**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM 10-Q**

 

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

 

**For the quarterly period ended March 31,2005**

 

**or**

 

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

 

**Commission file number:**

**333-115490**

 

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**WII COMPONENTS, INC.**

(Exact name of registrant as specified in itscharter)

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

 

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

(Address of principal executive offices) (ZipCode)

 

**(320) 252-1503**

(Registrant’s telephone number, Includingarea code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days.

 

Yes ý  No o.

 

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

 

Yes o  No ý.

 

As of May 9, 2005, 20,734,843 shares of voting common stock, $.01par value per share, were outstanding and 854,261 shares of non-voting commonstock, $.01 par value per share, were outstanding (all of which are privatelyowned and not traded on a public market).

 

 

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**WII COMPONENTS, INC.**

 

**FORM 10-Q**

**Quarter Ended March 31, 2005**

 

**Table of Contents**

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

 

2

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                                     | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                     |       |                     |       |                        |       |
| Current Assets:                                |       |                     |       |                        |       |
| Cash                                           |       | $                        | 259        |                        | $          | 2 |   |
| Accounts receivable, net                       |       | 12,015                   |       | 9,564                       |       |
| Inventories                                    |       | 17,969                   |       | 16,742                      |       |
| Other current assets                           |       | 2,446                    |       | 3,381                       |       |
| Total current assets                           |       | 32,689                   |       | 29,689                      |       |
|                                           |       |                     |       |                        |       |
| Property, plant, and equipment, net            |       | 42,461                   |       | 42,252                      |       |
| Goodwill                                       |       | 107,601                  |       | 107,601                     |       |
| Customer relationship                          |       | 7,150                    |       | 7,347                       |       |
| Noncompete agreements                          |       | 1,090                    |       | 1,201                       |       |
| Other assets                                   |       | 6,647                    |       | 6,897                       |       |
| TOTAL                                          |       | $                        | 197,638    |                        | $          | 194,987 |   |
|                                           |       |                     |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY** |       |                     |       |                        |       |
| Current Liabilities:                           |       |                     |       |                        |       |
| Current maturities of long-term debt           |       | $                        | 910        |                        | $          | 928 |   |
| Accounts payable                               |       | 6,294                    |       | 5,808                       |       |
| Accrued payroll                                |       | 4,020                    |       | 3,207                       |       |
| Other current liabilities                      |       | 5,670                    |       | 9,107                       |       |
| Total current liabilities                      |       | 16,894                   |       | 19,050                      |       |
|                                           |       |                     |       |                        |       |
| Long-term debt, net of current maturities      |       | 123,000                  |       | 120,000                     |       |
| Other noncurrent liabilities                   |       | 6,573                    |       | 6,720                       |       |
|                                           |       |                     |       |                        |       |
| Stockholders’ Equity:                     |       |                     |       |                        |       |
| Common stock—voting                       |       | 207                      |       | 207                         |       |
| Common stock—nonvoting                    |       | 9                        |       | 9                           |       |
| Additional paid-in capital                     |       | 45,763                   |       | 45,410                      |       |
| Retained earnings                              |       | 5,192                    |       | 3,591                       |       |
| Total stockholders’ equity                |       | 51,171                   |       | 49,217                      |       |
| TOTAL                                          |       | $                        | 197,638    |                        | $          | 194,987 |   |

 

See notes to condensed consolidated financialstatements (unaudited).

 

3

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                                       | ** ** | **Three Months  Ended  March 31, 2005** | ** ** | **Three Months  Ended  March 31, 2004** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| NET SALES                                        |       | $                                            | 57,808     |                                         | $          | 47,718 |   |
| COST OF SALES                                    |       | 48,594                                       |       | 39,352                                       |       |
| Gross profit                                     |       | 9,214                                        |       | 8,366                                        |       |
|                                             |       |                                         |       |                                         |       |
| OPERATING EXPENSES:                              |       |                                         |       |                                         |       |
| General and administrative                       |       | 2,305                                        |       | 2,864                                        |       |
| Selling and marketing                            |       | 784                                          |       | 749                                          |       |
| Stock compensation expense                       |       | 353                                          |       | 130                                          |       |
| Loss on sale of assets                           |       | —                                       |       | 1                                            |       |
| Total operating expenses                         |       | 3,442                                        |       | 3,744                                        |       |
|                                             |       |                                         |       |                                         |       |
| OPERATING INCOME                                 |       | 5,772                                        |       | 4,622                                        |       |
|                                             |       |                                         |       |                                         |       |
| OTHER INCOME (EXPENSE):                          |       |                                         |       |                                         |       |
| Interest income                                  |       | 3                                            |       | 11                                           |       |
| Interest expense                                 |       | (3,196                                       | )          | (2,489                                       | )          |
| Loss on modification of debt                     |       | —                                       |       | (3,454                                       | )          |
| Other income                                     |       | 3                                            |       | 15                                           |       |
| Total other expense                              |       | (3,190                                       | )          | (5,917                                       | )          |
|                                             |       |                                         |       |                                         |       |
| INCOME (LOSS) BEFORE PROVISION FOR INCOME  TAXES |       | 2,582                                        |       | (1,295                                       | )          |
| INCOME TAX PROVISION (BENEFIT)                   |       | 981                                          |       | (479                                         | )          |
| NET INCOME (LOSS)                                |       | $                                            | 1,601      |                                         | $          | (816 | ) |

 

See notes to condensed consolidated financialstatements (unaudited).

