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**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, 2009** |
|                                                    |   |                                                                                                              |
| **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 areacode)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x  No o.

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o  No o.

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting companyfiler.  See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

 

| Large Accelerated Filer o |   | Accelerated Filer o          |
|--------------------------------|--------|------------------------------|
|                           |   |                         |
| Non-accelerated Filer  x  |   | Smaller Reporting Company o. |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o  No x.

 

As of May 5, 2009, 100 shares of commonstock, $.01 par value per share, were outstanding (all of which are owned byWII Holding, Inc.).

 

 

 

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**WIICOMPONENTS, INC.**

 

**FORM 10-Q**

**QuarterEnded March 31, 2009**

 

**Tableof Contents**

 
| **Part I—Financial  Information**                                                                          |   |   |
|----------------------------------------------------------------------------------------------------------------------|--------|--------|
| Item 1. Financial Statements                                                                                         |   |   |
| Condensed Consolidated Balance Sheets (unaudited) as  of March 31, 2009 and December 31, 2008              |   | 1      |
| Condensed Consolidated Statements of Operations  (unaudited) for the Three Months Ended March 31, 2009 and 2008 |   | 2      |
| Condensed Consolidated Statements of Cash Flows  (unaudited) for the Three Months Ended March 31, 2009 and 2008 |   | 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                                                  |   | 14     |
| Item 4T. Controls and Procedures                                                                                     |   | 14     |
|                                                                                                                 |   |   |
| **Part II-Other  Information**                                                                                  |   |   |
| Item 1. Legal Proceedings                                                                                            |   | 16     |
| Item 1A. Risk Factors                                                                                                |   | 16     |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                                 |   | 16     |
| Item 3. Defaults Upon Senior Securities                                                                              |   | 16     |
| Item 4. Submission of Matters to a Vote of Security  Holders                                                         |   | 16     |
| Item 5. Other Information                                                                                            |   | 16     |
| Item  6. Exhibits                                                                                                    |   | 16     |
| Signatures                                                                                                           |   | 18     |

 

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**WIICOMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

**(Inthousands)**

 
| ** **                                    | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                    |       |                     |       |                        |       |
| Current Assets:                               |       |                     |       |                        |       |
| Cash                                          |       | $                        | 3,184      |                        | $          | 14,721 |   |
| Accounts receivable, net                      |       | 10,788                   |       | 6,603                       |       |
| Inventories                                   |       | 15,990                   |       | 13,442                      |       |
| Other current assets                          |       | 3,507                    |       | 2,168                       |       |
| Total current assets                          |       | 33,469                   |       | 36,934                      |       |
|                                          |       |                     |       |                        |       |
| Property, plant, and equipment, net           |       | 55,039                   |       | 56,537                      |       |
| Goodwill                                      |       | 112,748                  |       | 112,748                     |       |
| Customer relationship                         |       | 9,509                    |       | 9,924                       |       |
| Noncompete agreements                         |       | 57                       |       | 65                          |       |
| Other assets                                  |       | 4,565                    |       | 4,798                       |       |
| TOTAL                                         |       | $                        | 215,387    |                        | $          | 221,006 |   |
|                                          |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDER’S EQUITY** |       |                     |       |                        |       |
| Current Liabilities:                          |       |                     |       |                        |       |
| Current maturities of long-term debt          |       | $                        | —     |                        | $          | 3,597 |   |
| Accounts payable                              |       | 3,324                    |       | 1,187                       |       |
| Accrued payroll                               |       | 2,952                    |       | 2,935                       |       |
| Due to Parent                                 |       | 4,742                    |       | 4,768                       |       |
| Other current liabilities                     |       | 5,786                    |       | 8,943                       |       |
| Total current liabilities                     |       | 16,804                   |       | 21,430                      |       |
|                                          |       |                     |       |                        |       |
| Long-term debt, net of current maturities     |       | 108,350                  |       | 108,350                     |       |
| Deferred income tax liability                 |       | 5,217                    |       | 5,217                       |       |
| Other long-term liabilities                   |       | 1,947                    |       | 1,947                       |       |
|                                          |       |                     |       |                        |       |
| Stockholder’s Equity:                    |       |                     |       |                        |       |
| Common stock                                  |       | —                   |       | —                      |       |
| Additional paid-in capital                    |       | 71,304                   |       | 71,292                      |       |
| Retained earnings                             |       | 11,765                   |       | 12,770                      |       |
| Total stockholders’ equity               |       | 83,069                   |       | 84,062                      |       |
| TOTAL                                         |       | $                        | 215,387    |                        | $          | 221,006 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                                                | ** ** | **Three Months  Ended  March 31, 2009** | ** ** | **Three Months  Ended  March 31, 2008** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| NET SALES                                                 |       | $                                            | 32,805     |                                         | $          | 56,019 |   |
| COST OF SALES                                             |       | 28,338                                       |       | 48,192                                       |       |
| Gross profit                                              |       | 4,467                                        |       | 7,827                                        |       |
|                                                      |       |                                         |       |                                         |       |
| OPERATING EXPENSES:                                       |       |                                         |       |                                         |       |
| General and administrative                                |       | 2,300                                        |       | 2,760                                        |       |
| Selling and marketing                                     |       | 733                                          |       | 840                                          |       |
| Loss (Gain) on sale of assets                             |       | 11                                           |       | (1                                           | )          |
| Total operating expenses                                  |       | 3,044                                        |       | 3,599                                        |       |
|                                                      |       |                                         |       |                                         |       |
| OPERATING INCOME                                          |       | 1,423                                        |       | 4,228                                        |       |
|                                                      |       |                                         |       |                                         |       |
| OTHER INCOME (EXPENSE):                                   |       |                                         |       |                                         |       |
| Interest income                                           |       | 4                                            |       | 93                                           |       |
| Interest expense                                          |       | (3,026                                       | )          | (3,308                                       | )          |
| Other income/expense                                      |       | 1                                            |       | 1,728                                        |       |
| Total other income (expense)                              |       | (3021                                        | )          | (1,487                                       | )          |
|                                                      |       |                                         |       |                                         |       |
| (LOSS)/INCOME BEFORE (BENEFIT)/PROVISION FOR INCOME TAXES |       | (1,598                                       | )          | 2,741                                        |       |
| INCOME TAX (BENEFIT)/PROVISION                            |       | (593                                         | )          | 1,058                                        |       |
| NET (LOSS) EARNINGS                                       |       | $                                            | (1,005     | )                                            | $          | 1,683 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                                                                              | ** ** | **Three Months  Ended  March 31, 2009** | ** ** | **Three Months  Ended  March 31, 2008** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| OPERATING ACTIVITIES:                                                                   |       |                                         |       |                                         |       |
| Net (loss) earnings                                                                     |       | $                                            | (1,005     | )                                            | $          | 1,683 |   |
|                                                                                    |       |                                         |       |                                         |       |
| Adjustments to reconcile net (loss) earnings to net cash used in  operating activities: |       |                                         |       |                                         |       |
| Depreciation and amortization                                                           |       | 2,144                                        |       | 2,213                                        |       |
| (Gain) Loss on sale of assets                                                           |       | 11                                           |       | (1                                           | )          |
| Amortization of debt issuance costs                                                     |       | 369                                          |       | 382                                          |       |
| Gain on extinguishment of debt                                                          |       | —                                       |       | (1,725                                       | )          |
| Stock compensation expense                                                              |       | 13                                           |       | 13                                           |       |
|                                                                                    |       |                                         |       |                                         |       |
| Change in operating assets and liabilities:                                             |       |                                         |       |                                         |       |
| Accounts receivable                                                                     |       | (4,185                                       | )          | (3,214                                       | )          |
| Inventories                                                                             |       | (2,549                                       | )          | 906                                          |       |
| Other current assets                                                                    |       | (1,339                                       | )          | (850                                         | )          |
| Accounts payable                                                                        |       | 2,137                                        |       | 1,503                                        |       |
| Accrued payroll and other current liabilities                                           |       | (3,140                                       | )          | (10,462                                      | )          |
| Net cash used in operating activities                                                   |       | (7,544                                       | )          | (8,657                                       | )          |
|                                                                                    |       |                                         |       |                                         |       |
| INVESTING ACTIVITIES:                                                                   |       |                                         |       |                                         |       |
| Purchases of property, plant, and equipment                                             |       | (244                                         | )          | (1,241                                       | )          |
| Proceeds from sale of property, plant and equipment                                     |       | 10                                           |       | 4                                            |       |
| Net cash used in investing activities                                                   |       | (234                                         | )          | (1,237                                       | )          |
|                                                                                    |       |                                         |       |                                         |       |
| FINANCING ACTIVITIES:                                                                   |       |                                         |       |                                         |       |
| Principal payments under long-term financing agreements                                 |       | (3,597                                       | )          | (10,034                                      | )          |
| Debt issuance costs                                                                     |       | (136                                         | )          | (21                                          | )          |
| Distribution to Parent                                                                  |       | —                                       |       | (4,470                                       | )          |
| Borrowings of long-term debt                                                            |       | —                                       |       | 6,600                                        |       |
| Due to Parent                                                                           |       | (26                                          | )          | 895                                          |       |
| Net cash used in financing activities                                                   |       | (3,759                                       | )          | (7,925                                       | )          |
|                                                                                    |       |                                         |       |                                         |       |
| NET DECREASE IN CASH                                                                    |       | (11,537                                      | )          | (17,819                                      | )          |
| CASH—Beginning of period                                                           |       | 14,721                                       |       | 19,574                                       |       |
|                                                                                    |       |                                         |       |                                         |       |
| CASH—End of period                                                                 |       | $                                            | 3,184      |                                         | $          | 1,755 |   |
|                                                                                    |       |                                         |       |                                         |       |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                                     |       |                                         |       |                                         |       |
| Cash paid for interest                                                                  |       | $                                            | 5,486      |                                         | $          | 6,194 |   |
|                                                                                    |       |                                         |       |                                         |       |
| Cash paid for income taxes—net                                                     |       | $                                            | 69         |                                         | $          | 294 |   |
| NONCASH ACTIVITY:                                                                       |       |                                         |       |                                         |       |
| Capital expenditures in accounts payable                                                |       | $                                            | —     |                                         | $          | 66 |   |

