**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

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**FORM 10-Q**
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|-------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                        |
| ** ** | ** ** | **For the quarterly period ended March 31, 2007**                                                                 |
| ** ** | ** ** | ** **                                                                                                        |
| ** ** | ** ** | **or**                                                                                                            |
| ** ** | ** ** | ** **                                                                                                        |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** ** | ** ** | ** **                                                                                                        |
| ** ** | ** ** | **Commission file number:**                                                                                       |
| ** ** | ** ** | **333-115490**                                                                                                    |

 

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**WII COMPONENTS, INC.**

(Exact name of registrant as specified in its charter)

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

 

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

(Address of principal executive offices) (Zip Code)

**(320)252-1503**

(Registrant’s telephone number, Including area code)

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 x No o.

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

Large Accelerated Filer o                                  AcceleratedFiler  o                            Non-acceleratedFiler  x.

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

Yes o No x.

As of May 9, 2007, 100 shares of common stock, $.01 par value per share,were outstanding (all of which are owned by WII Holding, Inc.).

 

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**WII COMPONENTS, INC.**

**FORM 10-Q**

**Quarter Ended March 31, 2007**

**Table of Contents**
| **Part I—Financial Information**                                                                                                             |   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Item 1.  Financial Statements                                                                                                                     |   |   |
| Condensed Consolidated  Balance Sheets as of March 31, 2007 and December 31, 2006 (unaudited)                                                     |   | 1      |
| Condensed  Consolidated Statements of Operations for the Three Months Ended March 31,  2007 and the Three Months Ended March 31, 2006 (unaudited) |   | 2      |
| Condensed  Consolidated Statements of Cash Flows for the Three Months Ended March 31,  2007 and the Three Months Ended March 31, 2006 (unaudited) |   | 3      |
| Notes to Condensed Consolidated  Financial Statements (unaudited)                                                                                 |   | 4      |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                                              |   | 9      |
| Item 3.  Quantitative and Qualitative Disclosures about Market Risk                                                                               |   | 13     |
| Item 4. Controls and Procedures                                                                                                                   |   | 13     |
|                                                                                                                                              |   |   |
| **Part II-Other Information**                                                                                                                     |   |   |
| Item 1. Legal Proceedings                                                                                                                         |   | 15     |
| Item 1A. Risk Factors                                                                                                                             |   | 15     |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                                                              |   | 15     |
| Item 3.  Defaults Upon Senior Securities                                                                                                          |   | 15     |
| Item 4.  Submission of Matters to a Vote of Security Holders                                                                                      |   | 15     |
| Item 5. Other Information                                                                                                                         |   | 15     |
| Item 6.  Exhibits                                                                                                                                 |   | 15     |
| Signatures                                                                                                                                        |   | 16     |

 

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**WIICOMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

**(In thousands)**
| ** **                                     | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                     |       |                     |       |                        |       |
| Current Assets:                                |       |                     |       |                        |       |
| Cash                                           |       | $                        | 2,257      |                        | $          | 8,048 |   |
| Accounts  receivable, net                      |       | 15,381                   |       | 11,322                      |       |
| Inventories                                    |       | 20,704                   |       | 21,500                      |       |
| Other current  assets                          |       | 9,138                    |       | 1,908                       |       |
| Total current  assets                          |       | 47,480                   |       | 42,778                      |       |
|                                           |       |                     |       |                        |       |
| Property, plant, and  equipment, net           |       | 60,553                   |       | 59,876                      |       |
| Goodwill                                       |       | 112,748                  |       | 108,748                     |       |
| Customer relationship                          |       | 12,824                   |       | 13,239                      |       |
| Noncompete agreements                          |       | 298                      |       | 384                         |       |
| Other assets                                   |       | 8,035                    |       | 5,289                       |       |
| TOTAL                                          |       | $                        | 241,938    |                        | $          | 230,314 |   |
| ** **                                     |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY** |       |                     |       |                        |       |
| Current  Liabilities:                          |       |                     |       |                        |       |
| Current  maturities of long-term debt          |       | $                        | 2,061      |                        | $          | 581 |   |
| Accounts payable                               |       | 6,064                    |       | 4,937                       |       |
| Accrued payroll                                |       | 3,347                    |       | 3,826                       |       |
| Other current  liabilities                     |       | 13,317                   |       | 12,101                      |       |
| Total current  liabilities                     |       | 24,789                   |       | 21,445                      |       |
|                                           |       |                     |       |                        |       |
| Long-term debt, net of  current maturities     |       | 128,582                  |       | 128,030                     |       |
| Deferred income tax  liability                 |       | 5,505                    |       | 2,560                       |       |
| Other noncurrent liabilities                   |       | 2,418                    |       | 300                         |       |
|                                           |       |                     |       |                        |       |
| Stockholders’ Equity:                     |       |                     |       |                        |       |
| Common  stock—voting                      |       | —                   |       | 217                         |       |
| Common  stock—nonvoting                   |       | —                   |       | 9                           |       |
| Additional  paid-in capital                    |       | 71,140                   |       | 56,244                      |       |
| Retained  earnings                             |       | 9,504                    |       | 21,509                      |       |
| Total  stockholders’ equity               |       | 80,644                   |       | 77,979                      |       |
| TOTAL                                          |       | $                        | 241,938    |                        | $          | 230,314 |   |

 

See notes to condensed consolidated financial statements (unaudited).

1

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**WIICOMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

