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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

**FORM 10-K**

 

**FOR ANNUAL AND TRANSITION REPORTS**

**PURSUANT TO SECTIONS 13 OR 15(D) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**(Mark One)**

 

| x | **ANNUAL REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|--------------------------------------------------------------------------------------------------------------------|

 

**For thefiscal year ended December 31, 2008**

 

| o | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE  REQUIRED)** |
|---|-------------------------------------------------------------------------------------------------------------------------------------------|

 

**For thetransition period from                          to                         **

 

**Commission file number:****333-115490**

 

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**WIICOMPONENTS, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

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

(Address of principal executive offices) (Zip Code)

 

**(320) 252-1503**

(Registrant’s telephone number, Including area code)

 

**Securitiesregistered pursuant to Section 12(b) of the Act: None**

**Securitiesregistered pursuant to Section 12(g) of the Act: None**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act

Yes   o   No   x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.

Yes   x   No   o

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports) and (2) has been subject to such filing requirementsfor the past 90 days.     Yes x  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant**’**s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. x

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company filer:

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act) Yes o No x

 

The aggregate market value of the voting stock held by nonaffiliates ofthe registrant as of June 30, 2008: not applicable.

 

As of March 17,2009, 100 shares of common stock of the registrant, $.01 par value per share,were issued and outstanding (all of which are owned by WII Holding, Inc.).

 

**DOCUMENTSINCORPORATED BY REFERENCE:   None.**

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**Table of Contents**

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**WIICOMPONENTS, INC.**

** **

**FORM 10-K**

**YearEnded December 31, 2008**

 

**INDEX**

 
| **PART I**                                                                                                              | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                         |       |
| Item 1. Business                                                                                                             | 1          |
| Item 1A. Risk Factors                                                                                                        | 3          |
| Item 1B. Unresolved Staff Comments                                                                                           | 6          |
| Item 2. Properties                                                                                                           | 6          |
| Item 3. Legal Proceedings                                                                                                    | 8          |
| Item 4.  Submission of Matters to Vote of Security Holders                                                                   | 8          |
|                                                                                                                         |       |
| **PART II**                                                                                                             | ** ** |
|                                                                                                                         |       |
| Item 5. Market  For Registrant’s  Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities | 8          |
| Item 6. Selected  Financial Data                                                                                             | 8          |
| Item 7.  Management**’**s Discussion  and Analysis of Financial Condition and Results of Operations                     | 9          |
| Item 7A.  Quantitative and Qualitative Disclosures about Market Risk                                                         | 19         |
| Item 8.  Financial Statements and Supplementary Data                                                                         | 20         |
| Item 9. Changes in and  Disagreements With Accountants on Accounting Financial Disclosure                                    | 38         |
| Item 9A. Controls and Procedures                                                                                             | 38         |
| Item 9B. Other Information                                                                                                   | 38         |
|                                                                                                                         |       |
| **PART III**                                                                                                            | ** ** |
|                                                                                                                         |       |
| Item 10.  Directors, Executive Officers and Corporate Governance                                                             | 38         |
| Item 11. Executive Compensation                                                                                              | 40         |
| Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related  Stockholder Matters                    | 46         |
| Item 13.  Certain Relationships and Related Party Transactions, and Director  Independence                                   | 47         |
| Item 14.  Principal Accountant Fees and Services                                                                             | 48         |
|                                                                                                                         |       |
| **PART IV**                                                                                                             | ** ** |
|                                                                                                                         |       |
| Item 15.  Exhibits, Financial Statement Schedules                                                                            | 49         |
| Item 16. Signatures                                                                                                          | 54         |

 

 

ACCESS TO REPORTS

 

Investors may obtainaccess free of charge to the WII Components, Inc. annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K and otherreports by visiting the WII Components web site at www.wiicomponents.com.  These reports will be available as soon asreasonably practicable following electronic filing with, or furnishing to, theSecurities and Exchange Commission.

 

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*                Inthis report, the terms “WII Components,” “we,” “our,” “Company,” or “us” referto WII Components, Inc. and its subsidiaries on a consolidated basis andtheir respective predecessors, unless otherwise indicated or the contextotherwise requires.  In April 2003,WII Components, Inc. was formed by a group of investors to acquireWoodcraft Industries, Inc., or Woodcraft, and its subsidiaries, PrimeWood, Inc.,or PrimeWood, and Brentwood Acquisition Corp., or Brentwood.  On January 9, 2007, WII Components, Inc.became a wholly owned subsidiary of WII Holding, Inc., a newly formedinvestment entity controlled by Olympus Growth Fund IV, L.P. and OlympusExecutive Fund L.P., each of which is an investment fund managed by OlympusPartners.  WII Components conducts all ofits operations through its direct subsidiary, Woodcraft, and its indirectsubsidiaries, PrimeWood, Brentwood and Grand Valley Acquisition, Inc., orGrand Valley.  Grand Valley was mergedwith and into Woodcraft Industries, Inc. on December 31, 2006.*

 

**PART I**

 

# **Item 1. Business**

# ** **

**Our Company**

 

                We believe we areone of the leading manufacturers of hardwood cabinet doors, hardwood componentsand engineered wood products in the United States.  In 2008, we generated approximately 93% ofour sales from the kitchen and bath cabinet manufacturing industry.  We believe our reputation for high qualityand reliable performance has enabled us to establish strong, long-standingrelationships with our customers, which include most of the top cabinetmanufacturers in the United States.  Ourcustomers, in turn, distribute their products through various sales channels,including specialty kitchen and bath cabinet dealers, home center retailers andhomebuilders.  We generated net sales ofapproximately $34.3 million for the three months ended December 31, 2008and approximately $193.4 million for the year ended December 31,2008.