 

See notes to condensed consolidated financialstatements (unaudited).

 

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED**

**CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.  BASIS OF PRESENTATION**

*** ***

***Company Background******-*** OnJanuary 9, 2007, WII Components, Inc. (the “Company”) was acquired byWII Holding, Inc. (“Parent”), a newly formed investment entity controlledby two investment funds managed by Olympus Partners.  For ease of reference, these funds aresometimes collectively referred to herein as the “Olympus Funds.”  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 transaction (the “Transaction”).  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 Transaction was approximately$293.1 million, less indebtedness and certain expenses.  The aggregate purchase price and related feesand expenses were funded by borrowings under new credit facilities by theCompany and private offerings of debt and equity securities by Parent.  The Transaction 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 newaccounting basis because of the significance of the publicly traded debtoutstanding, which hinders the Parent’s ability to control the form ofownership of the Company.

*** ***

The Company prepared theaccompanying unaudited condensed consolidated financial statements followingthe requirements of the Securities and Exchange Commission for interimreporting.  As permitted under thoserules, certain notes or other financial information normally required byaccounting principles generally accepted in the United States of America havebeen condensed or omitted.  Therefore,the Company suggests that these financial statements be read in conjunctionwith the consolidated financial statements and accompanying notes for the yearended December 31, 2008 included in its Form 10-K as filed with theSecurities and Exchange Commission on March 31, 2009.  The condensed consolidated balance sheet asof December 31, 2008 has been derived from the audited consolidatedfinancial statements at that date, but does not include all the information andnotes required by accounting principles generally accepted in the United Statesof America for complete presentation.

 

In management’s opinion, the accompanying unauditedcondensed consolidated financial statements include all adjustments (consistingof normal recurring items) considered necessary to present fairly, when read inconjunction with the consolidated financial statements and accompanying notesfor the period ended December 31, 2008 included in our Form 10-K asfiled with the Securities and Exchange Commission on March 31, 2009, ourfinancial position, results of operations and cash flows for the periodspresented.

 

The unaudited condensedconsolidated financial statements include the accounts of the Company and itswholly owned subsidiaries.  Allintercompany accounts and transactions have been eliminated in the preparationof the consolidated financial statements.

 

**2.SIGNIFICANT ACCOUNTING POLICIES**

 

***Revenue Recognition***—Sales are recognized when revenue is realized orrealizable and has been earned.  TheCompany’s policy is to recognize revenue and the related cost of sales whenrisk and title passes to the customer. This is generally on the date of shipment, however, certain sales areshipped FOB destination and revenue is recognized when received by the customer.  Freight billed to customers is included insales and shipping costs are included in cost of sales.  The Company records an estimate foranticipated sales returns and customer discounts at the time revenue isrecognized based on historical experience and current trends.  These estimates have been consistent with theCompany’s actual experiences.  Provisionsfor estimated sales returns and customer discounts are recorded as a reductionof net sales.  For the three monthperiods ended March 31, 2009 and March 31, 2008, the provision forestimated sales returns and customer discounts as a percentage of net saleswere 3.2% and 3.3%, respectively.

*** ***

***Concentration of Credit Risk***—The Company receives a significantportion of its revenue from two customers. For the three months ended March 31, 2009 and 2008, the Company’stwo largest customers accounted for approximately 55% and 51%, respectively, ofits net sales.  As of March 31, 2009and December 31, 2008, these two largest customers accounted forapproximately 59% and 47%, respectively, of the Company’s consolidated accountsreceivables balance.  The permanent lossof, or a significant decrease in the level of purchases by, one or more of ourmajor customers could have a material adverse effect on our results of operationsand future cash flows.

 

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

 
| ** **      | ** ** | **March 31,  2009** | ** **  | **December 31,  2008** | ** ** |
|-----------------|------------|--------------------------|-------------|-----------------------------|------------|
| Raw materials   |       | $                        |  8,271 |                        | $          |  6,977 |   |
| Work in process |       | 2,728                    |        | 2,761                       |       |
| Finished goods  |       | 3,261                    |        | 2,496                       |       |
| LIFO adjustment |       | 1,730                    |        | 1,208                       |       |
|            |       | $                        | 15,990      |                        | $          |  13,442 |   |

 

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The majority of inventoryis valued at the lower of last-in, first-out (“LIFO”) cost or market.  The remainder of the inventory is valued atthe lower of first-in, first-out method (“FIFO”) cost or market.  As of March 31, 2009 and December 31,2008, inventory on the LIFO method represented 65% and 61%, respectively, ofconsolidated inventories.

 

***Goodwill***—The Company evaluates goodwill forimpairment at least annually or when events or changes in circumstancesindicate impairment.  The Company haselected to perform its annual tests for goodwill impairment as of December 31of each year.  Since December 31,2008, the Company concluded there were no events or changes in circumstancesrequiring an interim goodwill impairment analysis to be completed as of March 31,2009.  Fair value is measured using amarket multiple valuation method.  Thecarrying amount of goodwill was $112.7 million at March 31, 2009 and December 31,2008.