**(In thousands)**
| ** **                                           | ** ** | **Three Months  Ended  March 31, 2007** | ** ** | **Three Months  Ended  March 31, 2006** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| NET SALES                                            |       | $                                                      | 61,006     |                                                   | $          | 76,341 |   |
| COST OF SALES                                        |       | 50,257                                                 |       | 63,685                                                 |       |
| Gross profit                                         |       | 10,749                                                 |       | 12,656                                                 |       |
|                                                 |       |                                                   |       |                                                   |       |
| OPERATING  EXPENSES:                                 |       |                                                   |       |                                                   |       |
| General and administrative                           |       | 12,333                                                 |       | 3,956                                                  |       |
| Selling and marketing                                |       | 863                                                    |       | 806                                                    |       |
| Loss on sale of assets                               |       | 15                                                     |       | —                                                 |       |
| Total operating expenses                             |       | 13,211                                                 |       | 4,762                                                  |       |
|                                                 |       |                                                   |       |                                                   |       |
| OPERATING (LOSS)  INCOME                             |       | (2,462                                                 | )          | 7,894                                                  |       |
|                                                 |       |                                                   |       |                                                   |       |
| OTHER INCOME  (EXPENSE):                             |       |                                                   |       |                                                   |       |
| Interest income                                      |       | 52                                                     |       | 23                                                     |       |
| Interest expense                                     |       | (4,023                                                 | )          | (3,422                                                 | )          |
| Other expense                                        |       | (2                                                     | )          | (2                                                     | )          |
| Total other expense                                  |       | (3,973                                                 | )          | (3,401                                                 | )          |
|                                                 |       |                                                   |       |                                                   |       |
| (LOSS) INCOME  BEFORE INCOME TAX (BENEFIT) PROVISION |       | (6,435                                                 | )          | 4,493                                                  |       |
| INCOME TAX (BENEFIT)  PROVISION                      |       | (4,094                                                 | )          | 1,827                                                  |       |
| NET (LOSS) INCOME                                    |       | $                                                      | (2,341     | )                                                      | $          | 2,666 |   |

 

See notes to condensed consolidated financial statements (unaudited).

2

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**WIICOMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

**(In thousands)**
| ** **                                                                                           | ** ** | **Three Months  Ended  March 31, 2007**                             | ** ** | **Three Months  Ended  March 31, 2006**                         | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| OPERATING  ACTIVITIES:                                                                               |       |                                                                               |       |                                                                           |       |
| Net (loss) income                                                                                    |       | $                                                                                  | (2,341     | )                                                                              | $          | 2,666 |   |
|                                                                                                 |       |                                                                               |       |                                                                           |       |
| Adjustments to  reconcile net (loss) income to net cash (used in) provided by operating  activities: |       |                                                                               |       |                                                                           |       |
| Depreciation and amortization                                                                        |       | 1,659                                                                              |       | 1,866                                                                          |       |
| Loss on sale of assets                                                                               |       | 15                                                                                 |       | —                                                                         |       |
| Amortization of debt issue costs                                                                     |       | 1,371                                                                              |       | 269                                                                            |       |
| Deferred income taxes                                                                                |       | (33                                                                                | )          | —                                                                         |       |
| Stock compensation expense                                                                           |       | 1,029                                                                              |       | 1,154                                                                          |       |
| Current portion of tax benefit due to Seller                                                         |       | (4,106                                                                             | )          | —                                                                         |       |
|                                                                                                 |       |                                                                               |       |                                                                           |       |
| Change in operating assets and liabilities:                                                          |       |                                                                               |       |                                                                           |       |
| Accounts receivable                                                                                  |       | (4,059                                                                             | )          | (1,796                                                                         | )          |
| Inventories                                                                                          |       | 796                                                                                |       | 120                                                                            |       |
| Other current assets                                                                                 |       | (1,213                                                                             | )          | (198                                                                           | )          |
| Accounts payable                                                                                     |       | 1,001                                                                              |       | 1,741                                                                          |       |
| Accrued payroll and other current liabilities                                                        |       | (4,888                                                                             | )          | (3,930                                                                         | )          |
| Other long-term liabilities                                                                          |       | 114                                                                                |       | —                                                                         |       |
| Net cash (used in) provided by operating activities                                                  |       | (10,655                                                                            | )          | 1,892                                                                          |       |
|                                                                                                 |       |                                                                               |       |                                                                           |       |
| INVESTING  ACTIVITIES:                                                                               |       |                                                                               |       |                                                                           |       |
| Purchases of property, plant, and equipment                                                          |       | (2,226                                                                             | )          | (4,815                                                                         | )          |
| Proceeds from sale of assets                                                                         |       | 2                                                                                  |       | —                                                                         |       |
| DMI earn-out payment                                                                                 |       | (4,000                                                                             | )          | —                                                                         |       |
| Net cash used in investing activities                                                                |       | (6,224                                                                             | )          | (4,815                                                                         | )          |
|                                                                                                 |       |                                                                               |       |                                                                           |       |
| FINANCING  ACTIVITIES:                                                                               |       |                                                                               |       |                                                                           |       |
| Principal payments under long-term financing  agreements                                             |       | (8,119                                                                             | )          | (1,320                                                                         | )          |
| Recapitalization-equity contribution                                                                 |       | 21,747                                                                             |       | —                                                                         |       |
| Debt issuance costs                                                                                  |       | (3,616                                                                             | )          | —                                                                         |       |
| Recapitalization-repurchase of stock options                                                         |       | (7,880                                                                             | )          | —                                                                         |       |
| Distribution on behalf of Parent                                                                     |       | (1,196                                                                             | )          | —                                                                         |       |
| Borrowings of long-term debt                                                                         |       | 10,152                                                                             |       | 900                                                                            |       |
| Net cash provided by (used in) financing activities                                                  |       | 11,088                                                                             |       | (420                                                                           | )          |
|                                                                                                 |       |                                                                               |       |                                                                           |       |
| NET DECREASE IN  CASH                                                                                |       | (5,791                                                                             | )          | (3,343                                                                         | )          |
| CASH—Beginning  of period                                                                       |       | 8,048                                                                              |       | 3,981                                                                          |       |
|                                                                                                 |       |                                                                               |       |                                                                           |       |
| CASH—End of  period                                                                             |       | $                                                                                  | 2,257      |                                                                           | $          | 638 |   |
|                                                                                                 |       |                                                                               |       |                                                                           |       |
| SUPPLEMENTAL  CASH FLOW INFORMATION:                                                                 |       |                                                                               |       |                                                                           |       |
| Cash paid for interest                                                                               |       | $                                                                                  | 6,309      |                                                                           | $          | 6,203 |   |
|                                                                                                 |       |                                                                               |       |                                                                           |       |
| Cash paid for income taxes—net                                                                  |       | $                                                                                  | 265        |                                                                           | $          | 254 |   |
| NONCASH  ACTIVITY:                                                                                   |       |                                                                               |       |                                                                           |       |
| Recapitalization-repurchase of common stock funded  by 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                                                                                |       | $                                                                                  | 2,945      |                                                                           | $          | — |   |
|                                                                                                 |       |                                                                               |       |                                                                           |       |
| Capital  expenditures in accounts payable                                                            |       | $             545 |       | $            1,170 |       |

 

See notes to condensed consolidated financial statements (unaudited).