 

                We believe that wehave one of the broadest product offerings of doors and related components forthe kitchen and bath cabinet manufacturing industry.  Our products include: (1) hardwoodcabinet door components, face frames and drawer fronts, (2) fullyassembled hardwood cabinet doors, (3) rigid thermofoil, or RTF, cabinetdoors and components, (4) veneer raised panels, or VRPs, and (5) avariety of laminated and profile-wrapped components.  We produce over 100,000 SKUs for ourcustomers, representing a wide array of styles, sizes, designs and wood species.  In addition, we offer a variety ofvalue-added services for our customers, such as new product design anddevelopment and kitchen-at-a-time manufacturing, or KAT, a small batchproduction process that enables us to deliver semi-custom doors and componentson a quick-turnaround basis.

 

                We operate elevenmanufacturing facilities located in Minnesota, North Dakota, Ohio, Oregon,Pennsylvania, Kansas, North Carolina, and Kentucky that allow us to distributeour products nationwide.  In 2005, weacquired substantially all of the assets of Dimension Moldings, Inc., andas a result of the acquisition we commenced operations at a second Ohiofacility located in Middlefield, Ohio. In 2005, we also acquired a rough mill facility in Greenville,Pennsylvania and commenced operations at a manufacturing facility in Lansing,Kansas.  In 2007, we commenced operationsat manufacturing facilities in West Jordan, Utah and Monroe, Washington.  Each of these facilities in Utah andWashington contributed minimal capacity to the Company and were closed in thesecond half of 2008 due to the slowdown in the industry.  In the first quarter 2008, we commencedoperations at a manufacturing facility in Conover, North Carolina.  Overall, we have made substantial capitalinvestments to broaden the scope of our manufacturing operations from roughmilling through final production, which maximizes our yield from raw materialsand allows us to meet the short lead time requirements of our customers.  Our technical knowledge and expertise withrespect to the entire production process enable us to meet the specificationsand delivery time demands of our customers for almost any style of cabinetdoors or components with high quality standards at a competitive cost.  We believe we offer customers among theshortest lead times in the industry, an important criteria in our customers’ procurement decisions.

 

                Our seniormanagement team has an average of 18 years of industry experience and17 years with our Company.  OurPresident and Chief Executive Officer, John Fitzpatrick, has over 25 yearsof experience in managing manufacturing-based companies and has led our seniormanagement team since July 2000.

 

**Our History**

 

                Our subsidiary,Woodcraft Industries, Inc., was founded in 1945 in St. Cloud, Minnesota,and began as a manufacturer of millwork products, including store fixtures andshipping pallets.  In 1968, through anacquisition and by utilizing our millwork expertise, we began manufacturingkitchen cabinet components.  In 1989, weentered the door assembly business.  Overthe past 35 years, through strategic acquisitions and expansion of ourmanufacturing capabilities, we have become a leading U.S. hardwood cabinet doorand hardwood component manufacturer focused primarily on the kitchen and bathcabinet industry.  We acquired ourPrimeWood subsidiary in 1998, our Brentwood subsidiary in 2002, our GrandValley subsidiary in 2004, and 

 

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substantially all of the assets of Dimension Moldings, Inc. in2005.  On December 31, 2006, GrandValley was merged with and into Woodcraft. WII Components, Inc. was incorporated in Delaware in April 2003,in connection with the acquisition of Woodcraft and its subsidiaries.

 

                On January 9,2007, WII Holding, Inc. (“Parent”) acquired all of the outstanding capitalstock of WII Components, Inc. through the merger of a newly formed whollyowned subsidiary of Parent with and into WII Components, Inc. (the “Transaction”).  Parent is a newly formed investment entitycontrolled by Olympus Growth Fund IV, L.P. and Olympus Executive Fund, L.P.,each of which is an investment fund managed by Olympus Partners, a privateequity firm headquartered in Stamford, Connecticut.

 

**Customers**

 

**               **We have been servicing our top ten customers for anaverage of approximately 18 years, with a minimum of five years.  In 2008, sales to Masco Corporation and Elkayaccounted for 37% and 18%, respectively, of our net sales.  No other customer accounted for more than 10%of our sales in 2008.  We haveexperienced lower sales volume over the past two years with most of our top tencustomers due to the overall market decline related to lower demand for new homesand remodeling of existing homes.