 

***Customer Relationship—***Customer relationships relate tointangible assets recorded through previous acquisitions for relationships withsignificant customers.  The original costof these customer relationships was $16.6 million, and the related accumulatedamortization as of March 31, 2009 is $7.1 million.  The intangible assets are being amortizedover the estimated life of 10 years. Amortization was $0.4 million for the three-month periods ended March 31,2009 and 2008.  Expected annualamortization is as follows for the years ending December 31 (inthousands):

 
| 2009       |   | $     | 1,658  |   |
|------------|--------|-------|--------|--------|
| 2010       |   | 1,657 |   |
| 2011       |   | 1,658 |   |
| 2012       |   | 1,657 |   |
| 2013       |   | 1,658 |   |
| Thereafter |   | 1,636 |   |

*** ***

***Noncompete Agreement***—Noncompete agreements primarily relate to agreementswith the former owners of Brentwood, Grand Valley, and Dimension Moldings, Inc.(DMI).  The original cost of thesenoncompete agreements was $2.4 million, and the related accumulatedamortization as of March 31, 2009 is $2.3 million.  Noncompete rights are being amortized overthe applicable terms of the agreements (5 years, 7 years, and 5years, respectively).  The noncompeteagreement with the former owner of Brentwood was fully amortized in July 2007.  The noncompete agreement with the formerowners of Grand Valley and DMI are expected to be fully amortized by April 2011and July 2010, respectively. Amortization was $9,000 for the three-month periods ended March 31,2009 and 2008.  Expected annualamortization is as follows for the years ending December 31 (inthousands):

 
| 2009 |   | $  | 34     |   |
|------|--------|----|--------|--------|
| 2010 |   | 26 |   |
| 2011 |   | 5  |   |

 

***New Accounting Pronouncements***— In September 2006, theFASB issued SFAS No. 157, *Fair ValueMeasurements* (SFAS 157).  SFAS 157 defines fair value, establishes a frameworkfor measuring fair value in generally accepted accounting principles andexpands disclosures about fair value measurements.  This Statement applies under other accountingpronouncements that require or permit fair value measurements, the FASB havingpreviously concluded in those accounting pronouncements that fair value is therelevant measurement attribute. Accordingly, this Statement does not require any new fair valuemeasurements.

 

 In February 2007, FASB issued SFAS No. 159,*Establishing the Fair Value Option forFinancial Assets and Liabilities*(SFAS 159).  The Financial Accounting Standards Board hasissued SFAS 159 to permit all entities to choose to elect, at specifiedelection dates, to measure eligible financial instruments at fair value.

 

The Companyadopted SFAS 157 and SFAS 159 on January 1, 2008.  The Company didnot elect the fair value of accounting option for any eligible assets;therefore, the adoption of these standards had no impact on its financialstatements.

 

The Company evaluatedthe remaining aspects of SFAS 157 for which the effective date was deferredunder FSP No. 157-2.  Areas impactedby the deferral relate to non-financial assets and liabilities that aremeasured at fair value, but are recognized or disclosed at fair value on anonrecurring basis.  This deferralapplies to such items as long-lived asset groups measured at fair value for animpairment assessment.  The Companyapplied the effects of these remaining aspects of SFAS 157 to fair valuemeasurements prospectively beginning January 1, 2009.  The adoption ofSFAS 157 did not have a material impact on the Company’s consolidated resultsof operations or financial condition.

 

In December 2007, the FASB issued SFAS No. 141 (R), *Business Combinations* (SFAS 141(R)).  SFAS 141(R) establishes principles andrequirements for how an acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, anynon-controlling interest in the acquirer and the goodwill acquired.  SFAS 141(R) also establishes 

 

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disclosure requirements to enable the evaluation of the nature andfinancial effects of the business combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15,2008.  The adoption of SFAS No. 141(R) didnot have a material impact on the Company’s consolidated results of operationsor financial condition.

 

In March 2008, the FASB issued SFAS No. 161, *Disclosures about Derivative Instruments and Hedging Activities-anamendment of FASB Statement No. 133* (SFAS 161).  SFAS 161 will require increased disclosureabout: (i) an entity’s strategies and objectives for using derivativeinstruments, (ii) the location and amounts of derivative instruments in anentity’s financial statements, (iii) how derivative instruments andrelated hedged items are accounted for under SFAS 133, *Accountingfor Derivative Instruments and Hedging Activities*, and (iv) howderivative instruments and related hedged items affect its financial position,financial performance, and cash flows. Certain disclosures are required with respect to derivative featuresthat are credit-risk related.  SFAS 161is effective for the Company beginning January 1, 2009 on a prospectivebasis.  The adoption of SFAS 161 did nothave a material impact on the Company’s consolidated results of operations orfinancial condition.

** **

**3.RECAPITALIZATION AND OTHER ACQUISITIONS**

 

OnJanuary 9, 2007, the Company was acquired by Parent, a newly formedinvestment entity controlled by the Olympus Funds.  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 Transaction was approximately$293.1 million, less indebtedness and certain expenses.  The aggregate purchase price and related feesand expenses were funded by borrowings under new credit facilities by theCompany and private offerings of debt and equity securities by Parent.  The Transaction has been accounted for as arecapitalization in the Company’s consolidated financial statements, with noadjustments to the historical basis of the Company’s assets and liabilities.

 

Inconjunction with the Transaction, the Company entered into a senior creditfacility (the “Senior Credit Facility”), with Credit Suisse, Cayman IslandsBranch, 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 creditfacility in an aggregate principal amount up to $25.0 million, subject tocertain conditions (the “Revolving Facility” and, together with the First LienTerm Facility, the “First Lien Facilities”), of which $10.0 million isavailable through a sub facility in the form of letters of credit.

 

In conjunction with theTransaction, the Parent entered into note purchase agreements with OCM MezzanineFund II, L.P. and Olympus Growth Fund IV, L.P (the “Note Purchase Agreements”).  The Note Purchase Agreement with OCMMezzanine Fund II, L.P. consisted of $43.0 million senior payment-in-kind noteswith no required principal amortization. The Note Purchase Agreement with Olympus Growth Fund IV, L.P. consistedof $43.0 million junior payment-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, Parentis able at its option to pay interest on the Parent Notes through the issuanceof additional notes.  The Company is notliable for, and has not otherwise guaranteed, any of the obligations of Parentwith respect to the Parent Notes.  The Parentand its Subsidiaries (including the Company) are, however, subject to a numberof restrictive covenants under the Note Purchase Agreements.  The Parent and its Subsidiaries (includingthe Company) were in compliance with all covenants as of March 31, 2009.  In addition, the Company is limited in itsability to pay dividends or otherwise make distributions to Parent under theSenior Credit Facility and the indenture governing the 10% Senior Notes due2012 (the “Senior Notes”). The Parent Notes are not reflected in the Company’s consolidated balancesheet as the Company did not push down the new accounting basis because of thesignificance of the public debt holders’ influence on the Company’s ability tocontrol the form of ownership.

 

Effective as of June 13,2007, the Parent issued an additional $20.0 million of Parent Notes to OlympusGrowth Fund IV, L.P., and repurchased $20.0 million of Parent Notes from OCMMezzanine Fund II, L.P.  During thetwelve month period ended December 31, 2008, the Company distributed $4.5million to the Parent for payment on the Parent Notes.  This distribution to the Parent was recordedas a reduction in retained earnings.