3

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**WIICOMPONENTS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED**

**CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**1.  BASIS OFPRESENTATION**

***Company Background-***  WIIComponents, Inc., a Delaware corporation (the “Company”), was formed inApril 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”).  The acquisition was consummated through amerger of WII Merger Corporation (“MergerCo”), a wholly owned subsidiary ofParent, with and into the Company with the Company being the survivingcorporation in the merger (the “Merger”) pursuant to an Amended and RestatedAgreement and Plan of Merger, dated as of January 5, 2007, by and among Parent,MergerCo, the Company, and Behrman Capital III L.P.  The aggregate purchase price paid by Parent for all of the shares ofcapital stock of the Company and options to purchase shares of capital stock ofthe Company in the Merger was approximately $295.5 million, less indebtednessand certain expenses, and subject to customary adjustments.  The aggregate purchase price and related feesand expenses were funded by new credit facilities and private offerings of debtand equity securities by Parent and the Company.  The Merger has been accounted for as arecapitalization in the Company’s financial statements, with no adjustments tothe historical basis of the Company’s assets and liabilities.  The Company did not push down the basisbecause of the significance of the publicly traded debt outstanding, whichhinders the Parent’s ability to control the form of ownership of the Company.

The Company prepared the accompanying unaudited condensed consolidatedfinancial statements following the requirements of the Securities and ExchangeCommission for interim reporting. As permitted under those rules, certain notesor other financial information normally required by accounting principlesgenerally accepted in the United States of America have been condensed oromitted. Therefore, the Company suggests that these financial statements beread in conjunction with the consolidated financial statements and accompanyingnotes for the year ended December 31, 2006 included in its Form 10-K asfiled with the Securities and Exchange Commission on March 28, 2007. Thecondensed consolidated balance sheet as of December 31, 2006 has beenderived from the audited consolidated financial statements at that date, butdoes not include all the information and notes required by accountingprinciples generally accepted in the United States of America for completepresentation.

In our opinion, the accompanying unaudited condensed consolidatedfinancial statements include all adjustments (consisting of normal recurringitems) considered necessary to present fairly, when read in conjunction withthe consolidated financial statements and accompanying notes for the periodended December 31, 2006 included in our 10-K as filed with the Securitiesand Exchange Commission on March 28, 2007, our financial position, results of operationsand cash flows for the periods presented.

The unaudited condensed consolidated financial statements include theaccounts of the Company and its wholly owned subsidiaries.  All intercompany accounts and transactionshave been eliminated in the preparation of the consolidated financialstatements.

***Reclassifications-*** Certain prior year amounts, includingadjustments to the income statement classification of stock-based compensationin connection with the adoption of SFAS 123(R), have been reclassified toconform to the current fiscal year presentation.  These reclassifications have no impact on theCompany’s net income.

**2. SIGNIFICANT ACCOUNTING POLICIES**

***Inventories***—Inventories consisted of the following (inthousands):
| ** **      | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                        | 11,974     |                        | $          | 12,270 |   |
| Work in process |       | 3,990                    |       | 4,768                       |       |
| Finished goods  |       | 5,182                    |       | 5,037                       |       |
| LIFO adjustment |       | (442                     | )          | (575                        | )          |
|            |       | $                        | 20,704     |                        | $          | 21,500 |   |

 

The majority of inventory is valued at the lower of last-in, first-out (“LIFO”)cost or market. The remainder of the inventory is valued under the first-in,first-out method (“FIFO”). As of March 31, 2007 and December 31, 2006,inventory on the LIFO method represented 63% 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 March 31, 2007 due to an accelerated Dimension Moldings, Inc. earn-outpayment as a result of the change in control caused by the Merger.

4

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***CustomerRelationship—***Customerrelationships relates to an intangible asset recorded through the purchaseprice allocation of the Grand Valley acquisition in 2004 and the acquisition ofthe assets of Dimension Moldings, Inc. in 2005 for relationships with asignificant customer. The original cost of these customer relationshipsis $16.6 million, and the related accumulated amortization as of March 31, 2007is $3.8 million.  The intangible assets are being amortized over the estimated life of 10years. Amortization for the three-month period ended March 31, 2007 was$414,000.  Expected annual amortizationis as follows for the years ending December 31 (in thousands):
| 2007      |   | $     | 1,658  |   |
|-----------|--------|-------|--------|--------|
| 2008      |   | 1,657 |   |
| 2009      |   | 1,658 |   |
| 2010      |   | 1,657 |   |
| 2011      |   | 1,658 |   |
| 2012-2015 |   | 4,951 |   |

 

***Noncompete Agreement***—Noncompete agreements primarily relate toagreements with the former owners of Brentwood (acquired in 2002), GrandValley, and Dimension Moldings, Inc. The original cost of thesenoncompete agreements is $2.4 million, and the related accumulated amortizationas of March 31, 2007 is $2.1 million.  Noncompete rights are being amortized over theapplicable terms of the agreements (5 years, 7 years, and 5 yearsrespectively), and are expected to be fully amortized by July 2007,April 2011, and July 2010 respectively. Amortization for the three-monthperiod ended March 31, 2007 was $86,000. Expected annual amortization is as follows for the years endingDecember 31 (in thousands):
| 2007 |   | $  | 285    |   |
|------|--------|----|--------|--------|
| 2008 |   | 34 |   |
| 2009 |   | 34 |   |
| 2010 |   | 26 |   |
| 2011 |   | 5  |   |

 

***UncertainTax Positions*-** The Company adopted the provisions ofFinancial Accounting Standards Board (“FASB”) Interpretation No. 48 *Accounting for Uncertainty in Income Taxes-an interpretation of FASBStatement No. 109* (“FIN 48”), on January 1, 2007.  FIN 48 clarifies the accounting foruncertainty in income taxes by defining criteria that a tax position on anindividual matter must meet before that position is recognized in the financialstatements.  Additionally, FIN 48provides guidance for measurement, derecognition, classification, interest andpenalties, accounting for interim periods, disclosures and transition.