 

**Sales and Marketing**

 

                Substantially allof our sales are made directly to cabinet manufacturers without the use ofthird party sales representatives or distributors.  Our sales and marketing group is organizedprimarily by product and geography.  Thegroup includes a sales director for all product lines, a marketing director forhardwood products, and four account managers. Over the past few years, our sales and marketing efforts have beenfocused on strengthening relationships with our most important customers andintroducing new products to targeted markets. Due to our long-standing relationships with our key customers, sales andmarketing involves relationships at multiple levels with our customers.  Accordingly, our internal sales force worksclosely with our manufacturing and marketing personnel to develop newopportunities in our core kitchen and bath market, which accounted forapproximately 93% of our sales in 2008, as well as our other markets, includingstore fixtures.  In 2008, approximately99.8% of our net revenues resulted from sales in the United States, while thebalance resulted from sales in Canada and Mexico.

 

                We do not rely onimported product components for any significant portion of our business.  However, we do purchase imported componentsfor use in our domestic manufacturing process and for direct sale to ourcustomers.  In 2008, our sales ofimported products accounted for less than 1% of our total sales.

 

**Supply of Raw Materials**

 

                The primary rawmaterials we purchase are green, kiln-dried, and semi-processed hardwoodlumber, MDF, hardwood veneer and PVC foil. Hardwood lumber accounts for the largest portion of our material costs.  We purchase our lumber directly from hardwoodmills, which allows us to both leverage our scale and avoid the costsassociated with intermediaries.  Wepurchase from a network of over 50 regional mills throughout the Northern andAppalachian hardwood forest areas in close proximity to our manufacturingfacilities.  No single supplier accountedfor more than 7% of our material purchases in 2008, and we are not dependent onany single supplier for any raw material product.  Our top ten suppliers accounted forapproximately 35% of the key raw materials we purchased in 2008.

 

                We purchase avariety of species of hardwood lumber, with hard maple, red oak and cherryaccounting for our largest volumes.  Theprices of the various species have fluctuated historically on independentsupply and demand curves and are not highly correlated to one another.  Generally, with a lag time, we have passedlumber price changes through to our customers by working in a partnership withthem.

 

**Competition**

 

                We operate in thehighly competitive kitchen and bath cabinet door and component industry.  Our competitors include other independentkitchen and bath cabinet door and component manufacturers and verticallyintegrated cabinet manufacturers who produce their own doors and components.  We estimate that the cabinet door andcomponent market segment in which we compete represented approximately$1.7 billion of the overall U.S. cabinet market in 2008.  We believe that independent cabinet 

 

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door and component manufacturers, like us, accounted for approximately$0.9 billion of this segment in 2008, while vertically integrated cabinetmanufacturers accounted for the remainder.

 

                We are one of thethree largest manufacturers in the independent cabinet component industry.  We believe that in 2008 we accounted forapproximately 24% of total outsourced cabinet door and component market sales,and together with our principal competitors Conestoga Wood Products and AppalachianWood Products, based on publicly available information and managementestimates, accounted for approximately 48% of this market in 2008.

 

**Environmental Matters**

 

                Our operations andproperties are subject to extensive federal, state, local and foreignenvironmental laws relating to protection of the environment and human healthand safety.  Environmental laws andregulations are subject to frequent amendment and have become more stringentover time.  We could incur in the futuresignificant costs associated with compliance with, or liabilities under,environmental laws and regulations, including equipment costs, disposal costs,cleanup costs, civil and criminal penalties, injunctive relief and denial orloss of, or imposition of significant restrictions on, environmentalpermits.  In addition, we could in thefuture be subject to suit by private parties in connection with allegedviolations of or liabilities under environmental laws and regulations.

 

**Employees**

 

**               **As of December 31, 2008, we had approximately1,113 full-time employees, 10 part-time employees, and 41 independentcontractors.  Currently, none of ouremployees are covered by a collective bargaining agreement.

 

**Item1A. Risk Factors**

 

                Our ability to predict results or the effect ofcertain events on our operating results is inherently uncertain.  Therefore, we wish to caution each reader ofthis annual report to carefully consider the following factors and certainother factors discussed herein and in other past filings with the Securities andExchange Commission.

 

***Downturns in thenew home construction industry, repair and remodeling activity or the economycould negatively affect our business.***

 

                Sales to the kitchen and bath cabinet market accounted forapproximately 93% of our total sales for the year ended December 31,2008.  Sales in this market are driven bynew home construction and home repair and remodeling activity.  New home construction and repair andremodeling activity continues to be affected by changes in economic and otherconditions, such as gross domestic product levels, employment levels,demographic trends, availability of financing, interest rates and consumerconfidence.  These factors can negativelyaffect the demand for our products.  Anydeterioration in these factors could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

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 and remodelingof existing homes.  During the last 30months, the home building, repair and remodeling industry experienced aslowdown as a result of general economic conditions.  Basedon the Kitchen Cabinet Manufacturers Association data for 2008, the kitchencabinet market is estimated to be down approximately 19%, and this slowdown hashad, and continues to have, a negative effect on our sales and income fromoperations.  If this slowdown wereto continue or worsen over an extended period of time, it could have a materialadverse effect on the Company’s business, financial condition or results ofoperations.