 

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ EQUITY**

**(UNAUDITED)**

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

 
| ** **                      | ** ** | **Common  Stock** | ** ** | **Additional** | ** ** | ** **  | ** ** | ** **   | ** ** |
|---------------------------------|------------|-------------------|------------|----------------|------------|-------------|------------|--------------|------------|
| ** **                      | ** ** | **Voting**        | ** ** | **Nonvoting**  | ** ** | **Paid-in** | ** ** | **Retained** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **Shares**        | ** ** | **Amount**     | ** ** | **Shares**  | ** ** | **Amount**   | ** ** | **Capital** | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| BALANCE-December 31,  2004 |       | 20,734,843        |       | $              | 207        |        | 854,261    |         | $          | 9 |   | $ | 45,410 |   | $ | 3,591 |   | $ | 49,217 |   |
| Stock  compensation expense     |       |              |       |           |       |        |       |         |       | 353 |   |   |   | 353 |   |
| Net  income                     |       |              |       |           |       |        |       |         |       |   |   | 1,601 |   | 1,601 |   |
| BALANCE-March 31,  2005    |       | 20,734,843        |       | $              | 207        |        | 854,261    |         | $          | 9 |   | $ | 45,763 |   | $ | 5,192 |   | $ | 51,171 |   |

 

See notes to condensed consolidated financialstatements (unaudited).

 

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                                                                                          | ** ** | **Three Months  Ended  March 31, 2005** | ** ** | **Three Months  Ended  March 31, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| OPERATING ACTIVITIES:                                                                               |       |                                         |       |                                         |       |
| Net income (loss)                                                                                   |       | $                                            | 1,601      |                                         | $          | (816 | ) |
|                                                                                                |       |                                         |       |                                         |       |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |       |                                         |       |                                         |       |
| Loss on modification of debt                                                                        |       | —                                       |       | 3,454                                        |       |
| Depreciation and amortization                                                                       |       | 1,856                                        |       | 1,586                                        |       |
| Loss on sale of assets                                                                              |       | —                                       |       | 1                                            |       |
| Stock compensation expense                                                                          |       | 353                                          |       | 130                                          |       |
|                                                                                                |       |                                         |       |                                         |       |
| Change in operating assets and liabilities:                                                         |       |                                         |       |                                         |       |
| Accounts receivable                                                                                 |       | (2,451                                       | )          | 68                                           |       |
| Inventories                                                                                         |       | (1,227                                       | )          | (1,857                                       | )          |
| Other current assets                                                                                |       | 935                                          |       | (725                                         | )          |
| Accounts payable                                                                                    |       | 486                                          |       | 28                                           |       |
| Accrued payroll and other current  liabilities                                                      |       | (2,624                                       | )          | (72                                          | )          |
| Net cash (used in) provided by operating  activities                                                |       | (1,071                                       | )          | 1,797                                        |       |
|                                                                                                |       |                                         |       |                                         |       |
| INVESTING ACTIVITIES:                                                                               |       |                                         |       |                                         |       |
| Purchases of property, plant, and equipment                                                         |       | (1,495                                       | )          | (1,648                                       | )          |
| Proceeds from sale of assets                                                                        |       | —                                       |       | 2                                            |       |
| Change in other assets                                                                              |       | (12                                          | )          | 112                                          |       |
| Net cash used in investing activities                                                               |       | (1,507                                       | )          | (1,534                                       | )          |
|                                                                                                |       |                                         |       |                                         |       |
| FINANCING ACTIVITIES:                                                                               |       |                                         |       |                                         |       |
| Principal payments under long-term  financing agreements                                            |       | (3,165                                       | )          | (77,688                                      | )          |
| Borrowings of long-term debt                                                                        |       | 6,000                                        |       | 123,783                                      |       |
| Dividend distribution                                                                               |       | —                                       |       | (21,450                                      | )          |
| Repurchase of common stock                                                                          |       | —                                       |       | (17,550                                      | )          |
| Debt issue costs                                                                                    |       | —                                       |       | (7,423                                       | )          |
| Termination of interest rate collar                                                                 |       | —                                       |       | 52                                           |       |
| Net cash provided by (used in) financing  activities                                                |       | 2,835                                        |       | (276                                         | )          |
|                                                                                                |       |                                         |       |                                         |       |
| NET INCREASE (DECREASE) IN CASH                                                                     |       | 257                                          |       | (13                                          | )          |
| CASH—Beginning of period                                                                       |       | 2                                            |       | 39                                           |       |
|                                                                                                |       |                                         |       |                                         |       |
| CASH—End of period                                                                             |       | $                                            | 259        |                                         | $          | 26 |   |
|                                                                                                |       |                                         |       |                                         |       |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                                                 |       |                                         |       |                                         |       |
| Cash paid for interest                                                                              |       | $                                            | 6,087      |                                         | $          | 2,776 |   |
|                                                                                                |       |                                         |       |                                         |       |
| Cash paid for income taxes—net                                                                 |       | $                                            | 82         |                                         | $          | 86 |   |
| NONCASH ACTIVITY:                                                                                   |       |                                         |       |                                         |       |
| Conversion of subordinated convertible note  and accrued interest to common stock                   |       | $                                            | —     |                                         | $          | 20,850 |   |

 

See notes to condensed consolidated financialstatements (unaudited).