As a result of theimplementation of FIN 48, the Company recognized a $1.4 million decrease in theliability for uncertain tax positions which, as required, was accounted for asan increase to the January 1, 2007 balance of retained earnings.  In addition, the following informationrequired by FIN 48 is provided:

·                                                    Unrecognizedtax benefits were approximately $113,000 and $114,000 as of January 1, 2007 andMarch 31, 2007, respectively.  If theseunrecognized tax benefits were recognized approximately $114,000 would impactthe effective tax rate.  While it isexpected that the amount of unrecognized tax benefits will change in the next12 months, we do not expect the change to have a significant impact on theresults of operations or the financial position of the Company.

·                                                    TheCompany recognizes interest expense and penalties related to the aboveunrecognized tax benefit within income tax expense.  The Company had accrued interest andpenalties of approximately $22,000 and $23,000 as of January 1, 2007 and March31, 2007, respectively

·                                                    TheCompany is currently open to an audit under the statute of limitations by theInternal Revenue Service for the years ending December 31, 2003 through2006.  The Company files in numerousstate jurisdictions with varying statutes of limitation.  The Company’s unrecognized state tax benefitsare related to state returns open from 2002 through 2006 depending on each state’sstatute of limitations.

***Stock Options*****—**In April 2003, the 2003 Stock Option andGrant Plan (“2003 Plan”) was approved by the stockholders of the Company. The2003 Plan allowed the granting of both incentive stock options and nonqualifiedstock options. Under the terms of the 2003 Plan, a maximum of 2,500,000 sharesof stock, subject to adjustment, were made available for awards to officers,employees, directors, consultants, and other key persons of the Company. Awardsincluded but were not limited to, stock options, restricted stock, unrestrictedstock awards, and substitute performance awards.  Option awards were generally granted with anexercise price equal to the calculated fair market value of the company’sstock.  Options generally vested overfour years and had 10-year contractual terms. On May 31, 2006, the 2003 Plan was amended by the Board to provide forthe issuance of an additional 500,000 options for a total of 3,000,000options.  The stockholders approved theamendment on June 8, 2006.  As a resultof the Merger the 2003 Plan was terminated on January 9, 2007.  In addition, all of the options, which wereoutstanding at the time of the Merger were deemed to be fully vested and then terminatedon January 9, 2007.

5

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***New AccountingPronouncements***—In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*. SFAS No. 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue 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*(SFAS 159). The Financial AccountingStandards Board has issued SFAS 159 to permit all entities to choose to elect,at specified election dates, to measure eligible financial instruments at fairvalue. An entity shall report unrealized gains and losses on items for whichthe fair value option has been elected in earnings at each subsequent reportingdate, and recognize upfront costs and fees related to those items in earningsas incurred and not deferred. SFAS 159 applies to fiscal years beginning afterNovember 15, 2007, or our 2008 fiscal year, with early adoption permittedfor an entity that has also elected to apply the provisions of SFAS 157, FairValue Measurements. An entity is prohibited from retrospectively applying SFAS159, unless it chooses early adoption. SFAS 159 also applies to eligible itemsexisting at November 15, 2007 (or early adoption date). The Company hasnot completed its analysis but does not expect the adoption of SFAS 159 to havea material effect on the Company’s financial condition or results ofoperations.

**3. ACQUISITIONS**

OnJuly 28, 2005, the Company acquired substantially all of the assets of amoldings manufacturing company operating under the name of Dimension Moldings,Inc.  The Company paid a cash purchaseprice at closing of $9.3 million. In addition, the Company was required to pay up to an aggregate of $7.0million if certain earnings targets are met at the end of each calendar yearfrom 2005 to 2010, which may be accelerated upon certain events.  The Company paid $2.0 million of the earn-outconsideration in the first quarter 2006. As a resultof the change in control caused by the Merger the remaining $5.0 millionpotential earn-out obligation was accelerated and paid on January 9, 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 DimensionMoldings, Inc. are now operated and owned by Woodcraft Industries, Inc., theCompany’s subsidiary.

On January 9, 2007, the Company was acquired by Parent, a newly formedinvestment entity controlled by Olympus in the Merger.  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 aggregate purchaseprice and related fees and expenses were funded by new credit facilities andprivate offerings of debt and equity securities by Parent and the Company.  The Merger has been accounted for as arecapitalization in the Company’s financial statements, with no adjustments tothe historical basis of the Company’s assets and liabilities.

In conjunction with the Merger, the Company entered into a new seniorcredit facility (the “New Senior Credit Facility”), with Credit Suisse, CaymanIslands Branch, which provided for (i) a senior secured first lien term loanfacility in an aggregate principal amount of $150.0 million (the “First LienTerm Facility”) and (ii) a senior secured first lien revolving credit facilityin an aggregate principal amount up to $25.0 million, subject to certainconditions, (the “Revolving Facility” and, together with the First Lien TermFacility, 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.  Borrowings of $9.8 million were outstandingunder the First Lien Term Facility as of March 31, 2007.  Effective as of April 30, 2007, no additionalborrowings are available under the First Lien Term Facility beyond the $9.8million outstanding.  As of March 31,2007, the maximum amount of borrowings available to the Company under theRevolving Facility was $12.5 million.  The

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outstandingprincipal of such indebtedness bears interest at a fluctuating rate equal toeither the base rate plus an applicable margin per annum or LIBOR plus anapplicable margin.  The New Senior CreditFacility is scheduled to mature January 2013.

In conjunctionwith the Merger, the Parent entered into Note Purchase Agreements with OCMMezzanine 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, theCompany is limited in its ability to pay dividends or otherwise makedistributions to Parent under the New Senior Credit Facility and the indenturegoverning the $120.0 million of 10% Senior Notes due 2012 (the “10% SeniorNotes due 2012”).  The Parent Notes arenot reflected in the Company’s consolidated balance sheet due to thesignificance of the public debt holders’ influence on the Company’s ability tocontrol the form of ownership.