 

***Current economic conditions and disruptions in the credit and financialmarkets could have an adverse effect on our business, financial condition and resultsof operations.***

 

Recently,the financial markets experienced a period of unprecedented turmoil, includingthe bankruptcy, restructuring or sale of certain financial institutions and theintervention of the U.S. federal government. While the ultimate outcome ofthese events cannot be predicted, they may have a material adverse effect onour liquidity and financial condition if our ability to borrow money from ourexisting lenders under our Senior Credit Facility to finance our operationswere to be impaired. The crisis in the financial markets may also have amaterial adverse impact on the availability and cost of credit in the future.Our ability to pay our debt or refinance our obligations under our SeniorCredit Facility or Senior Notes will depend on our future performance, whichwill be affected by, among other things, prevailing economic conditions. Therecent 

 

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financial crisis may alsohave an adverse effect on the U.S., which would have a negative impact ondemand for our products. In addition, tightening of credit markets may have anadverse impact on our customers’ ability to finance the purchase of ourproducts or our suppliers’ ability to provide us with raw materials, either ofwhich could adversely affect our business and results of operations.

 

***Our debt agreements contain certain restrictions that limitour flexibility in operating our business, and our failure to comply with thesecovenants could result in an acceleration of our indebtedness.***

 

                We are subject to a number ofdebt agreements, including our Senior Credit Facility, the indenture governingthe Senior Notes and the purchase agreements governing the pay-in-kind notesissued by our Parent (the “Parent Notes”), which contain covenants thatrestrict our ability to incur indebtedness, pay dividends, make investments,grant liens, sell our assets and engage in certain other activities.  Inaddition, our Senior Credit Facility and Parent Notes require us to comply withcertain consolidated financial ratios and financial tests. Our ability to meetthese financial ratios and financial tests may be affected by events beyond ourcontrol, including a prolonged downturn in the housing market. We recentlyamended and obtained waivers to our Senior Credit Facility to, among otherthings, adjust the interest coverage ratio and total leverage ratio that wewere required to maintain as of December 31, 2008, and as of the end ofeach quarterly period through December 31, 2009 to reflect currenteconomic conditions. Parent also recently amended and obtained waivers to theParent Notes to, among other things, waive the total leverage ratio that wewere required to maintain as of December 31, 2008, and to adjust the totalleverage ratio we are required to maintain as of the end of each quarterlyperiod through December 31, 2009 to reflect current economic conditions.  Any breach of the covenants in our debtagreements could result in a default of the obligations under such debtagreement and cause a cross-default under one or more of our other debtagreements.  If there were an event of default under one of the debtagreements that was not cured or waived, the lenders under such debt agreementcould cause all amounts outstanding thereunder to be due and payableimmediately.  Our assets and cash flow may not be sufficient to fullyrepay borrowings under our debt agreements if accelerated upon an event ofdefault.

 

***We are dependent onmajor customers for a significant portion of our net sales.***

 

                For the year endedDecember 31, 2008, our top ten customers accounted for approximately 87%of our net sales.  During this period,our two largest customers accounted for approximately 55% of our netsales.  The permanent loss of, or asignificant decrease in the level of purchases by, one or more of our majorcustomers could have a material adverse effect on our results of operations.  The ongoing trend toward consolidation in thecabinet manufacturing market in which our customers operate could increase theconcentration of our sales and therefore increase these risks.

 

                In addition, someof our key cabinet manufacturer customers have the resources to manufactureinternally the cabinet doors and components that we sell to them.  Despite these manufacturing capabilities,these customers have chosen to outsource door and component production to us inpart due to the quality of our products and in order to reduce costs, eliminateproduction risks and maintain company focus. However, these customers may not continue to outsource door andcomponent production in the future. Increased levels of production insourcing could result from a number offactors, such as shifts in our customers’ business strategies, which could resultfrom the acquisition of another door and component manufacturer, the inabilityof third party suppliers to meet product specifications and the emergence oflow-cost production opportunities in foreign countries.  Any significant reduction in the level ofcabinet door and component production outsourcing from our cabinetmanufacturing customers could significantly impact our sales and, accordingly,have a material adverse effect on our business, results of operations andfinancial condition.

 

***Increased pricesfor raw materials used in our products could adversely affect our business.***

 

                Our profitabilityis affected by the prices of our raw materials, which may fluctuate based on anumber of factors beyond our control, including, among others, changes insupply and demand, general economic conditions, labor costs, competition and,in some cases, government regulation. The prices for the hardwood species we use in production of our hardwooddoors and components are subject to some volatility.  In the past calendar year the price of hardmaple, the primary hardwood specie we use, (accounting for approximately 43% ofour lumber purchases) decreased by approximately 10%, and the price of cherry,(accounting for approximately 28% of our lumber purchases) decreased by12%.  We have no long-term supplycontracts for the raw materials used in the manufacture of our products.  This means that we are subject to changes inthe prices charged by our suppliers. Significant increases in the prices of raw materials could materiallyadversely affect our business, financial condition and results of operations,especially if we are not able to recover these costs by increasing the priceswe charge our customers for our products. In 2008, the U.S. kitchen and bath cabinet industry relied heavily ondomestic maple, which is of a higher quality than imported maple.  A shortage in the supply of domestic maple orcertain other species of lumber could increase prices for these raw materials,which could also have a material adverse effect on our business, financialcondition and results of operations.  Wegenerally pass through cost increases to our customers, but the price increasesmay not fully offset the effects of increasing raw material costs.