 

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED**

**CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1. NATURE OF BUSINESS**

 

***Company Background***—WIIComponents, Inc. (formerly WII Holdings, Inc. and referred to hereinas the “Company”), a Delaware corporation, was formed to acquire 100% of thecommon stock of Woodcraft Industries, Inc. and its Subsidiaries in abuyout (the “Acquisition”) from the former owners. On April 9, 2003,pursuant to a sale agreement between the Company and the former owners, theCompany acquired the common stock of Woodcraft Industries, Inc. for atotal of approximately $145 million. The Company has no independent assets or operations separate from itsconsolidated subsidiaries.

 

The Acquisition was accounted for using the purchase method ofaccounting. Accordingly, the assets acquired and the liabilities assumed by theCompany were recorded at fair value as of the date of the Acquisition. Theexcess of the purchase price over the fair value of the assets acquired andliabilities assumed totaling approximately $104.0 million was recorded asgoodwill.

 

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

 

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

 

***Description ofBusiness***—The Company is a leading manufacturer ofwood cabinet doors, hardwood components, and engineered wood products in theUnited States. Its products are sold principally to leading national andregional kitchen and bathroom cabinet manufacturers. Its reputation for highquality and reliable performance has enabled the Company to establish strong,long-standing relationships with its customers. Its customers, in turn,distribute products through various sales channels, including specialty kitchenand bathroom cabinetry dealers, home center retailers, and homebuilders.

 

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

 

In ouropinion, the accompanying unaudited condensed consolidated financial statementsinclude all adjustments (consisting of normal recurring items) considerednecessary to present fairly, when read in conjunction with the consolidatedfinancial statements and accompanying notes for the period ended December 31,2004 included in our 10-K as filed with the Securities and ExchangeCommission on March 31, 2005, our financial position, results ofoperations and cash flows for the periods presented.

 

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

 

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**2. SIGNIFICANT ACCOUNTING POLICIES**

 

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

 
| ** **      | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                        | 10,111     |                        | $          | 9,995 |   |
| Work in process |       | 5,428                    |       | 4,796                       |       |
| Finished goods  |       | 3,632                    |       | 2,901                       |       |
| LIFO adjustment |       | (1,202                   | )          | (950                        | )          |
|            |       | $                        | 17,969     |                        | $          | 16,742 |   |

 

The majority of inventory is valued at the lower of last-in, first-out(“LIFO”) cost or market. The remainder of the inventory is valued under thefirst-in, first-out method (“FIFO”). As of March 31, 2005 and December 31,2004, inventory on the LIFO method represented 55% and 60%, respectively, ofconsolidated inventories.

 

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

 

***CustomerRelationship—***Customer Relationship relates to anintangible asset recorded through the purchase price allocation of the GrandValley acquisition (Note 4) for a relationship with a significant customer. The$7.9 million intangible asset is being amortized over the estimated life of 10years. Amortization for the three-month period ended March 31, 2005 was$197,000.  As of March 31, 2005, thenet Customer Relationship intangible asset was $7.2 million.  Expected amortization is as follows for theyears ending December 31 (in thousands):

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

 

***Noncompete Agreement***—Noncompeteagreements primarily relate to agreements with the former owners of Brentwoodand Grand Valley. Noncompete rights are being amortized over the applicableterms of the agreements (5 years and 7 years, respectively), and areexpected to be fully amortized by July 2007 and April 2011,respectively. Amortization for the three-month period ended March 31, 2005was $111,000.  As of March 31, 2005the net noncompete agreement intangible asset was $1.1 million.  Expected amortization is as follows for theyears ending December 31 (in thousands):

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

 

***Stock Options*—**In April 2003, the 2003Stock Option and Grant Plan (“2003 Plan”) was approved by the stockholders ofthe Company. The 2003 Plan allows 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 may include, but are not limited to, stock options,restricted stock, unrestricted stock awards, and substitute performance awards.

