 million in transaction incentives incurred in connection with theMerger.   These were partially offsetwith (i) lower salaries due to eliminated positions, (ii) lower stockcompensation expense, and (iii) lower incentive expenses.

 

*Operating income.*  Operating income decreased by$10.1 million, or 42.1%, from $24.0 million for the nine months endedSeptember 30, 2006 to $13.9 million for the nine months ended September30, 2007 as a result of the net effect of the factors described above.

 

*Interest expense.*  Interest expense increased $1.2 million,or 11.4%, from $10.5 million for the nine months ended September 30, 2006to $11.7 million for the nine months ended September 30, 2007. This increaserelates to (i) increased costs of deferred financing fees in connection withthe Merger, and (ii) a higher average debt balance due to the additional debtassumed in conjunction with the Merger.

 

*Other income.*  Other income was $40,000 and $296,000 for thenine months ended September 30, 2006 and September 30, 2007, respectively.  This income is from interest received fromour interest bearing accounts.

 

*Income tax provision.*  Income tax expense decreased $4.0 million, or75.5%, from an income tax expense of $5.3 for the nine months ended September30, 2006 to an income tax expense of $1.3 million for the nine months endedSeptember 30, 2007 as a result of lower earnings. The effective tax rateincreased 1050 basis points from 39.1% in 2006 to 49.6% in 2007 due topermanent differences associated with the Merger.

 

*Net income.*  Net income decreased $7.0 million, or84.3%, from net income of $8.3 million for the nine months ended September30, 2006 to $1.3 million for the nine months ended September 30, 2007 as aresult of the factors described above.

 

**Liquidity and Capital Resources**

 

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

 

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*Refinancing*. On February 18, 2004, weissued the 10% Senior Notes due 2012, and paid the entire outstanding balanceof our old senior secured credit facility and terminated the related creditagreement.  Our existing senior creditfacility (which is referred to herein as the “2005 Senior Credit Facility”) wasamended and restated in September 2005, provided for revolving credit of up to$40.0 million subject to a borrowing base, a $7.5 million nonamortizing termloan, and a $7.5 million nonamortizing capital expenditure loan to be drawnupon through June 30, 2006.  As of June30, 2006, the nonamortizing capital expenditure loan had expired.  The outstanding principal bore interest at afluctuating rate equal to either the base rate plus 2 3¤4% per annum or LIBORplus 3.0% per annum.  The 2005 SeniorCredit Facility was terminated, and all outstanding borrowings thereunderrepaid, on January 9, 2007 in connection with the Merger.

 

Inconjunction with the Merger on January 9, 2007, the Company entered into a newsenior credit facility (the “New Senior Credit Facility”), with Credit Suisse,Cayman Islands Branch, which provided for (i) a senior secured first lien termloan facility in an aggregate principal amount of $150.0 million (the “FirstLien Term Facility”) and (ii) a senior secured first lien revolving creditfacility in an aggregate principal amount up to $25.0 million, subject tocertain conditions, (the “Revolving Facility” and, together with the First LienTerm Facility, the “First Lien Facilities”) of which $10.0 million is availablethrough a subfacility in the form of letters of credit.  Subject to certain conditions, the First LienTerm Facility may be increased by up to $30.0 million during the life of theFirst Lien Term Facility at the request of the Company with the consent fromthose lenders that agree to participate in such increase.  Subject to the foregoing, effective as ofApril 30, 2007, no additional borrowings are available under the First LienTerm Facility beyond the $9.8 million outstanding at March 31, 2007.  As of September 30, 2007, the maximum amountof borrowings available to the Company under the Revolving Facility was $12.5million.  As of September 30, 2007borrowings of $9.0 million were outstanding under the First Lien Term Facility,and nothing was outstanding under the Revolving Facility.  The outstanding principal of suchindebtedness bears interest at a fluctuating rate equal to either the base rateplus 1.75% per annumor LIBOR plus 2.75% per annum.  We must comply with certain financial covenantsunder our New Senior Credit Facility, including maintenance of an interestcoverage ratio, a senior leverage ratio and a total leverage ratio.  We were in compliance with such covenants asof September 30, 2007.  The New Senior Credit Facility is scheduledto mature January 2013.