 

In conjunction with the Transaction, Parent issued equity securities ofapproximately $86.2 million (including rollover equity from management) to fundthe equity necessary for the acquisition, consisting of $81.0 million ofpreferred equity securities and $5.2 million of common equity securities.  Preferred dividends accrue and accumulate onthe outstanding preferred equity securities at the rate of 10% per annum,compounding quarterly, on the sum of its liquidation value per share ($1,000)plus all accumulated and unpaid dividends thereon.  Dividends are payable as and when declared byParent’s board of directors out of funds legally available for the payment ofdividends.  Such dividends accrue,whether or not they have been declared and whether or not there are profits,surplus or other funds of Parent legally available for the payment ofdividends, until such time as such dividends are actually paid by Parent.  The holders of a majority of the outstandingpreferred equity securities at any time and from time to time may demand thatParent redeem all or any portion of the outstanding preferred equity securitiesby delivering to the holder(s) thereof (i) an amount of cash pershare equal to the sum of its liquidation value per share ($1,000) plus allaccumulated and unpaid dividends thereon and (ii) a number of shares ofParent’s common equity securities as determined in accordance with theredemption procedures contained in Parent’s certificate of incorporation.  If Parent does not have funds legallyavailable for any particular redemption, Parent is obligated to use those fundsthat are legally available for the redemption of such securities to redeem themaximum possible number of preferred equity securities which would otherwise beredeemed in connection with such redemption. Thereafter, when additional funds of Parent are legally available forredemption of such securities, Parent is obligated to redeem the balance ofsuch securities.  Parent is prohibitedfrom redeeming any preferred equity securities if any such redemption isprohibited under any credit facility or 

 

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indenture to whichParent 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.

 

In conjunctionwith the Transaction, the previous stockholders of the Company will receive thebenefit of certain negotiated transaction related tax deductions whenever suchdeductions are realized.  Due to thisagreement, there was $6.2 million paid during the twelve-month period ended December 31,2008.  As of March 31, 2009, $9,000is included in Other Current Liabilities and $1.9 million is included in OtherLong-Term Liabilities under this agreement.

 

**4. FINANCINGARRANGEMENTS**

** **

***Senior Notes ***The Company has outstanding its 10%Senior Notes due in 2012.  During thethree months ended March 31, 2008, the Company purchased and canceledapproximately $11.5 million in principal amount of the Senior Notes for paymentof $9.8 million resulting in a gain on extinguishment of debt of approximately$1.7 million.  The Company used availablecash and borrowings under its Revolving Facility for payment thereof.

 

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 assets or operations independent of its subsidiaries.  As a result, the Company has not presentedseparate financial statements of the subsidiary guarantors

 

***CreditFacility***** Inconjunction with the Transaction, the Company entered into the Senior CreditFacility, with Credit Suisse, Cayman Islands Branch, which provided for (i) theFirst Lien Term Facility in an aggregate principal amount of $150.0 million and(ii) the Revolving Facility in an aggregate principal amount up to $25.0million, subject to certain conditions, of which $10.0 million is availablethrough a sub facility in the form of letters of credit.  Subject to certain conditions, the First LienTerm Facility may be increased by up to $30.0 million during the life of theFirst Lien Term Facility at the request of the Company with the consent fromthose lenders that agree to participate in such increase.  Subject to the foregoing, effective as of March 30,2009, no additional borrowings are available under the First Lien TermFacility.  As of March 31, 2009, themaximum amount of borrowings available to the Company under the RevolvingFacility was $12.5 million.  As of March 31,2009, the Company had nothing outstanding under the Revolving Facility.  As of March 31, 2009, the outstandingprincipal of such indebtedness bears interest at a fluctuating rate equal toeither the base rate plus 2.75% per annum or LIBOR plus 3.75% per annum(effective rate of 4.2% and 6.5% at March 31, 2009 and March 31,2008, respectively).  On March 30,2009, the Company entered into an amendment to its Senior Credit Facility,which among other things: (i) increased the applicable interest ratemargin for borrowings thereunder; (ii) eliminated the requirement that theCompany maintain corporate debt ratings; (iii) extended the date by whichthe Company must amend the indenture governing the Senior Notes to eliminatecertain of the restrictive covenants contained therein (including covenantsrelated to the incurrence of indebtedness and liens) or redeemed the SeniorNotes to March 31, 2010; (iv) extended the Company’s ability tocontinue to pay cash dividends to enable Parent to make cash interest paymentson the Parent Notes to March 31, 2010; (v) increased the maximumtotal leverage ratio the Company may have at the end of each quarterly periodfrom December 31, 2008 through December 31, 2009, (vi) requiredpayment of the remaining balance due under the First Lien Term Facility ofapproximately $3.6 million and (vii) decreased the minimum interestcoverage ratio the Company is required to maintain at the end of each quarterlyperiod from December 31, 2008 through December 31, 2009.  Theamendment also waived for the four fiscal quarters ended December 31,2008, any default or event of default that may have arisen from the Company’sfailure to maintain the maximum consolidated leverage ratio and the minimumconsolidated interest coverage ratio set forth in the Senior Credit Facilityprior to the effective date of the amendment. The Company must comply with certain financial covenants under itsSenior Credit Facility, including maintenance of an interest coverage ratio anda total leverage ratio.  The Company wasin compliance with such covenants as of March 31, 2009.  TheSenior Credit Facility is collateralized by substantially all assets of theCompany including real and personal property, inventory, accounts receivable,intellectual property and other intangibles and is scheduled to mature January 2013.

 

***Restrictions on Indebtedness ***OurSenior Credit Facility and the indenture for the Senior Notes impose certainrestrictions on the Company**’**s ability to incur indebtedness, pay dividends, makeinvestments, grant liens, sell assets and engage in certain other activities. The subsidiary guarantors are generally not restricted in their abilityto dividend or otherwise distribute funds to the Company except forrestrictions imposed under applicable state corporate law.  The Company islimited in its ability to pay dividends or otherwise make other distributionsto Parent under the Senior Credit Facility and the indenture governing theSenior Notes.  Specifically, the Senior Credit Facility, as amended,  prohibits the Company from making anydistributions to Parent except for limited purposes, including, but not limitedto: (i) prior to March 31, 2010, the Company may pay cash dividendsand distributions to Parent to enable Parent to make cash interest payments onthe acquisition loan, providedthat (x) after giving pro formaeffect to such dividend or distribution, the consolidated first lien leverageratio does not exceed 1.0 to 1.0, and (y) the amount of such dividends anddistributions shall not exceed $3,225,000 in any calendar quarter, (ii) customaryand reasonable out-of-pocket expenses, legal and accounting fees and expensesand overhead of Parent incurred in the ordinary course of business to theextent attributable to the business of the Company and its subsidiaries and inthe aggregate not to exceed $500,000 in any fiscal year, and (iii) theCompany may pay management fees of Parent not to exceed $750,000 in any fiscalyear so long as no default has occurred.  The indenture provides that theCompany can generally pay dividends and make other distributions to Parent inan amount not to exceed (i) 50% of 

 

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the Company**’**s consolidated net income for the periodbeginning April 1, 2004 and ending as of the end of the last fiscalquarter before the proposed payment, plus (ii) 100% of the net cashproceeds received by the Company from the issuance and sale of capital stock,plus (iii) the net return of certain investments, provided that certainconditions are satisfied, including that the Company has a consolidatedinterest coverage ratio of greater than 2.0 to 1.0.  For the three month period ended March 31,2009, the Company’s consolidated interest coverage ratio was less than 2.0 to1.0.

 

**5.RELATED-PARTY TRANSACTIONS**

 

The Company hasnoncompete agreements with the former owners of Grand Valley and DimensionMoldings, Inc.