 

InMay 2003, 1,617,000 options were granted with terms of 10 years fromthe date of grant, and at an exercise price of $3.00 per share under the 2003Plan.  Issued options vest in equalannual installments over four years.  Thefair value of options granted during the nine months ended December 31,2003 was estimated on the date of the grant using the Black-Scholesoption-pricing model with the following assumptions: a risk-free interest rateof 3.0%, an expected life of six years, and no volatility.  During 2004, 100,000 options werecancelled.  As a part of the February 2004equity restructuring (Note 5), the Company repriced the outstanding stockoptions. The Company has adopted variable plan accounting for these optionsfrom the date of the repricing.  TheCompany

 

8

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recorded $353,000 and $130,000 of noncashcompensation expense during the three month periods ended March 31, 2005and March 31, 2004, respectively. As of December 31, 2004, the 1,517,000 options have an exerciseprice of $1.78 per share and a weighted average remaining contractual life ofeight and one-half years.

 

In 2004, the Company granted in April and November 489,000and 50,000 options, respectively under the 2003 Plan. The fair value of theseoptions was estimated on the date of the grant using the Black-Scholesoption-pricing model with the following assumptions: a risk-free interest ratein April and November of 3.9% and 4.2%, respectively, an expectedlife of six years, and no volatility.

 

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

 
| ** **        | ** ** | **Three Months  Ended  March 31,  2005** | ** ** | **Three Months  Ended  March 31,  2004** | ** ** |
|-------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| Net income (loss) |       |                                          |       |                                          |       |
| As reported       |       | $                                             | 1,601      |                                          | $          | (816 | ) |
| Pro forma         |       | 1,571                                         |       | (841                                          | )          |
|                   |            |                                               |            |                                               |            |  |  |

 

***New Accounting Pronouncements***—InDecember 2004, the FASB revised SFAS No. 123 and issued SFAS No. 123(R).  This Statement supersedes APB No. 25,which resulted in no stock-based employee compensation cost related to stockoptions if the options granted had an exercise price equal to the market valueof the underlying common stock on the date of grant. SFAS No. 123(R)requires recognition of employee services provided in exchange for ashare-based payment based on the grant date fair market value.  In April 2005, the SEC delayed theeffective date of SFAS No. 123(R) to fiscal years beginning after June 15,2005.  As a result, the Company isrequired to adopt SFAS No. 123(R) as of January 1, 2006.  As of the effective date, this Statementapplies to all new awards issued as well as awards modified, repurchased, orcancelled.  Additionally, for stock-basedawards issued prior to the effective date, compensation cost attributable tofuture services will be recognized as the remaining service is rendered.  The Company may also elect to restate priorperiods by applying a modified retrospective method to periods prior to theeffective date.  The Company is in theprocess of determining which method of adoption it will elect (see “StockOptions” above for SFAS No. 123 required disclosures).

 

**3. GOODWILL**

 

Effective January 1, 2002, the Company adopted and beganaccounting for goodwill in accordance with SFAS No. 142 which states thatcompanies are no longer required to amortize goodwill but instead must evaluategoodwill for impairment annually, if not more frequently. The Company haselected to perform its annual tests for goodwill impairment as of December 31of each year. Previously, goodwill was amortized over its estimated usefullife. Based on the impairment tests performed on December 31, 2004, theCompany’s fair value exceeds the carrying value, resulting in no goodwillimpairment.

 

The were no changes in the carrying amount of goodwill between December 31,2004 and March 31, 2005.

 

**4. ACQUISITIONS**

 

On April 30,2004, the Company acquired a cabinet door manufacturer operating under the nameof Grand Valley Door Co. The acquisition was accomplished through theacquisition of substantially all of the assets of Ohio Door Company and certainland and improvements from Grand Valley Investment LLC. The Company paid a cashpurchase price at closing of $16 million and, if the business acquiredachieves certain sales and profit margin targets, an additional $1 millionwill be payable prior to June 30, 2006. Approximately half of the purchaseprice was funded with borrowings under the senior secured revolving creditfacility and the remainder was funded from the proceeds of an equitycontribution from existing stockholders. The acquired company is a 100% ownedsubsidiary of the Company and, on June 25, 2004, agreed to fully andunconditionally guarantee the senior notes on a joint and several basis withthe Company’s existing subsidiary guarantors.

 

The Acquisition of Grand Valley was accounted for using the purchasemethod of accounting. Accordingly, the assets acquired and the liabilitiesassumed by the Company were recorded at fair value as of the date of theAcquisition. The excess of the purchase price over the fair value of the assetsacquired and liabilities assumed totaling $3.8 million was recorded asgoodwill. Based upon the Company’s final purchase price allocation, $7.9million of the purchase price was recorded as another intangible asset,Customer Relationship (Note 2). The pro forma effects of this transaction arenot material to the Company’s results of operations. The components of thepurchase price allocation are as follows (in thousands):

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

 

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**5. FINANCING ARRANGEMENTS**

 

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

 
| ** **                                                                                  | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Senior notes (10%) due 2012                                                                 |       | $                        | 120,000    |                        | $          | 120,000 |   |
| Revolver (6.31% and 5.37% at March 31,  2005 and December 31, 2004, respectively) |       | 3,000                    |       | —                      |       |
| Total debt                                                                                  |       | 123,000                  |       | 120,000                     |       |
| Less current maturities                                                                     |       | —                   |       | —                      |       |
|                                                                                        |       | $                        | 123,000    |                        | $          | 120,000 |   |

 

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

 

The Company’s existing senior secured revolving credit facility and theindenture for the notes imposes certain restrictions on it, includingrestrictions on its ability to incur indebtedness, pay dividends, makeinvestments, grant liens, sell our assets and engage in certain otheractivities.  The Company must comply withcertain financial covenants under the credit facility including maintenance ofa minimum fixed charge coverage ratio, a maximum total leverage ratio and anEBITDA minimum.  As of December 31,2004, the Company was in compliance with these covenants.  Indebtedness under its existing seniorsecured revolving credit facility is secured by substantially all of itsassets, including real and personal property, inventory, accounts receivable,intellectual property and other intangibles.