In conjunctionwith the Merger, Parent issued equity securities of approximately $86.2 million(including rollover equity from management) to fund the equity necessary forthe acquisition, consisting of $81.0 million of preferred equity securities and$5.2 million of common equity securities. Preferred dividends accrue and accumulate on the outstanding preferredequity securities at the rate of 10% per annum, compounding quarterly, of thesum of its liquidation value per share ($1,000) plus all accumulated and unpaiddividends thereon.  Dividends are payableas and when declared by Parent’s board of directors out of funds legallyavailable for the payment of dividends. Such dividends accrue, whether or not they have been declared andwhether or not there are profits, surplus or other funds of Parent legallyavailable for the payment of dividends, until such time as such dividends areactually paid by Parent.  The holders ofa majority of the outstanding preferred equity securities at any time and fromtime to time may demand that Parent redeem all or any portion of theoutstanding preferred equity securities by delivering to the holder(s) thereof(i) an amount of cash per share equal to the sum of its liquidation value pershare ($1,000) plus all accumulated and unpaid dividends thereon and (ii) anumber of shares of Parent’s common equity securities as determined inaccordance with the redemption procedures contained in Parent’s certificate ofincorporation.  If Parent does not havefunds legally available for any particular redemption, Parent is obligated touse those funds that are legally available for the redemption of suchsecurities to redeem the maximum possible number of preferred equity securitieswhich would otherwise be redeemed in connection with such redemption.  Thereafter, when additional funds of Parentare legally available for redemption of such securities, Parent is obligated toredeem the balance of such securities. Parent is prohibited from redeeming any preferred equity securities ifany such redemption is prohibited under any credit facility or indenture towhich Parent or any of its subsidiaries is a party or is otherwise bound.  The Company is not liable for, and has nototherwise guaranteed, any of these obligations of Parent with respect to theequity securities issued by Parent. These equity securities are not reflected in the Company’s consolidatedbalance sheet due to the significance of the public debt holders’ influence onthe Company’s ability to control the form of ownership.

On December 11,2006, Parent and MergerCo, in anticipation of the consummationof the Merger, entered into an employment agreement with Mr. John Fitzpatrick,as Chief Executive Officer of MergerCo (the “New Fitzpatrick EmploymentAgreement”).  Pursuant to the NewFitzpatrick Employment Agreement, upon consummation of the Merger, the NewFitzpatrick Employment Agreement superceded and preempted Mr. Fitzpatrick’sprior employment agreement with the Company. On January 9, 2007, by operationof law upon consummation of the Merger, the New Fitzpatrick EmploymentAgreement was assigned by MergerCo to the Company.  Under the New Fitzpatrick Employment Agreement, in the event (i) Mr. Fitzpatrickresigns for retirement purposes from the employment of the Company and its subsidiariesafter December 31, 2009 (or such earlier date as the Company’s board of directorsand Mr. Fitzpatrick mutually agree upon) and (ii) Mr. Fitzpatrickprovided at least twelve months’ prior written notice to the Company and Parentof such resignation, then Mr. Fitzpatrick may elect to have Parentrepurchase up to 50% of the common equity securities and 50% of the preferredequity securities acquired by Mr. Fitzpatrick on January 9, 2007 in connectionwith the Merger at their respective fair market values.  Any such repurchase by Parent shall besubject to applicable restrictions contained in the Delaware GeneralCorporation Law and in Parent’s and its subsidiaries’ debt financing agreementswith unaffiliated third parties.  If anysuch restrictions prohibit any such repurchase which Parent is otherwiserequired to make, the repurchase obligation is suspended until such time asParent may make such repurchase under such restrictions.

The Companyrecorded expenses of $9.9 million in the three months ended March 31, 2007related to the Merger.  These expensescomprised $1.0 million of compensation expense related to accelerated vestingof stock options,  $0.2 million ofemployer related payroll taxes for accelerated vesting of stock options, $1.3million of transaction incentive expenses, $7.0 million of transaction costs,and $0.4 million of deferred financing costs related to refinancedindebtedness.  In addition to theseamounts, the Company capitalized $4.0 million of transaction costs intogoodwill related to the accelerated earn-out, and $3.6 million of deferredfinancing 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**

The Companyentered into a noncompete agreement on April 30, 2004 with the formerowners of Grand Valley, and on July 28, 2005 with the owners of DimensionMoldings, Inc. (Notes 2 and 3).

Parent has a managementservices agreement with an affiliate of the Parent’s largest stockholder,Olympus Partners.  Parent is obligated topay a transaction fee to the affiliate for services provided for eachfinancing, 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.

 

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

As used in thisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations, the terms “we,” “us” or “our” refer to WII Components, Inc. and itsconsolidated subsidiaries and their respective predecessors.

**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.  Please alsosee our discussion of risk factors contained in Item 1A. Part II of this Reporton Form 10-Q.

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

·                  financial results andconditions;

·                  margins, costs andexpenditures;

·                  cash flows and growthrates;

·                  demand for our products;

·                  industry trends;

·                  new product and customerinitiatives;

·                  our current plans forcapital expenditures;

·                  manufacturing and othercost-saving initiatives; and

·                  our liquidity and capitalresources.

In addition, we, through our senior management, 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 integrateacquired businesses;

·                  our need for additionalmanufacturing capacity;

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

·                  changes in interest ratesand general economic 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 oflabor.

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**Overview**

We believe that we are one of the leading manufacturers ofhardwood doors, hardwood components and engineered wood products for thekitchen and bath cabinet market in the United States. Our products include(1) hardwood cabinet door components, face frames and drawer fronts,(2) fully assembled hardwood cabinet doors, (3) rigid thermofoil, orRTF, cabinet doors and components, (4) veneer raised panels, or VRPs, and(5) a variety of laminated and profile-wrapped components. We generateapproximately 94% of our sales from the kitchen and bath cabinet manufacturingindustry. Our customers, in turn, distribute their products through varioussales channels, including specialty kitchen and bath cabinet dealers, homecenter retailers and homebuilders. We conduct all of our operations through ourWoodcraft, PrimeWood and Brentwood subsidiaries and we operate elevenmanufacturing facilities located in Minnesota, North Dakota, Oregon, Ohio,Kansas, Pennsylvania, Utah and Kentucky that allow us to distribute ourproducts nationwide.

In the past nineyears, we have consummated four strategic acquisitions that have enhanced ourmarket position, product breadth and geographic reach. In June 1998, weacquired PrimeWood, a manufacturer of RTF, VRP and profile-wrapped engineeredwood products based in North Dakota. In July 2002, we acquired Brentwood,a manufacturer of solid wood and RTF cabinet doors located in Oregon. InApril 2004, we acquired Grand Valley, a manufacturer of solid wood cabinetdoors located in Ohio.  On December 31,2006, Grand Valley was merged with and into Woodcraft.  In July 2005, we acquired substantially allof the assets of Dimension Moldings, Inc. (DMI), an Ohio corporation, which wasin the business of manufacturing hardwood component moldings at a facilitylocated in Middlefield, Ohio.  Followingthe acquisition, our Woodcraft subsidiary manufactures hardwood componentmoldings at the Middlefield facility for sale to one of our major customers.