 

The Parent has amanagement services agreement with Olympus Advisory Partners, an affiliate ofthe Parent’s largest stockholder.  Parent is obligated to pay atransaction fee to the affiliate for services provided to Parent and itssubsidiaries, including the Company, for each financing, refinancing,acquisition, or similar nonrecurring transaction.  The Parent paidapproximately $3.0 million to this affiliate for services related to theTransaction, of which, $0.7 million was recorded as deferred financing fees onthe Company’s consolidated financial statements, while the remaining $2.3million was recorded on the Parent’s financial statements.  In addition,the affiliate will be paid a $150,000 quarterly advisory fee by Parent forongoing services provided to Parent and its subsidiaries, including theCompany.  In 2008, the affiliate loweredthe quarterly fee payable by Parent for the third and fourth quarters to$135,000.  The Company paid a total of $150,000 and nothing on account ofParent for the three month period ended March 31, 2008 and March 31,2009, respectively.  In connection with the amendments to the NotePurchase Agreements related to the Parent Notes, the $150,000 quarterly fee hasbeen deferred by the affiliate for 2009 and will be payable in 2010 orthereafter.  Although neither the Companynor any of its subsidiaries is party to this Agreement, the Company hasrecorded this expense in its statement of operations because most of theservices relate to its operations.

 

The Company and itsParent file a consolidated federal income tax return, and federal income taxesare allocated to the Company based upon the respective taxable earnings orloss.  The Company records income taxliabilities as an amount due to Parent.  As of March 31, 2009 and December 31, 2008, the Companyincluded a total of $4.7 million and $4.8 million, respectively as an amountdue to Parent for these income tax liabilities.

 

**6.BUSINESS SEGMENTS**

 

The Company conducts 93% of its business within onereportable market segment: the wood kitchen and bath products segment.  The Company has two primary productcategories: hardwood products and engineered wood products.  Hardwood products produce a comprehensiveline of hardwood doors and components. Engineered wood products includes rigid thermofoil doors and components,veneer raised panels, and wrapped profiles.

 

The Company’s sales by product category are as follows(in thousands):

 
| ** **               | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------|------------|----------------------------------------|------------|
| ** **               | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Hardwood products        |       | $                                      | 26,112     |   | $ | 46,493 |   |
| Engineered wood products |       | 6,693                                  |       | 9,526 |   |
| Total                    |       | $                                      | 32,805     |   | $ | 56,019 |   |

 

Substantially all sales are made within North America.

 

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

 

As used in thisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and elsewhere in this Quarterly Report on Form 10-Q, the terms “we,”“us” or “our” refer to WII Components, Inc. and its consolidatedsubsidiaries and their respective predecessors.

 

**Forward-LookingStatements**

 

Certain statements inthis report are “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer tofuture events 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 you that forward-lookingstatements involve unknown risks, uncertainties and other factors that maycause our actual results and performance to differ materially from any futureresults or performance expressed or implied by these forward-lookingstatements.  Please also see ourdiscussion of risk factors contained in Item 1A. Part II of this Report onForm 10-Q.

 

Without limiting thegenerality of the preceding statement, all statements in this report providingestimates and projections concerning or relating to the following matters areforward-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, throughour senior management, from time to time make forward-looking public statementsconcerning our expected future operations, performance 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 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 webelieve that these forward-looking statements are based on reasonableassumptions, you should be aware that many factors could affect our actualfinancial results or results of operations and could cause actual results todiffer materially from those expressed in the forward-looking statements.  Those factors include, among other things:

 

·                  our high degree ofleverage and significant debt service obligations;

 

·                  our ability to integrateacquired businesses;

 

·      our need foradditional manufacturing capacity;

 

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

 

·                  changes in interest ratesand general economic conditions;

 

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

 

·                  changes in the price ofraw materials;

 

·                  interruptions indeliveries of raw materials or finished goods;

 

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·                  the highly competitivenature of our industry; and

 

·                  increases in the cost oflabor.

** **

**Overview**

 

We are one of the leadingmanufacturers of hardwood cabinet doors, hardwood components and engineeredwood products in the United States.  Ourproducts include (1) hardwood cabinet door components, face frames anddrawer fronts, (2) fully assembled hardwood cabinet doors, (3) rigidthermofoil, or RTF, cabinet doors and components, (4) veneer raisedpanels, or VRPs, and (5) a variety of laminated and profile-wrappedcomponents.  We generate approximately93% of our sales from the kitchen and bath cabinet manufacturing industry.  Our customers, in turn, distribute theirproducts through various sales channels, including specialty kitchen and bathcabinet dealers, home center 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, North Carolina, and Kentucky that allow us to distributeour products nationwide.

 

In the past eleven years, we have consummated four strategicacquisitions that have enhanced our market position, product breadth andgeographic 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 doorslocated in Oregon.  In April 2004,we acquired Grand Valley, a manufacturer of solid wood cabinet doors located inOhio.  In July 2005, we acquiredsubstantially all of the assets of Dimension Moldings, Inc. (DMI), an Ohiocorporation, which was in the business of manufacturing hardwood componentmoldings at a facility located in Middlefield, Ohio.  Following the acquisition, our Woodcraftsubsidiary manufactures hardwood component moldings at the Middlefieldfacility.

 

OnJanuary 9, 2007, WII Components, Inc.(the “Company”) was acquired by WII Holding, Inc. (“Parent”), a newlyformed investment entity controlled by two investment funds managed by OlympusPartners.  For ease of reference, thesefunds are sometimes collectively referred to herein as the “Olympus Funds.”  Theacquisition was consummated through a merger of WII Merger Corporation (“MergerCo”),a wholly owned subsidiary of Parent, with and into the Company with the Companybeing the surviving corporation in the transaction (the “Transaction”).  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 Transaction was approximately$293.1 million, less indebtedness and certain expenses.  The Transaction 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 newaccounting basis because of the significance of the publicly traded debtoutstanding, which hinders the Parent’s ability to control the form ofownership of the Company.

 

**Resultsof Operations**

 

Asdiscussed below, we continued to experience a slowdown in net sales for thethree months ended March 31, 2009 that began in the second half of2006.  This kitchen and bathindustry-wide slowdown had a negative impact on our gross profit and operatingincome margin percentages due to fixed costs becoming a higher percentage ofsales.   In addition, we have continuedto experience decreases in hardwood material prices, which generally are passedon to our customers through lower selling prices in accordance with indexingagreements that reset approximately every 3 to 6 months.  The prices we pay for hardwood materialscontinued to decline throughout the three months ended March 31, 2009.