 

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

 

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

 

**6. RELATED-PARTY TRANSACTIONS**

 

The Companyhas a management services agreement with an affiliate of the primary investorwhereby the Company pays a transaction fee to the affiliate for servicesprovided for each financing, refinancing, acquisition, or similar nonrecurringtransaction. The Company paid $1.7 million to this affiliate for servicesrelated to the Acquisition which is recorded as goodwill and $1.2 million forfinancing services which was recorded in other assets as deferred financingcosts.  The deferred financing costs weresubsequently written off in conjunction with the February 2004 financingtransaction as discussed in Note 1. In addition, the Company paid $2.4million to this affiliate related to the February 2004 financingtransaction, which is recorded in other assets as deferred financing costs. TheCompany paid $320,000 to this affiliate for services related to the acquisitionof Grand Valley, $224,000 of which is recorded as goodwill and $96,000 of whichis recorded in other assets as financing costs.

 

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

 

10

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

###  

**FORWARD-LOOKING STATEMENTS**

 

Certain statements in this report are “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995.Statements that are predictive in nature, that depend upon or refer to futureevents or conditions or that include words such as “believe,” “anticipate,” “expect,”“estimate,” “may,” “will,” “should,” “continue,” “plans,” “intends,” “likely”or other similar expressions are forward-looking statements. We caution youthat forward-looking statements involve unknown risks, uncertainties and otherfactors that may cause our actual results and performance to differ materiallyfrom any future results or performance expressed or implied by theseforward-looking statements.

 

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

 

•                  financial results and conditions;

 

•                  margins, costs and expenditures;

 

•                  cash flows and growth rates;

 

•                  demand for our products;

 

•                  industry trends;

 

•                  new product and customer initiatives;

 

•                  manufacturing and other cost-saving initiatives; and

 

•                  our liquidity and capital resources.

 

In addition, we, through our senior management, from time to time makeforward-looking public statements concerning our expected future operations andperformance and other developments. Such forward-looking statements are necessarilyestimates reflecting our judgment based upon current information and involve anumber of risks and uncertainties. There can be no assurance that other factorswill not affect the accuracy of these forward-looking statements or that ouractual results will not differ materially from the results anticipated in suchforward-looking statements. Although we believe that these forward-lookingstatements are based on reasonable assumptions, you should be aware that manyfactors could affect our actual financial results or results of operations andcould cause actual results to differ materially from those expressed in theforward-looking statements. Those factors include, among other things:

 

•                  our high degree of leverage and significant debtservice obligations;

 

•                  restrictions under the indenture governing the notesand our senior secured revolving credit facility;

 

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

 

•                  changes in the price of raw materials;

 

•                  interruptions in deliveries of raw materials orfinished goods;

 

•                  the highly competitive nature of our industry; and

 

•                  increases in the cost of labor.

 

11

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**Overview**

 

We are one ofthe leading manufacturers of hardwood cabinet doors and components andengineered wood products in the United States. Our products include (1) hardwoodcabinet door components, face frames and drawer fronts, (2) fullyassembled hardwood cabinet doors, (3) rigid thermofoil, or RTF, cabinetdoors and components, (4) veneer raised panels, or VRPs, and (5) avariety of laminated and profile-wrapped components. We generate approximately93% of our sales from the kitchen and bath cabinet manufacturing industry. Our customers,in turn, distribute their products through various sales channels, includingspecialty kitchen and bath cabinet dealers, home center retailers andhomebuilders. We conduct all of our operations through our Woodcraft,PrimeWood, Grand Valley and Brentwood subsidiaries and we operate eightfacilities located in Minnesota, North Dakota, Oregon, Ohio, West Virginia andKentucky that allow us to distribute our products nationwide.

 

We consummatedthree strategic acquisitions that have substantially enhanced our marketposition, product breadth and geographic reach. In June 1998, we acquiredour PrimeWood subsidiary, or PrimeWood, a manufacturer of RTF, VRP andprofile-wrapped engineered wood products based in North Dakota. In July 2002,we acquired our Brentwood subsidiary, or Brentwood, a manufacturer of solidwood and RTF cabinet doors located in Oregon. In April 2004, we acquiredour Grand Valley subsidiary, or Grand Valley, a manufacturer of cabinet doorslocated in Ohio.