In September 2005,we amended and restated our existing senior secured revolving credit facility(which is referred to herein as the “2005 Senior Credit Facility”), byexpanding the revolving line of credit capacity to $40.0 million, advancing a$7.5 million nonamortizing term loan, and allowing the flexibility to advanceup to $7.5 million through June 30, 2006 on a nonamortizing capital expenditureloan.  As of December 31, 2006, we hadnot borrowed any funds under the nonamortizing capital expenditure loan.  The 2005 Senior Credit Facility wasterminated on January 9, 2007 in connection with the Merger, and alloutstanding borrowings thereunder were repaid.

The Merger was completed onJanuary 9, 2007.  The aggregate purchaseprice paid 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.  TheMerger has been accounted for as a recapitalization in the Company’s financialstatements, with no adjustments to the historical basis of the Company’s assetsand liabilities. The Company did not push down the basis because of thesignificance of the publicly traded debt outstanding, which hinders the Parent’sability to control the form of ownership of the Company.  Parent financed the Merger through thefollowing transactions:

·  borrowings of approximately$86.0 million by Parent through the issuance of $43.0 million in principalamount of senior pay-in-kind notes to OCM Mezzanine Fund II, L.P. and $43.0million in principal amount of junior pay-in-kind notes to Olympus Growth FundIV, L.P. (collectively, the “Parent Notes”);

·  the issuance and sale ofequity securities of Parent (including rollover equity from management) to theOlympus funds, co-investors and certain members of management of approximately$86.2 million; and

·  borrowings of approximately$10.2 million by the Company under the New Senior Credit Facility (as definedbelow), of which, $9.8 million was outstanding as of March 31, 2007.

In conjunction with the Merger, the Company entered into a new seniorcredit facility (the “New Senior Credit Facility”), with Credit Suisse, CaymanIslands Branch, which provided for (i) a senior secured first lien term loanfacility in an aggregate principal amount of $150.0 million (the “First LienTerm Facility”) and (ii) a senior secured first lien revolving credit facilityin an aggregate principal amount up to $25.0 million, subject to certainconditions, (the “Revolving Facility” and, together with the First Lien TermFacility, 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.  Borrowings of $9.8 million were outstandingunder the First Lien Term Facility as of March 31, 2007.  Effective as of April 30, 2007, no additionalborrowings are available under the First Lien Term Facility beyond the $9.8million outstanding.  As of March 31,2007, the maximum amount of borrowings available to the Company under the RevolvingFacility was $12.5 million.  Theoutstanding principal of such indebtedness bears interest at a fluctuating rateequal to either the base rate plus an applicable margin per annum or LIBOR plusan applicable margin.  The New SeniorCredit Facility is scheduled to mature January 2013.

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**Results of Operations**

***Three Months Ended March 31, 2007 Comparedto the Three Months Ended March 31, 2006***

The following table outlines, for the three months ended March 31, 2007and for the three months ended March 31, 2006, selected operating data derivedfrom our condensed consolidated statements of operations and presents thisinformation as a percentage of net sales:
| ** **                      | ** ** | **WII Components, Inc.**                         | ** ** |
|---------------------------------|------------|------------------------------------------------------------|------------|
| ** **                      | ** ** | **Three Months Ended  March 31, 2007** | ** ** | **Three Months Ended  March 31, 2006** | ** ** |
| ** **                      | ** ** | **(dollars in thousands)**                       | ** ** |
| Net sales                       |       | $                                                          | 61,006     |   | $ | 76,341 |   |
| *% of  net sales*               | * *   | *100.0*                                                    | *%*        | *100.0* | *%* |
| Cost of sales                   |       | 50,257                                                     |       | 63,685 |   |
| *% of  net sales*               | * *   | *82.4*                                                     | *%*        | *83.4* | *%* |
| * *                        | * *   | * *                                                   | * *   | * * | * * |
| Gross profit                    |       | 10,749                                                     |       | 12,656 |   |
| *% of  net sales*               | * *   | *17.6*                                                     | *%*        | *16.6* | *%* |
| Operating  expenses             |       | 13,211                                                     |       | 4,762 |   |
| *% of  net sales*               | * *   | *21.6*                                                     | *%*        | *6.2* | *%* |
| * *                        | * *   | * *                                                   | * *   | * * | * * |
| Operating (loss)  income        |       | (2,462                                                     | )          | 7,894 |   |
| *% of  net sales*               | * *   | *-4.0*                                                     | *%*        | *10.4* | *%* |
| Other expenses  (income):       |       |                                                       |       |   |   |
| Interest expense                |       | 4,023                                                      |       | 3,422 |   |
| *% of  net sales*               | * *   | *6.6*                                                      | *%*        | *4.5* | *%* |
| Other income,  net              |       | (50                                                        | )          | (21 | ) |
| *% of  net sales*               | * *   | *-0.0*                                                     | *%*        | *-0.0* | *%* |
| Income tax  (benefit) provision |       | (4,094                                                     | )          | 1,827 |   |
| *% of  net sales*               | * *   | *-6.7*                                                     | *%*        | *2.4* | *%* |
| * *                        | * *   | * *                                                   | * *   | * * | * * |
| Net (loss)  income              |       | (2,341                                                     | )          | 2,666 |   |
| *% of net sales*                | * *   | *-3.8*                                                     | *%*        | *3.5* | *%* |
|                                 |            |                                                            |            |  |  |  |  |

 

*Net sales.*  Net sales decreased $15.3 million,or 20.0%, from $76.3 million for the three months ended March 31, 2006 to$61.0 million for the three months ended March 31, 2007.  Sales in our hardwood and engineered woodproduct line decreased $12.1 million and $3.2 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 2007 as ourcustomers were not operating above their capacities as they were in 2006, (iii)lower selling prices in conjunction with lower material costs, and (iv) to alesser extent, a reduction due to the loss of market share on a hardwood doorprogram in 2007.