 

***Three Months Ended March 31, 2009 Compared to the ThreeMonths Ended March 31, 2008***

 

The following tableincludes, for the three months ended March 31, 2009 and 2008, selectedoperating data derived from our condensed consolidated statements of earningsand presents this information as a percentage of net sales:

 
| ** **                     | ** ** | **Three Months  Ended  March 31, 2009** | ** ** | **Three Months  Ended  March 31, 2008** | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                     | ** ** | **(dollars in thousands)**                   | ** ** |
| Net sales                      |       | $                                            | 32,805     |                                         | $          | 56,019 |   |
| *% of net sales*               | * *   | *100.0*                                      | *%*        | *100.0*                                      | *%*        |
| Cost of sales                  |       | 28,338                                       |       | 48,192                                       |       |
| *% of net sales*               | * *   | *86.4*                                       | *%*        | *86.0*                                       | *%*        |
| * *                       | * *   | * *                                     | * *   | * *                                     | * *   |
| Gross profit                   |       | 4,467                                        |       | 7,827                                        |       |
| *% of net sales*               | * *   | *13.6*                                       | *%*        | *14.0*                                       | *%*        |
| Operating expenses             |       | 3,045                                        |       | 3,599                                        |       |
| *% of net sales*               | * *   | *9.3*                                        | *%*        | *6.4*                                        | *%*        |
| * *                       | * *   | * *                                     | * *   | * *                                     | * *   |
| Operating income               |       | 1,423                                        |       | 4,228                                        |       |
| *% of net sales*               | * *   | *4.3*                                        | *%*        | *7.5*                                        | *%*        |
| Other expenses (income):       |       |                                         |       |                                         |       |
| Interest expense               |       | 3,026                                        |       | 3,308                                        |       |
| *% of net sales*               | * *   | *9.2*                                        | *%*        | *5.9*                                        | *%*        |
| Other income, net              |       | (5                                           | )          | (1,821                                       | )          |
| *% of net sales*               | * *   | *-0.0*                                       | *%*        | *-3.3*                                       | *%*        |
| Income tax (benefit) provision |       | (593                                         | )          | 1,058                                        |       |
| *% of net sales*               | * *   | *-1.8*                                       | *%*        | *1.9*                                        | *%*        |
| * *                       | * *   | * *                                     | * *   | * *                                     | * *   |
| Net (loss) earnings            |       | (1,005                                       | )          | 1,683                                        |       |
| *% of net sales*               | * *   | *-3.1*                                       | *%*        | *3.0*                                        | *%*        |
|                                |            |                                              |            |                                              |            |  |  |

 

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*Netsales.*  Net sales decreased $23.2 million, or 41.4%,from $56.0 million for the three months ended March 31, 2008 to $32.8million for the three months ended March 31, 2009.  Sales in our hardwood and engineered woodproduct line decreased $20.4 million and $2.8 million, respectively.  These decreases are mainly attributable to anoverall slowdown in the market that began in the second half of 2006, and to alesser extent, an approximately 4% decline in our overall selling prices,mainly due to lower hardwood material costs. We have indexing agreements with a majority of our customers, wherebyselling prices to customers are increased or decreased as our material costsincrease or decrease.

 

*Cost ofsales.*  Cost of sales decreased $19.9 million, or41.3%, from $48.2 million for the three months ended March 31, 2008 to$28.3 million for the three months ended March 31, 2009.  This decrease in cost of sales is primarilyattributable to lower material, labor and overhead costs as a result of lowervolume of sales.

* *

*Grossprofit.*  Gross profit decreased $3.3 million, or42.3%, from $7.8 million for the three months ended March 31, 2008 to $4.5million for the same period in 2009.  Asa percentage of net sales, our gross profit decreased 40 basis points from14.0% for the three months ended March 31, 2008 to 13.6% for the sameperiod in 2009.  This decrease is relatedto spreading fixed costs over lower sales volumeand lower selling prices in 2009 mainly due tomaterial cost decreases that have occurred over the past year.  This decrease was partially offset by lowerhardwood material costs in 2009 versus 2008 and favorable LIFO cost of materialadjustment in 2009 versus 2008.

 

*Operating expenses.* Operating expenses decreased $0.6 million, or 16.7%, from $3.6million for the three months ended March 31, 2008 to $3.0 million for thesame period in 2009.  The decreaseprimarily consists of (i) $0.1 million of lower incentive compensationexpense, (ii) $0.3 million of lower salaries, including benefits, due toeliminated positions throughout 2008, and (iii) $0.1 million of lowerprofessional fees in 2009.

 

*Operatingincome.*  Operating income decreased by $2.8 million,or 66.7%, from $4.2 million for the three months ended March 31, 2008 to$1.4 million for the three months ended March 31, 2009 as a result of thenet effect of the factors described above.

 

*Interestexpense.*  Interest expense decreased $0.3 million, or9.1%, from $3.3 million for the three months ended March 31, 2008 to $3.0million for the three months ended March 31, 2009.  This decrease mainly relates to lowerinterest expense in 2009 due to lower debt balances for the Senior Notes,mainly due to the $11.5 million principal reduction during the three monthsended March 31, 2008, and the First Lien Term Facility.

 

*Otherincome.*  Other income was $1.8 million and $5,000 forthe three months ended March 31, 2008 and March 31, 2009,respectively.  This income mainlyrepresents interest received from our interest bearing accounts and 2008 alsoincludes a $1.7 million gain on the extinguishment of debt.

 

*Incometax (benefit) provision. *Income tax provision decreased $1.7million, from an income tax expense of $1.1 million for the three months ended March 31,2008 to an income tax benefit $0.6 million for the three months ended March 31,2009 due to decreased earnings in 2009. The effective tax rate decreased from 38.6% in 2008 to 37.1% in 2009 dueto permanent differences.

 

*Net (loss)earnings.*  Net earnings decreased $2.7 million, or158.8%, from a net income of $1.7 million for the three months ended March 31,2008 to a net loss of $1.0 million for the three months ended March 31,2009 as a result of the factors described above.

 

**Liquidityand Capital Resources**

 

Our primary cash needs are for working capital,capital expenditures and debt service. We have historically financed these cash requirements through internallygenerated cash flow and funds borrowed under our prior and existing seniorsecured credit facilities.

 

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In conjunction with theTransaction on January 9, 2007, the Company entered into the senior creditfacility (as amended from time to time, the “Senior Credit Facility”), whichprovided for (i) a senior secured first lien term loan facility in the initialaggregate principal amount of $150.0 million (the “First Lien Term Facility”)and (ii) which provides for a senior secured first lien revolving creditfacility (the “Revolving Facility”) in the aggregate principal amount of $12.5million.  As of March 30, 2009, noadditional borrowings are available under the First Lien Term Facility. Inaddition, as of March 31, 2009, the maximum amount of borrowings availableto the Company under the Revolving Facility was $12.5 million, of which noborrowings were outstanding as of this date.  As of March 31, 2009, the outstandingprincipal of indebtedness under our Senior Credit Facility bears interest at afluctuating rate equal to either the base rate plus 2.75% per annum or LIBORplus 3.75% per annum (effective rate of 4.2% at March 31, 2009).  The Company must comply with certain financialcovenants under the Senior Credit Facility, including maintenance of aninterest coverage ratio and a total leverage ratio.  The Company was in compliance with suchcovenants as of March 31, 2009.

 

On March 30, 2009, the Company entered into anamendment to its Senior Credit Facility, which among other things: (i) increasedthe applicable interest rate margin for borrowings thereunder; (ii) eliminatedthe requirement that the Company maintain corporate debt ratings; (iii) extendedthe date by which the Company must amend the indenture governing the SeniorNotes to eliminate certain of the restrictive covenants contained therein(including covenants related to the incurrence of indebtedness and liens) orredeemed the Senior Notes to March 31, 2010; (iv) extended theCompany’s ability to continue to pay cash dividends to enable Parent to makecash interest payments on the Parent Notes to March 31, 2010; (v) increasedthe maximum total leverage ratio the Company may have at the end of eachquarterly period from December 31, 2008 through December 31, 2009, (vi) requiredpayment of the remaining balance due under the First Lien Term Facility ofapproximately $3.6 million and (vii) decreased the minimum interestcoverage ratio the Company is required to maintain at the end of each quarterlyperiod from December 31, 2008 through December 31, 2009.  The amendmentalso waived for the four fiscal quarters ended December 31, 2008, anydefault or event of default that may have arisen from the Company’s failure tomaintain the maximum consolidated leverage ratio and the minimum consolidatedinterest coverage ratio set forth in the Senior Credit Facility prior to theeffective date of the amendment.