 

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

 

In February 2004, we entered into a new senior secured revolvingcredit facility and used the proceeds from the sale of our 10% Senior Notes due2012 to pay off the term loans and revolving line of credit under our oldsenior credit facility, pay a dividend of approximately $21.5 million, torepurchase an aggregate of 3,317,580 shares of our voting and non-voting commonstock from all of our existing stockholders on a proportionate basis for anaggregate purchase price of approximately $17.5 million or $5.29 per shareand to pay financing costs of $7.4 million.

 

**Results of Operations**

 

***Three Months Ended March 31,2005 Compared to the Three Months Ended March 31, 2004***

 

The following table outlines, for the three months ended March 31,2005 and for the three months ended March 31, 2004, selected operatingdata derived from our consolidated statements of operations and presents thisinformation as a percentage of net sales:

 
| ** **                     | ** ** | **WII Components, Inc.**               | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|
| ** **                     | ** ** | **Three Months Ended  March 31, 2005** | ** ** | **Three Months Ended  March 31, 2004** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**                  | ** ** |
| Net sales                      |       | $                                           | 57,808     |   | $ | 47,718 |   |
| *% of net  sales*              | * *   | *100.0*                                     | *%*        | *100.0* | *%* |
| Cost of sales                  |       | 48,594                                      |       | 39,352 |   |
| *% of net  sales*              | * *   | *84.1*                                      | *%*        | *82.5* | *%* |
| * *                       | * *   | * *                                    | * *   | * * | * * |
| Gross profit                   |       | 9,214                                       |       | 8,366 |   |
| *% of net  sales*              | * *   | *15.9*                                      | *%*        | *17.5* | *%* |
| Operating expenses             |       | 3,442                                       |       | 3,744 |   |
| *% of net  sales*              | * *   | *5.9*                                       | *%*        | *7.8* | *%* |
| * *                       | * *   | * *                                    | * *   | * * | * * |
| Operating income               |       | 5,772                                       |       | 4,622 |   |
| *% of net  sales*              | * *   | *10.0*                                      | *%*        | *9.7* | *%* |
| Other expenses (income):       |       |                                        |       |   |   |
| Interest expense               |       | 3,196                                       |       | 2,489 |   |
| *% of net  sales*              | * *   | *5.5*                                       | *%*        | *5.2* | *%* |
| Other loss (income), net       |       | (6                                          | )          | 3,428 |   |
| *% of net  sales*              | * *   | *-0.0*                                      | *%*        | *7.2* | *%* |
| Income tax provision (benefit) |       | 981                                         |       | (479 | ) |
| *% of net  sales*              | * *   | *1.7*                                       | *%*        | *-1.0* | *%* |
| * *                       | * *   | * *                                    | * *   | * * | * * |
| Net income (loss)              |       | 1,601                                       |       | (816 | ) |
| *% of net  sales*              | * *   | *2.8*                                       | *%*        | *-1.7* | *%* |
|                                |            |                                             |            |  |  |  |  |

 

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*Net sales.*  Net sales increased $10.1 million, or21.2%, from $47.7 million for the three months ended March 31, 2004to $57.8 million for the three months ended March 31, 2005.  Sales in our hardwood product line increased$8.4 million attributable to a combination of (i) increases in volumedue to overall industry growth and market share gain, and (ii) upwardprice adjustments made in response to increases in raw material costs. Theremaining $1.7 million increase in sales relates to our engineered woodproducts line and is attributable to increases in volume due to overallindustry growth and market share gain.

 

*Cost of sales.*  Cost of sales increased $9.3 million, or23.7%, from $39.3 million for the three months ended March 31, 2004to $48.6 million for the three months ended March 31, 2005. Thisincrease in cost of sales is attributable to (i) increased material, laborand overhead costs related to volume growth, (ii) inflation, primarily inrespect to hardwood raw material costs, and (iii) higher quality and scrapcosts due to the rollout of a new door program. These costs were offset in partby the spreading of our fixed costs over a larger sales base and higheroperating efficiencies.

 

*Gross profit.*  Gross profit increased $0.8 million, or9.5%, from $8.4 million for the three months ended March 31, 2004 to$9.2 million for the same period in 2005 as a result of the factorsdescribed above. As a percentage of net sales, our gross profit decreased 170 basispoints from 17.6% for the three months ended March 31, 2004 to 15.9% forthe same period in 2005. This decrease reflects (i) increases in our rawmaterial costs compared to the same period in 2004 and (ii) higher qualityand scrap costs due to the rollout of a new door program; offset in part by thespreading of our fixed costs over a larger sales base and improved operatingefficiencies.

 

*Operating expenses.*  Operating expenses decreased$0.3 million, or 8.1%, from $3.7 million for the three months ended March 31,2004 to $3.4 million for the same period in 2005. The decrease consists of(i) $0.8 million of additional incentive compensation paid to certainkey employees in February 2004 in recognition of our improved financialperformance and the successful completion of the offering of the senior notes,and (ii) $0.2 million of consulting and noncompete expense in 2004 for theprevious owner of a subsidiary of Woodcraft Industries, Inc.  This decrease was offset partially by (i) $0.2million for additional stock compensation expense in 2005, and (ii) $0.5 milliondue to the inclusion of three full months of operations of Grand Valley in2005, which includes $0.2 million of amortization for a Customer Relationshipintangible asset.