*Cost of sales.*  Cost of sales decreased $13.4 million,or 21.0%, from $63.7 million for the three months ended March 31, 2006 to$50.3 million for the three months ended March 31, 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 and (ii) lowerhardwood material costs. These were partially offset by (i) increasedmulti-density fiber board and particle board costs related to our engineeredwood products line and (ii) transaction incentives incurred in connectionwith the Merger.

*Gross profit.*  Gross profit decreased $1.9 million,or 15.1%, from $12.6 million for the three months ended March 31, 2006 to$10.7 million for the same period in 2007. As a percentage of net sales,our gross profit increased 100 basis points from 16.6% for the three monthsended March 31, 2006 to 17.6% for the same period in 2007.  This increase reflects (i) improvedoperational performance and (ii) lower hardwood material costs.  This increase was partially offset with (i) boardcost increases related to our engineered wood product line and(ii) transaction incentives incurred in connection with the Merger.

*Operating expenses.*  Operating expenses increased $8.5 million,or 180.9%, from $4.7 million for the three months ended March 31, 2006 to$13.2 million for the same period in 2007. The increase consists of approximately (i) $7.2 million oftransaction expenses related to the Merger, (ii) $0.4 million related toefforts to refinance a portion of the outstanding debt, and (iii) $1.0 millionin transaction incentives incurred in connection with the Merger. These were partially offset with (i) lower salariesdue to eliminated positions and (ii) lower incentive expenses.

*Operating income.*  Operating income decreased by$10.4 million, or 131.6%, from $7.9 million for the three monthsended March 31, 2006 to an operating loss of $2.5 million for the threemonths ended March 31, 2007 as a result of the net effect of the factorsdescribed above.

*Interest expense.*  Interest expense increased$0.6 million, or 17.6%, from $3.4 million for the three months endedMarch 31, 2006 to $4.0 million for the three months ended March 31, 2007.This increase relates to (i) increased costs of deferred financing fees inconnection with the Merger, and (ii) a higher average debt balance due to theadditional debt assumed in conjunction with the Merger.

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*Other income.*  Other income was $50,000 and$21,000 for the three months ended March 31, 2007 and March 31, 2006,respectively.  This income is frominterest received from our interest bearing accounts.

*Income tax provision.*  Incometax expense decreased $5.9 million, or 327.8%, from an income tax expense of$1.8 for the three months ended March 31, 2006 to an income tax benefit of $4.1for the three months ended March 31, 2007 as a result of lower earnings. Theeffective tax rate increased 229 basis points from 40.7% in 2006 to 63.6% in2007 due to permanent differences associated with the Merger.

*Net income.*  Net income decreased$5.0 million, or 185.2%, from net income of $2.7 million for thethree months ended March 31, 2006 to a net loss of $2.3 million for thethree months ended March 31, 2007 as a result of the factors described above.

**Liquidity and Capital Resources**

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

*Refinancing*. On February 18, 2004,we issued the 10% Senior Notes due 2012, and paid the entire outstandingbalance of our old senior secured credit facility and terminated the relatedcredit agreement.  Our 2005 Senior CreditFacility was amended and restated in September 2005, provided for revolvingcredit of up to $40.0 million subject to a borrowing base, a $7.5 millionnonamortizing term loan, and a $7.5 million nonamortizing capital expenditureloan to be drawn upon through June 30, 2006. As of June 30, 2006, the nonamortizing capital expenditure loan hadexpired.  The outstanding principal boreinterest at a fluctuating rate equal to either the base rate plus 2 3¤4% per annum or LIBOR plus 3.0% per annum.  The 2005 Senior Credit Facility wasterminated, and all outstanding borrowings thereunder repaid, on January 9,2007 in connection with the Merger.

On January 9,2007, we entered into the New Senior Credit Facility.  As ofMarch 31, 2007, we have incurred borrowings of approximately $9.8million under First Lien Term Facility and no borrowings have been incurredunder the Revolving Facility.  Theoutstanding principal of such indebtedness currently bears interest at afluctuating rate equal to either the base rate plus 1.75% per annum or LIBORplus 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 March 31, 2007.

The 2005acquisition of substantially all of the assets of Dimension Moldings, Inc, andassociated fees and expenses at closing were funded one-half by the sale ofshares of the Company’s voting common stock to the Company’s formerstockholders, and the remainder with operating cash and a draw down on theCompany’s senior secured credit facility. In the first quarter 2006, we paid an accelerated earn-out payment inthe amount of $2.0 million to the owners of Dimension Moldings, Inc. as aresult of the operations of these assets meeting agreed upon earnings targets.  As a result of the change in control caused by the Merger on January 9,2007, the remaining $5.0 million potential earnout obligation, which included$1.0 million accrued at June 30, 2006, was accelerated and paid.

Our New 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.  Indebtednessfor borrowed money incurred under our First Lien Term Facility under our NewSenior Credit Facility is secured by substantially all of our assets, includingour real and personal property, inventory, accounts receivable, intellectualproperty and other intangibles.

As of March 31, 2007, we had $1.0 million of capital lease obligations,of which $0.6 million was current and as of December 31, 2006, we had $1.1million of capital lease obligations, of which $0.6 million was current.

As of March 31, 2007, we had $2.3 million of cash and cash equivalentsavailable for any corporate purposes, compared to $0.6 million as of March 31,2006.

*Cash flow from operating activities.*  Cashused in operating activities for the three months ended March 31, 2007 was $10.7million, while cash provided by operating activities for the three months endedMarch 31, 2006 was $1.9 million.  Theincreased use of cash for operating activities is mainly attributable to (i)the semi-annual interest payment on the 10% Senior Notes due 2012, (ii) lowernet income, and (iii) increased receivables due to a higher daily sales rateand days of receivables outstanding.

*Cash flow from investing activities.*  Netcash used in investing activities was $6.2 million for the three monthsended March 31, 2007 and $4.8 million for the three months ended March 31,2006. Capital expenditures in three months ended March 31, 2007 were $2.2million compared to $4.8 million for the three months ended March 31,2006.  The decrease in capitalexpenditures in 2007 is primarily due to (i) the expansion of our St. Clouddoor plant in 2006, and (ii) the acquisition of equipment for our roughmillfacility in Greenville, Pennsylvania, most of which was paid in 2006. Net cashused in investing activities for the three months ended March 31, 2007 includes$4.0 million due to an accelerated Dimension Moldings, Inc. earn-out payment inconjunction with the Merger.