 

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***Interruptions indeliveries of raw materials could adversely affect our business.***

 

                Our dependencyupon regular deliveries from suppliers means that interruptions or stoppages insuch deliveries could adversely affect our operations until arrangements withalternate suppliers could be made.  If asubstantial number of our suppliers were unable to deliver materials to us foran extended period of time, as the result of financial difficulties,catastrophic events affecting their facilities or other factors beyond ourcontrol, or if we were unable to negotiate acceptable terms for the supply ofmaterials with these or alternative suppliers, our business, financialcondition and results of operations could suffer.  We may not be able to find acceptablealternatives, and any such alternatives could result in increased costs tous.  Even if acceptable alternatives arefound, the process of locating and securing such alternatives might bedisruptive to our business.  Extendedunavailability of a necessary raw material could cause us to ceasemanufacturing of one or more products for a period of time, which could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

***Environmentalrequirements may impose significant compliance costs and liabilities on us.***

 

***               ***Our facilities are subject to numerousfederal, state and local laws relating to the protection of theenvironment.  We believe we are insubstantial compliance with all applicable requirements.  Our efforts to comply with environmentalrequirements does not remove the risk that we may be held liable, or incurfines or penalties, and that the amount of liability, fines or penalties may bematerial, for, among other things, releases of hazardous substances fromcurrent properties or any associated offsite disposal location, or forcontamination at our properties from activities conducted by previousoccupants.  Changes in environmental lawsand regulations or the discovery of previously unknown contamination or otherliabilities relating to our properties and operations could result in significantenvironmental liabilities.  In addition,we might incur significant capital and other costs to comply with increasinglystringent environmental laws and enforcement policies, which would decrease ourcash flow available to service our indebtedness.

 

***We face intensecompetition in our markets.***

 

                We operate in thehighly fragmented and very competitive cabinet door and componentindustry.  Our competitors includeinternational, national and local cabinet and cabinet component manufacturers.  These can be large consolidated operationswith manufacturing facilities in large and efficient plants, as well asrelatively small, local cabinetmakers. Some of our competitors may achieve greater market penetration incertain of the markets in which we operate, have greater financial and otherresources available and be less leveraged, which may provide them with greaterfinancial flexibility.  Moreover,companies in other building products industries may choose to compete withus.  To remain competitive, we will needto invest continuously in manufacturing, customer service and productdevelopment.  We may have to adjust theprices of some of our products to stay competitive.  In this regard, we have recently facedincreased pricing pressure in light of the current economic slowdown.  We may not have sufficient resources tocontinue to make such investments to maintain our competitive position withineach of the markets we serve.

 

***Cabinetmanufacturers may increasingly rely on imported components, which couldnegatively affect our business.***

 

                The number offoreign-made kitchen cabinets sold in the United States has increased slightlyin the last ten years.  We believe thatthe number of foreign-made cabinet components sold in the United States hasalso increased, though we do not believe any detailed study of such a trend iscurrently available.  This increase insales of imported components is the result of foreign wood componentmanufacturers improving the quality of their products and services and, in somecases, offering lower prices.  While wecurrently believe that the impact of imported products in our target markets islimited by, among other factors, the need for greater variety in terms ofprofiles, sizes and finishes, demand for higher quality products and short leadtimes, there is no assurance that demand for foreign-made products will notincrease in such markets.  If domesticcabinet manufacturers continue to increasingly rely on foreign imports fortheir components, our business, financial condition and results of operationscould be materially and negatively affected.

 

***If we are unable tomeet future capital requirements, our business may be adversely affected.***

 

                We periodicallymake capital investments to, among other things, maintain and upgrade ourfacilities and enhance our production processes.  As we grow our businesses, we may have toincur significant capital expenditures. We may not have, or be able to obtain, adequate funds to make allnecessary capital expenditures when required, or the amount of future capitalexpenditures may be materially in excess of our anticipated or currentexpenditures.  If we are unable to makenecessary capital expenditures, our product offering may become dated, ourproductivity may be decreased and the quality of our products may be adverselyaffected, which, in turn, could negatively impact our business, financialcondition and results of operations.

 

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***Increases in thecost of labor, union organizing activity and work stoppages at ourfacilities could materially affect our business.***

 

                Our business islabor intensive.  As a result, ourfinancial performance is affected by the availability of qualified personneland the cost of labor.  Currently, noneof our employees are represented by labor unions.  However, there could be strikes or othertypes of conflicts with personnel that may arise or we could become a targetfor union organizing activity.  Strikes,work stoppages or slowdowns could result in slowdowns or closures of ouror our suppliers’ facilities.  Inaddition, organizations responsible for shipping our products may be impactedby strikes.  Any interruption in theproduction or delivery of our products could reduce sales of our products andincrease our costs.