 

As of September 30, 2007 the weighted average interest rate for theCompany's outstanding debt was 9.9%.

 

Inconjunction with the Merger, the Parent entered into Note Purchase Agreementswith OCM Mezzanine Fund II, L.P. and Olympus Growth Fund IV, L.P.  The Note Purchase Agreement with OCMMezzanine Fund II, L.P. consisted of $43.0 million senior pay-in-kind noteswith no required principal amortization. The Note Purchase Agreement with Olympus Growth Fund IV, L.P. consistedof $43.0 million junior pay-in-kind notes with no required principalamortization.  These notes (the “ParentNotes”) are scheduled to mature in April 2012. During the term of the Parent Notes, Parent is able at its option to payinterest on the Parent Notes through the issuance of additional notes. TheCompany is not liable for, and has not otherwise guaranteed, any of theobligations of Parent with respect to the Parent Notes.  The Company is, however, subject to a numberof restrictive covenants under the Note Purchase Agreements.  In addition, the Company is limited in itsability to pay dividends or otherwise make distributions to Parent under theNew Senior Credit Facility and the indenture governing the $120.0 million of10% Senior Notes due 2012 (the “10% Senior Notes due 2012”).  The Parent Notes are not reflected in theCompany’s consolidated balance sheet due to the significance of the public debtholders’ influence on the Company’s ability to control the form ofownership.  Effective as of June 13,2007, the Parent issued an additional $20.0 million of Parent Notes to OlympusGrowth Fund IV, L.P., and purchased $20.0 million of Parent Notes from OCMMezzanine Fund II, L.P.

 

The 2005 acquisition of substantially all of theassets of Dimension Moldings, Inc, and associated fees and expenses at closingwere funded one-half by the sale of shares of the Company’s voting common stockto the Company’s former stockholders, and the remainder with operating cash anda draw down on the Company’s senior secured credit facility.  In the first quarter 2006, we paid anaccelerated earn-out payment in the amount of $2.0 million to the owners ofDimension Moldings, Inc. as a result of the operations of these assets meetingagreed upon earnings targets.  As a result of the change in control caused bythe Merger on January 9, 2007, the remaining $5.0 million potential earnoutobligation, which included $1.0 million accrued at June 30, 2006, was acceleratedand paid.

 

OurNew Senior Credit Facility, the indenture governing the 10% SeniorNotes due 2012, and Parent Notes impose certain restrictions on our ability toincur indebtedness, pay dividends, make investments, grant liens, sell ourassets and engage in certain other activities. We are not liable for, and did not otherwise guarantee, any of theobligations of Parent with respect to the Parent Notes.  We are limited in our ability to paydividends or otherwise make other distributions to Parent under the New SeniorCredit Facility and the indenture governing the 10% Senior Notes due 2012.  Indebtedness for borrowed moneyincurred under our First Lien Term Facility under our New Senior CreditFacility is secured by substantially all of our assets, including our real andpersonal property, inventory, accounts receivable, intellectual property andother intangibles.

 

Asof September 30, 2007, we had $0.8 million of capital lease obligations, ofwhich $0.5 million was current and as of December 31, 2006, we had $1.1 millionof capital lease obligations, of which $0.6 million was current.

 

Asof September 30, 2007, we had $10.0 million of cash and cash equivalentsavailable for any corporate purposes, compared to $0.2 million as of September30, 2006.

 

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*Cash flow from operating activities.*  Cash provided by operating activities for the ninemonths ended September 30, 2007 was $2.2 million, while cash provided byoperating activities for the nine months ended September 30, 2006 was $10.3million.  The decreased source of cashfor operating activities is mainly attributable to (i) lower net income and(ii) increased days of receivables outstanding.