 

Indebtedness for borrowed money incurredunder our Senior Credit Facility is secured by substantially all of our assets,including our real and personal property, inventory, accounts receivable,intellectual property and other intangibles and is scheduled to mature in January 2013.

 

As of March 31,2009, the weighted average interest rate for the Company’s outstanding debt was10.1%.

 

Our Senior CreditFacility and the indenture for the Senior Notes impose certain restrictions onour ability to incur indebtedness, pay dividends, make investments, grantliens, sell our assets and engage in certain other activities.  Thesubsidiary guarantors are generally not restricted in their ability to dividendor otherwise distribute funds to the Company except for restrictions imposedunder applicable state corporate law.  The Company is limited in itsability to pay dividends or otherwise make other distributions to Parent under theSenior Credit Facility and the indenture governing the Senior Notes. Specifically, as amended, the Senior Credit Facility prohibits theCompany from making any distributions to Parent except for limited purposes,including, but not limited to: (i) prior to March 31, 2010, theCompany may pay cash dividends and distributions to Parent to enable Parent tomake cash interest payments on the Parent Notes, providedthat (x) aftergiving pro forma effect to such dividend or distribution, the consolidated firstlien leverage ratio does not exceed 1.0 to 1.0, and (y) the amount of suchdividends and distributions shall not exceed $3,225,000 in any calendarquarter, (ii) customary and reasonable out-of-pocket expenses, legal andaccounting fees and expenses and overhead of Parent incurred in the ordinarycourse of business to the extent attributable to the business of the Companyand its subsidiaries and in the aggregate not to exceed $500,000 in any fiscalyear, and (iii) the Company may pay management fees of Parent not toexceed $750,000 in any fiscal year so long as no default has occurred. The indenture provides that the Company can generally pay dividends andmake other distributions to Parent in an amount not to exceed (i) 50% ofthe Company**’**s consolidated net income for the period beginning April 1,2004 and ending as of the end of the last fiscal quarter before the proposedpayment, plus (ii) 100% of the net cash proceeds received by the Companyfrom the issuance and sale of capital stock, plus (iii) the net return ofcertain investments, provided that certain conditions are satisfied, includingthat the Company has a consolidated interest coverage ratio of greater than 2.0to 1.0.  For the period ended March 31,2009, the Company’s consolidated interest coverage ratio was less than 2.0 to1.0.

 

On March 30, 2009,Parent amended and obtained a waiver to the Note Purchase Agreements related tothe Parent Notes to waive the total leverage ratio that Parent and its Subsidiaries(including the Company) were required to maintain as of December 31, 2008and to adjust the total leverage ratio that Parent and its Subsidiaries(including the Company) are required to maintain as of the end of eachquarterly period through December 31, 2009 to reflect current economic conditions.

 

As of March 31, 2009 and December 31, 2008,we had no capital lease obligations.

 

Each of the Company’ssubsidiaries, which are all 100% owned subsidiaries of the Company, have fullyand unconditionally guaranteed the Senior Notes on a joint and severalbasis.  The Company has no assets oroperations independent of its subsidiaries. As a result, the Company has not presented separate financial statementsof the subsidiary guarantors.

 

As of March 31, 2009, we had $3.2 million of cashavailable for any corporate purposes, compared to $14.7 million as of December 31,2008.

 

*Cashflow from operating activities.*  Cash used inoperating activities was $7.6 million for the three months ended March 31,2009, and $8.7 million for the three months ended March 31, 2008.  The decrease in cash used in operatingactivities is mainly attributable to a payment of $6.2 million in 2008 forincome tax refunds that were due to previous stockholders of the Company in

 

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accordance with theTransaction agreement.  This waspartially offset with an increase in cash used in operating activities in 2009versus 2008 due to an increase in accounts receivable of approximately $1.0million and inventories of approximately $3.4 million.  Days of receivables outstanding increased byone day as of March 31, 2009 versus December 31, 2008 mainly due to amajority of customers that were closed the last two weeks of December 2008.

 

*Cashflow from investing activities.*  Net cash usedin investing activities was $0.2 million for the three months ended March 31,2009 and $1.2 million for the three months ended March 31, 2008.  Capital expenditures in the three monthsended March 31, 2009 were $0.2 million compared to $1.2 million for thethree months ended March 31, 2008. The decrease in capital expenditures in 2009 is primarily due to lowercapital expenditures needed for capacity requirements.

 

*Cashflow from financing activities.*  Net cash usedin financing activities for the three months ended March 31, 2009 totaled$3.7 million primarily due to principal payments on the Senior CreditFacility.  Net cash used in financingactivities for the three months ended March 31, 2008 totaled $7.9 millionprimarily due to (i) thepurchase and cancellation of approximately $11.5 million in principal amount ofthe Senior Notes at a net of discount cost of $9.8 million, (ii) capitallease payments of $0.1 million, (iii) principal payments on the SeniorCredit Facility of $0.2 million, and (iv) a distribution on behalf of theParent for principal and interest on a portion of the Parent Notes of $4.5million.  Net cash used in financingactivities for the three months ended March 31, 2008 was offset partiallydue to a borrowing on the Revolving Facility of $6.6 million.

 

For the three monthperiods ended March 31, 2009 and March 31, 2008, our two largestcustomers accounted for approximately 55% and 51% of our net sales,respectively.  As of March 31, 2009and December 31, 2008, our two largest customers accounted forapproximately 59% and 47%, respectively, of our consolidated accountsreceivables balance.  The permanent lossof, or a significant decrease in the level of purchases by, one or more of ourmajor customers could have a material adverse effect on our results ofoperations and future cash flows.

 

We cannot provideassurances that our business will generate sufficient cash flow fromoperations, that anticipated net sales growth and operating improvements willbe realized or that future borrowings will be available under our Senior CreditFacility in an amount sufficient to enable us to service our indebtedness,including the Senior Notes, or to fund our other liquidity needs.  In addition, we cannot provide assurancesthat we will be able to refinance any of our indebtedness, including our SeniorCredit Facility and the Senior Notes, on commercially reasonable terms, if atall.

 

We derive a significantportion of our revenue as a result of demand for our products created by thebuilding of new homes, and repair and remodeling of existing homes.  During the second half of 2006, the homebuilding, and repair and remodeling industry experienced a slowdown as a resultof general economic conditions.  Thisslowdown has worsened into 2009, and has had a negative impact on our resultsof operations for the three months ended March 31, 2009.  If this slowdown were to continue or worsenover an extended period of time, it could have a material adverse effect on ourbusiness, financial condition or results of operations which may includeimpairment charges of goodwill and other long-term assets.

 

Recently, the financialmarkets experienced a period of unprecedented turmoil, including thebankruptcy, restructuring or sale of certain financial institutions and theintervention of the U.S. federal government. While the ultimate outcome of these events cannot be predicted, they mayhave a material adverse effect on our liquidity and financial condition if ourability to borrow money from our existing lenders under our Senior CreditFacility to finance our operations were to be impaired.  The crisis in the financial markets may alsohave a material adverse impact on the availability and cost of credit in thefuture.  Our ability to pay our debt orrefinance our obligations under our Senior Credit Facility will depend on ourfuture performance, which will be affected by, among other things, prevailingeconomic conditions.  The recentfinancial crisis may also have an adverse effect on the U.S., which would havea negative impact on demand for our products. In addition, tightening of credit markets may have an adverse impact onour customers**’** ability to finance the purchase of our products orour suppliers**’** ability to provide us with raw materials, either ofwhich could adversely affect our business and results of operations.