 

*Operating income.*  Operating income increased by$1.2 million, or 26.1%, from $4.6 million for the three months ended March 31,2004 to $5.8 million for the three months ended March 31, 2005 as aresult of the net effect of the factors described above.

 

*Interest expense.*  Interest expense increased $0.7 million,or 28.0%, from $2.5 million for the three months ended March 31, 2004to $3.2 million for the three months ended March 31, 2005. Thisincrease relates to the increase in debt and the higher interest rate inconnection with the issuance of the $120.0 million senior notes in February 2004.

 

*Other expense (income).*  Other income increased from $3.4 million ofother loss for the three months ended March 31, 2004 to $6,000 of otherincome for the three months ended March 31, 2005.  This increase relates to the $3.4 millionwrite-off of financing fees related to the senior credit facility from April 2003,which was subsequently paid-off in February 2004.

 

*Income tax provision (benefit).*  Income tax expense increased $1.5 million,or 300.0% from an income tax benefit of $0.5 million for the three monthsended March 31, 2004 to an income tax expense of $1.0 million for thethree months ended March 31, 2005 as a result of higher earnings. Theeffective tax rate increased 100 basis points from 37.0% in 2004 to 38.0% in2005 due to permanent differences.

 

*Net income (loss).*  Net income increased $2.4 million, or300.0%, from a net loss of $0.8 million for the three months ended March 31,2004 to a net income of $1.6 million for the three months ended March 31,2005 as a result of the factors described above.

 

**Liquidity and Capital Resources**

 

Our primarycash needs are working capital, capital expenditures and debt service. We havehistorically financed these cash requirements through internally generated cashflow and funds borrowed under and existing senior secured credit facilities.

 

*Refinancing*. On February 18, 2004, we issued$120 million of 10% senior notes due in 2012, and paid the entire outstandingbalance of our old senior secured credit facility and terminated the relatedcredit agreement. Under that credit facility, we had three outstanding termloans and a $15.0 million revolving credit facility. Our existing creditfacility provides for revolving credit of up to $25.0 million subject to aborrowing base and outstanding principal bears interest at a fluctuating rateequal to, at our option, either the base rate plus 2 1¤4%per annum or LIBOR plus 3 1¤2% perannum for the first twelve months the facility is in place and thereaftereither the base rate plus 2% per annum or LIBOR plus 3 1¤4%per annum when the ratio of total debt to trailing twelve month EBITDA is lessthan 4.0 to 1.0. As of December 31, 2004 we had nothing outstanding underour credit facility and as of March 31, 2005 we had $3.0 millionoutstanding under our credit facility. We must comply with certain financialcovenants under our credit facility including maintenance of a minimum fixedcharge coverage ratio, a maximum total leverage ratio and an EBITDA minimum. Asof March 31, 2005 we were in compliance with

 

13

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these covenants.  As of December 31,2004 we had $3.1 million of capital lease obligations, of which$0.9 million was current and as of March 31, 2005 we had $3.0 millionof capital lease obligations, of which $0.9 million was current.

 

Our existing senior secured revolving credit facility and the indenturefor the senior notes imposes certain restrictions on us, including restrictionson our ability to incur indebtedness, pay dividends, make investments, grantliens, sell our assets and engage in certain other activities. Indebtednessunder our existing senior secured revolving credit facility is secured bysubstantially all of our assets, including our real and personal property,inventory, accounts receivable, intellectual property and other intangibles.

 

*Cash flow from operating activities.*  As of December 31, 2004, we had $2,000of cash and cash equivalents available for working capital purposes. As of March 31,2005, we had approximately $259,000 of cash and cash equivalents available forworking capital purposes.  Cash used byoperating activities for the three months ended March 31, 2005 was $1.1million compared to cash provided by operating activities for the three monthsended March 31, 2005 of $1.8 million. The decrease is primarily driven by the semiannual interest payment paidin February 2005 on the 10% senior notes.

 

*Cash flow from investing activities.*  Net cash used in investing activities was$1.5 million for both the three months ended March 31, 2005 and thethree months ended March 31, 2004. Capital expenditures were$1.5 million for the three months ended March 31, 2005 compared to$1.6 million for the same period in 2004.

 

*Cash flow from financing activities.*  Net cash provided by financing activities forthe three months ended March 31, 2005 totaled $2.8 million dueadditional borrowings under the revolving credit facility.  These additional borrowings were needed tosupport an increase in working capital driven by (i) higher inventoriesand accounts receivable due to sales growth, and (ii) the semiannualinterest payment paid in February related to the 10% senior notes.  Net cash used by financing activities in thethree month period ended March 31, 2004 totaled $0.3 million.