 

*Cash flow from investing activities.*  Net cash used in investing activities was $9.9 millionfor the nine months ended September 30, 2007 and $13.1 million for the ninemonths ended September 30, 2006. Capital expenditures in nine months endedSeptember 30, 2007 were $5.9 million compared to $13.3 million for the ninemonths ended September 30, 2006.  Thedecrease in capital expenditures in 2007 is primarily due to (i) the expansionof our St. Cloud door plant in 2006, and (ii) the acquisition of equipment forour roughmill facility in Greenville, Pennsylvania, most of which was paid in2006.  Net cash used in investingactivities for the nine months ended September 30, 2007 includes $4.0 milliondue to an accelerated Dimension Moldings, Inc. earn-out payment in conjunctionwith the Merger.

 

*Cash flow from financing activities.*  Net cash provided by financing activities forthe nine months ended September 30, 2007 totaled $9.7 million primarily due to(i) capital contributions of $21.7 million that funded debt issuance costs of$3.6 million and stock option payments of $7.9 million, (ii) borrowings oflong-term debt under the New Senior Credit Facility of $10.2 million thatfunded the payoff of the 2005 Senior Credit Facility of $7.5 million, (iii)capital lease payments of $0.3 million, (iv) principal payments on the NewSenior Credit Facility of $1.1 million, and (v) a distribution on behalf of theParent for costs in conjunction with the Merger or ongoing operations of $1.6million.  Net cash used in financingactivities for the nine months ended September 30, 2006 totaled $0.9 million,primarily attributable to capital lease payments.

 

Weanticipate that the funds generated by operations and funds available under theNew Senior Credit Facility will be sufficient to meet working capitalrequirements and to finance capital expenditures for the foreseeable future,including the next twelve months. We cannot provide assurances that ourbusiness will generate sufficient cash flow from operations, that anticipatednet sales growth and operating improvements will be realized or that futureborrowings will be available under our New Senior Credit Facility in an amountsufficient to enable us to service our indebtedness, including the 10% SeniorNotes due 2012, or to fund our other liquidity needs. In addition, we cannotprovide assurances that we will be able to refinance any of our indebtedness,including our New Senior Credit Facility and the 10% Senior Notes due 2012, oncommercially reasonable terms, if at all. We intend toincur additional capital expenditures in the ordinary course of business.

 

**Inflation**

 

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

 

**Seasonality**

 

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

 

### **Critical Accounting Policies**

 

Inour Annual Report on Form 10-K for the year ended December 31, 2006, weidentified the critical accounting policies, which affect our more significantestimates and assumptions used in preparing our consolidated financialstatements.  We have not changed thesepolicies from those previously disclosed in our annual report.

 

**New Accounting Standards**

 

See Note 2 of the CondensedConsolidated Financial Statements for information pertaining to recently adoptedaccounting standards or accounting standards to be adopted in the future.

 

### **Item 3. Quantitative and Qualitative Disclosures aboutMarket Risk**

 

Weare subject to various market risks such as fluctuating lumber prices, interestrates, and market conditions.

 

*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.

 

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*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 ofSeptember 30, 2007, we had $9.0 million outstanding under the First Lien TermFacility, which bears interest at variable rates.  In addition, as of that date,we had approximately $0.6 million of capital leases that bear interest at variablerates. We believe that a one percent (1%) increase in the interest ratescurrently in effect would not have a material adverse effect on our financialcondition or results of operations.

 

*Market Conditions. *The Company derives asignificant portion of its revenue as a result of the demand for its productscreated by the building of new homes, and repair and remodeling of existinghomes.  During the second half of 2006,the home building, repair and remodeling industry experienced a slowdown as aresult of general economic conditions. If this slowdown were to continue or worsen over an extended period oftime, it could have a material adverse effect on the Company’s business,financial condition or results of operations.

 

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

 

(a)           Evaluation of disclosurecontrols and procedures.