 

***We are dependent oncertain key personnel, the loss of whom could materially affect our financialperformance and prospects.***

 

                Our continuedsuccess depends to a large extent upon the continued services of our seniormanagement and certain key employees. The loss of the services of any of these individuals could have amaterial adverse effect on our business, financial condition and results ofoperations.  We have no keyman lifeinsurance on any of our employees.

 

***We may not be ableto successfully integrate, and may inherit significant liabilities inconnection with, future acquisitions.***

 

                We exploreopportunities to acquire related businesses from time to time, some of whichcould be material to us.  If we makeacquisitions, our ability to continue to grow will depend upon effectivelyintegrating these acquired companies, achieving cost efficiencies and managingthese businesses as part of our company.

 

                We may not be ableto effectively integrate the acquired companies or successfully implementappropriate operational, financial and management systems and controls toachieve the benefits expected to result from these acquisitions.  Our efforts to integrate these businessescould be affected by a number of factors beyond our control, including generaleconomic conditions and increased competition. In addition, the process of integrating these businesses could cause theinterruption of, or loss of momentum in, the activities of our existingbusiness.  The diversion of management’s attention and any delays ordifficulties encountered in connection with the integration of these businessescould negatively impact our business and results of operations. Further, thebenefits that we anticipate from these acquisitions may not materialize.

 

                Additionally, wemay be subject to unexpected claims and liabilities arising from theseacquisitions.  Such claims andliabilities could be costly to defend, could be material in amount and mayexceed either the limitations of any applicable indemnification provisions orthe financial resources of the indemnifying parties, in which event suchunexpected claims and liabilities could materially and negatively affect ourbusiness and financial performance.

 

***Our principalstockholder is in a position to affect our ongoing operations, corporatetransactions and other matters.***

 

                As of March 17,2009, Parent owned 100% of our outstanding voting capital stock and OlympusGrowth Fund IV, L.P. and Olympus Executive Fund, L.P. (each of which is aninvestment fund managed by Olympus Partners) collectively owned 86.53% of theoutstanding voting capital stock of Parent. For ease of reference, we sometimes collectively refer to Olympus GrowthFund IV, L.P. and Olympus Executive Fund, L.P. herein as the “Olympus Funds”.  Olympus Growth Fund IV, L.P. has the abilityto control the election of our Board of Directors and the election of the boardof directors of Parent and, by virtue of its ownership in Parent and certaincontractual voting rights set forth in the Parent Stockholders Agreement amongthe current stockholders of Parent, the outcome of other issues submitted tothe stockholders for approval.  See “SecurityOwnership of Certain Beneficial Owners and Management and Related Stockholder Matters.”  We cannot assure you that the interests ofOlympus Growth Fund IV, L.P. will not conflict with the interests of theholders of our Senior Notes.  Inparticular, Olympus Growth Fund IV, L.P. may cause a change of control at atime when we do not have sufficient funds to repurchase our Senior Notes, or torepay our Senior Credit Facility.

 

**Item 1B. UnresolvedStaff Comments**

 

                Not Applicable.

 

**Item 2.Properties**

 

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                Our headquartersare located in St. Cloud, Minnesota. We own eight and lease three manufacturing facilities.  We believe that our facilities are currentlyoperating at approximately 50-55% of overall plant capacity.  We intend to increase current levels ofcapacity utilization while handling an increased volume of sales.  In addition, we have increased capacity overtime through increases in operating efficiencies and growth investments at ourhardwood component, door and engineered woods facilities.  We expanded our Molalla, Oregon plant in 2004to create additional capacity for customers located on the West Coast.  In 2006, we completed the expansions of our (i) CabinetDoor plant in St. Cloud, Minnesota to create additional door manufacturingcapacity, and (ii) Greenville, Pennsylvania facility to add incrementalcapacity for lumber drying and roughmilling. In 2007, we completed the expansion of leased facilities in West Jordan,Utah and Monroe, Washington to add incremental door manufacturingcapacity.  Each of these facilities inUtah and Washington contributed minimal capacity to the Company and were closedin the second half of 2008 due to the slowdown in the industry.  In the first quarter 2008, we completed theexpansion of a leased facility in Conover, North Carolina to add incrementaldoor manufacturing capacity.

 

                Our Woodcraftsubsidiary operates three facilities in Minnesota, two of which are located inSt. Cloud and one of which is located in Foreston.  Our Minnesota facilities manufacture hardwoodcomponents, and one of our St. Cloud facilities also producesapproximately 54% of our hardwood doors. The hardwood door plant in St. Cloud includes high-volume hardwooddoor production together with flexible production cells required to respond tocustomer KAT orders.  Our Woodcraftdivision also has a fourth facility located in Bowling Green, Kentucky where wemanufacture hardwood components for shipment to our Minnesota and Ohiofacilities.  Our Woodcraft subsidiary in2005 acquired a facility located in Middlefield, Ohio, which manufactureshardwood component moldings, and also purchased a facility located inGreenville, Pennsylvania, which manufactures hardwood components for shipmentto our Minnesota and Ohio facilities.  In2007, our Woodcraft subsidiary completed an expansion in West Jordan, Utah toproduce hardwood doors.  In the firstquarter 2008, our Woodcraft subsidiary completed an expansion in Conover, NorthCarolina to produce hardwood doors.