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*Cash flow from financing activities.*  Netcash provided by financing activities for the three months ended March 31, 2007totaled $11.1 million primarily due to (i) capital contributions of $21.7million that funded debt issuance costs of $3.6 million and stock optionpayments of $7.9 million, (ii) borrowings of long-term debt under the New senior credit facilityof $10.2 million that funded the payoff of the 2005 Senior Credit Facility of$7.5 million, (iii) capital lease payments of $0.1 million, (iv) principalpayments on the New Senior Credit Facility of $0.4 million, and (v) adistribution on behalf of Parent for costs in conjunction with the Merger of$1.2 million.  Net cash used in financingactivities for the three months ended March 31, 2006 totaled $0.4 million,primarily attributable to capital lease payments.

We anticipate that the funds generated by operations and funds availableunder the New 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 our businesswill generate sufficient cash flow from operations, that anticipated net salesgrowth and operating improvements will be realized or that future borrowingswill be available under our New Senior Credit Facility in an amount sufficientto enable us to service our indebtedness, including the 10% Senior Notes due2012, or to fund our other liquidity needs. In addition, we cannot provideassurances that we will be able to refinance any of our indebtedness, includingour New Senior Credit Facility and the 10% Senior Notes due 2012, oncommercially reasonable terms, if at all. We intend to incur additional capital expenditures in theordinary course of business.

**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**

In our Annual Report on Form 10-K for the year ended December 31, 2006,we identified the critical accounting policies, which affect our moresignificant estimates and assumptions used in preparing our consolidatedfinancial statements.  We have notchanged these policies from those previously disclosed in our annual report.

**New Accounting Standards**

See Note 2 of the Condensed Consolidated Financial Statements forinformation pertaining to recently adopted accounting standards or accountingstandards to be adopted in the future.

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

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

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

*Interest rate risk.*  We areexposed to market risk relating to changes in interest rates in respect of aportion of our long-term debt and a portion of our capital leases. As of March 31, 2007, we had $9.8 millionoutstanding under the First Lien Term Facility, which bears interest atvariable rates.  In addition, as of that date, we hadapproximately $0.7 million of capital leases that bear interest atvariable rates. We believe that a one percent (1%) increase in the interestrates currently in effect would not have a material adverse effect on ourfinancial condition or results of operations.

*Market Conditions. *The Company derives a significant portion ofits revenue as a result of the demand for its products created by the buildingof new homes, and repair and remodeling of existing homes.  During the second half of 2006, the homebuilding, repair and remodeling industry experienced a slowdown as a result ofgeneral economic conditions.  If thisslowdown were to continue or worsen over an extended period of time, it couldhave a material adverse effect on the Company’s business, financial conditionor results of operations.

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

(a)           Evaluation of disclosure controls andprocedures.

As required by Rule 13a-15 under the Securities Exchange Act of1934, 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, 2007. In designing and evaluating our disclosurecontrols and procedures, we and our management

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recognizethat any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and our management necessarily was required to apply its judgment in evaluatingand implementing possible controls and procedures. Based upon that evaluation,our Chief Executive Officer and Chief Financial Officer have concluded thatthey believe that, as of March 31, 2007, 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. The ChiefExecutive Officer and Chief Financial Officer have also concluded that controlsand procedures are designed to ensure that information required to be disclosedis accumulated and communicated to our management, including our principalexecutive and principal financial officers as appropriate to allow timelydecisions regarding required disclosure. We will continue to reviewand document our disclosure controls and procedures on an ongoing basis, andmay from time to time make changes aimed at enhancing their effectiveness andto ensure that our systems evolve with our business.

(b)           Changes in internal controls over financialreporting.

None.

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**PART II—OTHER INFORMATION**

**Item 1. Legal Proceedings**

No pending 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 the home building,repair and remodeling industry continues for an extended period of time, itcould have a material adverse effect on the Company’s business, financialcondition or results of operations. ***The Company derives a significant portion ofits revenue as a result of the demand for its products created by the buildingof new homes, and repair and remodeling of existing homes.  During the third quarter of 2006, the homebuilding, repair and remodeling industry experienced a slowdown as a result ofgeneral economic conditions.  Thisslowdown has continued into 2007, and has had a negative impact on our resultsof operations for the quarterly period ended March 31, 2007.  If this slowdown were to continue or worsen overan 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                           FirstLien Senior Secured Credit Agreement, dated as of January 9, 2007, by andamong WII Components, Inc. (as successor-in-interest to WII Merger Corporation)as Borrower and Credit Suisse, for itself and as Administrative Agent, SwingLine Lender, an L/C Issuer and as Collateral Agent for all Lenders, and theLenders Party thereto.

10.2                           AmendmentNo. 1 To The Credit Agreement, dated as of February 7, 2007, by and amongWII Components, Inc. as Borrower, and Credit Suisse, for itself and asAdministrative Agent, Swing Line Lender, an L/C Issuer and as Collateral Agent.

10.3                           EmploymentAgreement dated December 11, 2006, between WII Components, Inc. (assuccessor-in-interest to WII Merger Corporation), WII Holding, Inc. and JohnFitzpatrick

10.4                           EmploymentAgreement dated December 11, 2006, between WII Components, Inc. (assuccessor-in-interest to WII Merger Corporation), WII Holding, Inc. and DaleHerbst.

10.5                           EmploymentAgreement dated December 11, 2006, between WII Components, Inc. (assuccessor-in-interest to WII Merger Corporation), WII Holding, Inc. and JoeBeyer.

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

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

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

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

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*Thiscertification shall not be deemed “filed” for purposes of Section 18 of theSecurities Exchange Act of 1934, or otherwise subject to the liability of thatsection, nor shall it be deemed to be incorporated by reference into any filingunder the 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, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|                      | WII COMPONENTS, INC. |
|----------------------|----------------------|
|                 |                 |
| Dated: May 23,  2007 | By:                  |
|                 |                 | /s/ John Fitzpatrick |
|                 |                 | John Fitzpatrick |
|                 |                 | President and Chief Executive Officer |
|                 |                 | (Principal Executive Officer) |
| Dated: May 23,  2007 |                 |   |
|                 |                 | /s/ Dale B. Herbst |
|                 |                 | Dale B. Herbst |
|                 |                 | Chief Financial Officer, Treasurer and Secretary |
|                 |                 | (Principal Financial and Accounting Officer) |

 

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