 

Asrequired by Rule 13a-15 under the Securities Exchange Act of 1934, wecarried out an evaluation under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of our disclosure controls and procedures as of September30, 2007. 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 September 30,2007, our disclosure controls and procedures were reasonably effective toensure that information required to be disclosed by us in the reports we fileor submit under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the Securities and ExchangeCommission’s rules and forms. The Chief Executive Officerand Chief Financial Officer have also concluded that controls and proceduresare designed to ensure that information required to be disclosed is accumulatedand communicated to our management, including our principal executive andprincipal financial officers as appropriate to allow timely decisions regardingrequired disclosure.  We will continueto review and document our disclosure controls and procedures on an ongoingbasis, and may from time to time make changes aimed at enhancing theireffectiveness and to ensure that our systems evolve with our business.

 

(b)           Changes in internal controlsover financial reporting.

 

None.

 

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**PART II—OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

Nopending material legal proceedings.

 

**Item 1A. Risk Factors**

 

The Company has included in its Annual Report on Form10-K for the year ended December 31, 2006, a description of certain risks anduncertainties that could affect the Company’s business, future performance orfinancial condition (the “Risk Factors”). The Risk Factors are hereby incorporated in Part II, Item IA of thisForm 10-Q.  Investors should consider theRisk Factors prior to making an investment decision with respect to the Company’ssecurities.

 

In addition, the following Risk Factor should beconsidered prior to making an investment decision with respect to the Company’ssecurities:

 

***If the current slowdown in thehome building, repair and remodeling industry continues for an extended periodof time, it could have a material adverse effect on the Company’s business,financial condition or results of operations. ***The Company derives a significant portion of itsrevenue as a result of the demand for its products created by the building ofnew homes, and repair and remodeling of existing homes.  During the third quarter of 2006, the home building,repair and remodeling industry experienced a slowdown as a result of generaleconomic conditions.  This slowdown hascontinued into 2007, and has had a negative impact on our results of operationsfor the quarterly period ended September 30, 2007.  If this slowdown were to continue or worsenover an extended period of time, it could have a material adverse effect on theCompany’s business, financial condition or results of operations.

 

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

 

None.

 

**Item 3. Defaults Upon Senior Securities**

 

None.

 

**Item 4. Submission of Matters to a Vote of SecurityHolders**

 

None.

 

**Item 5. Other Information**

### ** **

### **None.**

### ** **

### **Item 6. Exhibits**

| 10.1  |   | Restricted Stock Agreement  dated August 31, 2007, between WII Holding, Inc. and John Fitzpatrick.                                                                                                                  |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2  |   | Restricted Stock Agreement  dated August 31, 2007, between WII Holding, Inc. and Dale Herbst.                                                                                                                       |
| 10.3  |   | Restricted Stock Agreement  dated August 31, 2007, between WII Holding, Inc. and Joe Beyer.                                                                                                                         |
| 31.1  |   | Certification of Vice  President, Treasurer and Secretary of WII Components, Inc., pursuant to  Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 |
| 31.2  |   | Certification of Chief  Executive Officer of WII Components, Inc., pursuant to  Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                 |
| 32.1* |   | Certification of Vice  President, Treasurer and Secretary of WII Components, Inc., pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002        |
| 32.2* |   | Certification of Chief  Executive Officer of WII Components, Inc., pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                        |

 

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*Thiscertification shall not be deemed “filed” for purposes of Section 18 ofthe Securities Exchange Act of 1934, or otherwise subject to the liability ofthat section, nor shall it be deemed to be incorporated by reference into anyfiling under the Securities Act of 1933 or the Securities Exchange Act of 1934.

 

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**SIGNATURES**

 

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

 
|                      | WII  COMPONENTS, INC. |
|---------------------------|-----------------------|
|                      |                  |
| Dated:  November 13, 2007 | By:                   |
|                      |                  | /s/  John Fitzpatrick |
|                      |                  | John  Fitzpatrick |
|                      |                  | President  and Chief Executive Officer |
|                      |                  | (Principal  Executive Officer) |
| Dated:  November 13, 2007 |                  |   |
|                      |                  | /s/  Dale B. Herbst |
|                      |                  | Dale  B. Herbst |
|                      |                  | Chief  Financial Officer, Treasurer and Secretary |
|                      |                  | (Principal  Financial and Accounting Officer) |

 

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