 

                In Wahpeton, North Dakota, our PrimeWood subsidiarymanufactures RTF doors and components, VRPs and wrapped profiles.  We believe our Wahpeton facility, whichsupplies cabinet manufacturers throughout North America, is one of the largestindependent producers of engineered woods in North America.  We acquired this facility in 1998 inconnection with our acquisition of PrimeWood, Inc.  The PrimeWood subsidiary in 2005 also beganoperations at a manufacturing facility in Lansing, Kansas that manufactures RTFdoors and components.  The Lansingfacility is located in the Lansing Correctional Institute and employs inmatesin the production of RTF components.

 

                Our Brentwoodsubsidiary operates a manufacturing facility in Molalla, Oregon where we producehardwood and RTF doors, primarily for distribution to our customers located onthe West Coast.  Our Molalla facilityfocuses primarily on KAT production of custom and semi-custom products.  We acquired this facility in 2002 inconnection with our acquisition of Brentwood, Inc.  In 2007, our Brentwood subsidiary completedan expansion in Monroe, Washington to produce hardwood doors.

 

                Our former GrandValley subsidiary (which is now part of Woodcraft) operates a manufacturingfacility in Orwell, Ohio where we produce hardwood doors through KATproduction, primarily for semi-custom products. We acquired this facility in 2004 in connection with our acquisition ofthe former Grand Valley subsidiary.

 

                The followingchart sets forth information regarding our headquarters and our elevenmanufacturing facilities:

 
| **Location**               | ** ** | **Primary  Product Line**      | ** ** | **Square Footage** | ** ** | **Description  of********Property Interest** |
|----------------------------|------------|--------------------------------|------------|--------------------|------------|----------------------------------------------|
| St. Cloud,  Minnesota |       | Headquarters                   |       | 10,000             |       | Owned                                        |
| St. Cloud,  Minnesota |       | Hardwood Doors                 |       | 153,000            |       | Owned                                        |
| St. Cloud,  Minnesota |       | Hardwood  Components           |       | 157,450            |       | Owned                                        |
| Foreston,  Minnesota       |       | Hardwood  Components           |       | 137,770            |       | Owned                                        |
| Bowling Green,  Kentucky   |       | Hardwood  Components           |       | 116,880            |       | Owned                                        |
| Middlefield,  Ohio.        |       | Hardwood  Components           |       | 40,000             |       | Leased                                       |
| Greenville,  Pennsylvania. |       | Hardwood  Components           |       | 80,000             |       | Owned                                        |
| Wahpeton, North  Dakota    |       | RTF Doors and  Components, VRP |       | 200,000            |       | Owned                                        |
| Lansing, Kansas            |       | RTF Doors and  Components      |       | 19,000             |       | Leased                                       |
| Molalla, Oregon            |       | Hardwood and RTF  Doors        |       | 100,000            |       | Owned                                        |
| Orwell, Ohio               |       | Hardwood Doors                 |       | 40,000             |       | Owned                                        |
| Conover, North  Carolina   |       | Hardwood Doors                 |       | 55,000             |       | Leased                                       |

 

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**               **We also lease a number ofnon-manufacturing facilities utilized for warehousing.  Our West Jordan, Utah facility is nowincluded as a non-manufacturing facility as of December 31, 2008.  These facilities are deemed to not bematerial.

 

**Item 3. Legal Proceedings**

 

                We are involved invarious proceedings incidental to the ordinary conduct of our business.  We do not presently believe that any of theproceedings currently pending will have a material adverse effect on ourbusiness, financial condition, cash flows or results of operations.

 

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

 

                None.

 

**PART II**

 

**Item 5.Market for Registrant’s Common Equity, Related StockholderMatters and Issuer Purchases of Equity Securities**

 

There is no established public trading market for the common stock ofWII Components, Inc.  As a result ofthe Transaction, WII Components, Inc. is a wholly owned subsidiary ofParent.

 

We became a whollyowned subsidiary of Parent on January 9, 2007.  Since that time, wehave made cash dividends to, and made other distributions on account of the,Parent from time to time to enable Parent to (i) make cash interestpayments on the Parent Notes, (ii) pay its customary and reasonableout-of-pocket expenses, legal and accounting fees and expenses and overheadincurred on account of its ownership of us, and (iii) pay the fees under amanagement services agreement between Parent and Olympus Advisory Partners, Inc. These payments totaled approximately $3.2 million in 2007 and $5.0million in 2008.  We expect to make similar payments to or on account ofParent in the foreseeable future.  Any payment of future dividends and theamounts thereof will be dependent upon the Company’s earnings, fiscalrequirements and other factors deemed relevant by the Company’s Board ofDirectors.  Certain restrictive covenants contained in the Company’sSenior Credit Facility and the indenture governing the Senior Notes currentlyrestrict our ability to make dividends or other payments to Parent.  See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources” for a detailed discussion of suchrestrictions.