 

We intend to continue tomanage the business in this slower economy and its effect on our industry bydiligently reviewing our costs of doing business on a routine basis,controlling working capital in a slower business climate, and minimizing ourcapital expenditure needs.

 

We anticipate, but cannotprovide assurance, that the funds generated by operations and funds availableunder the Senior Credit Facility will be sufficient to meet working capitalrequirements and to finance capital expenditures for the foreseeable future,including the next twelve months.  Weintend to incur additional capital expenditures in the ordinary course of doingbusiness.

 

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**Inflation**

 

Our cost of sales issubject to inflationary pressures on labor costs, prices of the raw materialswe use and various overhead costs.  Wegenerally have been able over time to offset the effects of inflation and pricefluctuations through a combination of sales price increases and operationalefficiencies.  We currently believe thatraw material cost pressure has moderated. We continue to attempt to pass along these costs, but such effortstypically lag behind material cost changes and we can not guarantee a fulloffset.

 

**Seasonality**

 

Our sales historicallyhave been moderately seasonal, reflecting the temporary slow down in consumerpurchasing activity during the winter holiday season and the summer months.

 

### **CriticalAccounting Policies**

 

In our Annual Report on Form 10-Kfor the year ended December 31, 2008, we identified the criticalaccounting policies, which affect our more significant estimates andassumptions used in preparing our consolidated financial statements.  The basis for developing the estimates and assumptionswithin our critical accounting policies is based on historical information andknown current trends and factors.  Theestimates and assumptions are evaluated on an ongoing basis and actual resultshave been within the Company’s expectations. We have not changed these policies from those previously disclosed inour annual report.

 

TheCompany performed its SFAS 142 analysis as of December 31, 2008.  To establish fair market value, itemsconsidered were:  (1) comparablepublic company trading multiples, (2) other comparable transactionmultiples and (3) the Woodcraft transaction multiple resulting from acompetitive auction process.  Based onthe fair market value methodology and the assumptions above, as compared to theCompany’s December 31, 2008 net worth and interest-bearing indebtedness,it was concluded that no goodwill impairment existed and that the fair value ofits assets exceeded the carrying value by approximately 10 to 15%.  The Company determined there were no eventsthat would require a SFAS 142 analysis to be completed as of March 31,2009.

 

**NewAccounting Standards**

 

See Note 2 of the Condensed Consolidated FinancialStatements for information pertaining to recently adopted accounting standardsor accounting standards to be adopted in the future.

 

### **Item3. Quantitative and Qualitative Disclosures about Market Risk**

 

We are subject to variousmarket risks such as fluctuating lumber prices and interest rates.

 

*Commodity price risk.* Hardwood lumber accounts for the largest portion of our materialcosts.  Our profitability is thereforeaffected by the prices of lumber which may fluctuate based on a number offactors beyond our control, including, among others, changes in supply anddemand, general economic conditions, labor costs, competition and, in somecases, government regulation. Though we are not dependent on any singlesupplier for our raw materials, we have no long-term supply contracts and thus,are subject to changes in the prices charged by our suppliers.  The prices for the primary hardwood specieswe use in the production of our hardwood doors and components are subject tosome volatility.  We generally passthrough cost increases to our customers, but the price increases may not fullyoffset the effects of increasing raw material costs.

 

*Interestrate risk.*  We are exposed to market risk relating tochanges in interest rates in respect to our Revolving Facility.  As of March 31, 2009, we had nothingoutstanding under the Revolving Facility, which bears interest at variablerates.  We believe that a one percent(1%) increase in the interest rates currently in effect would not have amaterial adverse effect on our financial condition or results of operations.

 

### **Item4T. Controls and Procedures**

 

(a)           Evaluation of disclosure controls andprocedures.

 

As required by Rule 13a-15under the Securities Exchange Act of 1934 (the “Exchange Act”), we carried outan evaluation under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer,of the effectiveness of our disclosure controls and procedures as of March 31,2009.  For purposes of the foregoing, theterm disclosure controls and procedures means controls and other procedures ofan issuer that are designed to ensure that information required to be disclosedby the issuer in the reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed byan issuer in the reports that it files or submits under the Exchange Act isaccumulated and communicated to the issuer’s management, including itsprincipal executive and principal financials officers, or persons performingsimilar functions, as appropriate to allow timely decisions regarding requireddisclosure.  Our disclosure controls andprocedures are designed to provide us with a reasonably level of assurance ofachieving their objectives as outlined above. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer 

 

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have concluded that theybelieve that, as of March 31, 2009, our disclosure controls and procedureswere effective at a reasonable level of assurance.

 

(b)           Changes in internal controls overfinancial reporting.

 

There were no changes inour internal controls over financial reporting during our first fiscal quarterthat have materially affected, or are reasonably likely to materially affect,our internal controls over financial reporting.

 

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**PART II—OTHER INFORMATION**

 

**Item1. Legal Proceedings**

 

No pending material legalproceedings.

 

**Item1A. Risk Factors**

 

TheCompany has included in its Annual Report on Form 10-K for the year ended December 31,2008, a description of certain risks and uncertainties that could affect theCompany’s business, future performance or financial condition (the “RiskFactors”).  The Risk Factors are herebyincorporated in Part II, Item IA of this Form 10-Q.  Investors should consider the Risk Factorsprior to making an investment decision with respect to the Company’ssecurities.  We are updating the riskfactor under the heading, “Downturns in the new home construction industry,repair and remodeling activity or the economy could negatively affect ourbusiness” to read as follows:

 

***Downturns in the new home constructionindustry, repair and remodeling activity or the economy could negatively affectour business.***

 

Sales to the kitchen and bath cabinet market accounts forapproximately 90-95% of our total sales. Sales in this market are driven by new home construction and home repairand remodeling activity.  New homeconstruction and repair and remodeling activity continues to be affected bychanges in economic and other conditions, such as gross domestic productlevels, employment levels, demographic trends, availability of financing,interest rates and consumer confidence. These factors can negatively affect the demand for our products.  Any deterioration in these factors could havea material adverse effect on our business, financial condition and results ofoperations.

 

TheCompany derives a significant portion of its revenue as a result of the demandfor its products created by the building of new homes, and repair andremodeling of existing homes.  During thesecond half of 2006, the home building, repair and remodeling industryexperienced a slowdown as a result of general economic conditions.  This slowdown has continued into 2009, andhas had a negative impact on our results of operations for the three monthsended March 31, 2009.  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.

 

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

 

None.

 

**Item3. Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**Item5. Other Information**

### ** **

### **None.**

### ** **

### **Item6. Exhibits**

31.1                           Certification of Vice President,Treasurer and Secretary of WII Components, Inc., pursuant to Rule 15d-14(a),as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2                           Certification of Chief Executive Officerof WII Components, Inc., pursuant to Rule 15d-14(a), as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

32.2*                    Certification of Chief Executive Officer of WIIComponents, 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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*This certification shallnot be deemed “filed” for purposes of Section 18 of the SecuritiesExchange Act of 1934, or otherwise subject 

 

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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 therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                      | WII COMPONENTS, INC. |
|---------------------------|----------------------|
|                      |                 |   |
| Dated: May 11,  2009 | By:                  |   |
|                      |                 | /s/ John Fitzpatrick |
|                      |                 | John Fitzpatrick |
|                      |                 | President and Chief  Executive Officer |
|                      |                 | (Principal Executive  Officer) |
| Dated: May 11,  2009 |                 |   |
|                      |                 | /s/ Dale B. Herbst |
|                      |                 | Dale B. Herbst |
|                      |                 | Chief Financial  Officer, Treasurer and Secretary |
|                      |                 | (Principal Financial  and Accounting Officer) |

 

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