 

*Dividends.*  We are limited by our current debt covenantsregarding the payment of dividends. On February 24, 2004, we used$39.0 million of the net proceeds from the offering of the old notes tomake payments to our stockholders through a combination of dividends andredemptions of common stock.

 

We anticipate that the funds generated by operations and fundsavailable under the senior secured revolving credit facility will be sufficientto meet working capital requirements and to finance capital expenditures overthe next twelve months. We cannot provide assurances that our business willgenerate sufficient cash flow from operations, that anticipated net salesgrowth and operating improvements will be realized or that future borrowingswill be available under our senior secured revolving credit facility in anamount sufficient to enable us to service our indebtedness, including thenotes, or to fund our other liquidity needs. In addition, we cannot provideassurances that we will be able to refinance any of our indebtedness, includingour senior secured revolving credit facility and the notes, on commerciallyreasonable terms, if at all.

 

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**Inflation**

 

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

 

**Seasonality**

 

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

 

### **Critical Accounting Policies**

###  

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

 

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

 

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

 

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

 

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

 

*Insurance benefit accruals.*  Each accounting period, we estimate an amountto accrue for medical costs incurred but not yet reported under our self-fundedemployee medical and workers compensation insurance plans. We base our determinationon an evaluation of past rates of claim payouts and trends in the amount ofpayouts. This determination requires significant judgment and assumes pastpatterns are representative of future payment patterns. A significant shift inusage and payment patterns within these plans could necessitate significantadjustments to these accruals in future accounting periods.

 

*Purchase accounting.*  We accounted for our acquisitions under thepurchase method of accounting and, accordingly, the acquired assets and liabilitiesassumed are recorded at their respective fair values. The recorded values ofassets and liabilities are based on third-party estimates and valuations whenavailable. The remaining values are based on management’s judgments andestimates. Our financial position and results from operations may be affectedby changes in estimates and judgments.

 

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

 

**New Accounting Standards**

 

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

 

15

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### **Item 3**.Quantitative and Qualitative Disclosures about Market Risk

###  

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

 

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

 

*Interest rate risk.*  We are exposed to market risk relating tochanges in interest rates in respect of a portion of our long-term debt and aportion of our capital leases. As of March 31, 2005, we had$3.0 million outstanding under our senior secured revolving creditfacility, all of which will bear interest at variable rates. In addition, as ofthat date, we had approximately $1.7 million of capital leases that bearinterest at variable rates. We believe that a one percent (1%) increase in theinterest rates currently in effect would not have a material adverse effect onour financial condition or results of operations.

 

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

###  

(a)           Evaluation ofdisclosure controls and procedures.

 

As required by Rule 13a-15 under the Securities Exchange Actof 1934, we carried out an evaluation under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of our disclosure controls andprocedures as of March 31, 2005. In designing and evaluating ourdisclosure controls and procedures, we and our management recognize that anycontrols and procedures, no matter how well designed and operated, can provideonly reasonable assurance of achieving the desired control objectives, and ourmanagement necessarily was required to apply its judgment in evaluating andimplementing possible controls and procedures. Based upon that evaluation, ourChief Executive Officer and Chief Financial Officer have concluded that theybelieve that, as of March 31, 2005, our disclosure controls and procedureswere reasonably effective to ensure that information required to be disclosedby us in the reports we file or submit under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in theSecurities and Exchange Commission’s rules and forms. We will continue toreview and document our disclosure controls and procedures on an ongoing basis,and may from time to time make changes aimed at enhancing their effectivenessand to ensure that our systems evolve with our business.

 

(b)           Changes in internalcontrols.

 

None.

 

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**PART II****—OTHERINFORMATION**

 

**Item1****. LegalProceedings**

 

None.

 

**Item2****. UnregisteredSales of Equity Securities and Use of Proceeds**

 

None.

 

**Item3****. Defaults UponSenior Securities**

 

None.

 

**Item4****. Submission ofMatters to a Vote of Security Holders**

 

None.

 

**Item5****. OtherInformation**

 

None.

###  

### **Item 6**.Exhibits

###  

31.1                           Certification of VicePresident, Treasurer and Secretary of WII Components, Inc., pursuant to Rules 13a-14(a) and15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-OxleyAct of 2002

31.2                           Certification of ChiefExecutive Officer of WII Components, Inc., pursuant to Rules 13a-14(a) and15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-OxleyAct 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 ExecutiveOfficer of WII Components, Inc., pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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

 

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**SIGNATURES**

 

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

 
|                     | WII COMPONENTS, INC. |
|--------------------------|----------------------|
|                     |                 |
| Dated: May 16, 2005 | By:                  |   |
|                     |                 | /s/ John Fitzpatrick |
|                     |                 | John Fitzpatrick |
|                     |                 | Chief Executive Officer |
|                     |                 | (Principal Executive Officer) |
| Dated: May 16, 2005 |                 |   |
|                     |                 | /s/ Dale B. Herbst |
|                     |                 | Dale B. Herbst |
|                     |                 | Vice President, Treasurer and Secretary |
|                     |                 | (Principal Financial and Accounting Officer) |

 

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