 

As a result of theTransaction, all outstanding stock options were terminated and canceled on January 9,2007, and there are currently no stock options of the Company issued andoutstanding.

 

Parent issued restrictedstock on August 31, 2007 and September 14, 2007 to certain members ofour management totaling 55,219 shares of Parent common stock.  The fair value of the Parents common stockwas considered contributed capital to the Company and had a fair value ofapproximately $397,023 on the date of the grant.  The restricted stock becomes fully vestedafter seven years, or earlier, if certain milestones described in theunderlying grant agreements are met.

 

###### **Item 6. Selected Financial Data**

###### ** **

The following table sets forth certain of ourhistorical consolidated financial data. The Transaction was completed on January 9, 2007, and theTransaction has been accounted for as a recapitalization in the Company’s financial statements, with noadjustments to the historical basis of the Company’s assets and liabilities.  The selected historical consolidatedfinancial data as of and for the years ended December 31, 2008, 2007,2006, 2005 and 2004 have been derived from our audited consolidated financialstatements.  Historical results are notnecessarily indicative of the results to be expected in the future.  You should read the following data inconjunction with “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and our historical consolidated financial statements andaccompanying notes included elsewhere in this annual report.

 

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| ** **                                | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005 (1)** | ** ** | **2004 (2)** | ** ** |
| ** **                                | ** ** | **(Dollars in thousands)**       | ** ** |
| **Statement of Operations Data:**         |       |                             |       |   |   |   |   |   |   |   |   |
| Net sales                                 |       | $                                | 193,373    |   | $ | 249,303 |   | $ | 285,633 |   | $ | 259,603 |   | $ | 203,066 |   |
| Cost of sales                             |       | 166,635                          |       | 205,063 |   | 237,289 |   | 217,625 |   | 167,279 |   |
| Gross profit                              |       | 26,738                           |       | 44,240 |   | 48,344 |   | 41,978 |   | 35,787 |   |
| Total operating expenses (3)              |       | 13,934                           |       | 24,096 |   | 18,024 |   | 14,805 |   | 12,643 |   |
| Operating income                          |       | 12,804                           |       | 20,144 |   | 30,320 |   | 27,173 |   | 23,144 |   |
| Interest expense                          |       | 13,024                           |       | 15,460 |   | 14,038 |   | 13,561 |   | 12,767 |   |
| Other (income) loss, net (4)              |       | (1,860                           | )          | (453 | ) | (88 | ) | (50 | ) | 3,414 |   |
| Income tax expense                        |       | 324                              |       | 2,096 |   | 6,627 |   | 5,487 |   | 2,684 |   |
| Net earnings                              |       | $                                | 1,316      |   | $ | 3,041 |   | $ | 9,743 |   | $ | 8,175 |   | $ | 4,279 |   |
| **Other Financial Data:**                 |       |                             |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization (5)         |       | $                                | 8,762      |   | $ | 8,712 |   | $ | 7,926 |   | $ | 6,760 |   | $ | 6,071 |   |
| Capital expenditures (6)                  |       | 3,722                            |       | 7,629 |   | 15,999 |   | 11,787 |   | 5,733 |   |
| Net cash provided by operating activities |       | 13,714                           |       | 16,500 |   | 23,426 |   | 12,990 |   | 15,969 |   |
| **Balance Sheet (at end of period):**     |       |                             |       |   |   |   |   |   |   |   |   |
| Total assets                              |       | $                                | 221,006    |   | $ | 247,957 |   | $ | 230,314 |   | $ | 221,594 |   | $ | 194,987 |   |
| Long-term debt, plus current maturities   |       | 111,947                          |       | 124,202 |   | 127,500 |   | 127,500 |   | 120,000 |   |
| Capital lease obligations                 |       | —                           |       | 530 |   | 1,111 |   | 2,466 |   | 3,122 |   |

----

(1)   In July 2005, the Company acquiredsubstantially all of the assets of a moldings manufacturing company operatingunder the name Dimension Moldings, Inc. through an asset purchase.  The results of operations for this acquiredbusiness have been included in our financial statements since the date ofacquisition.  Our results of operationsfor periods since the acquisition may not be comparable to our results ofoperations for the periods prior to the acquisition.

 

(2)   In April 2004, the Company acquiredGrand Valley, Inc. through an asset purchase.  The results of operations for this acquiredbusiness have been included in our financial statements since the date ofacquisition.  Our results of operationsfor periods since the acquisition may not be comparable to our results ofoperations for the periods prior to the acquisition.

 

(3)   Total operating expenses include $0.6 millionof stock compensation expense in 2004 related to stock option variableaccounting, $1.3 million of stock compensation expense in 2005 related to stockoption variable accounting, $3.1 million of stock compensation expense in 2006related to stock option accounting, and $1.8 million of compensation expense in2007 related to stock option accounting and transaction incentives.  In addition, 2007 includes transaction costsfor the Transaction, tender offer costs, and management advisory fees ofapproximately $7.2 million, $0.8 million, and $0.6 million, respectively.  Total operating expenses in 2008 include $0.6million for management advisory fees.

 

(4)   For the fiscal year ended December 31,2004, the Company wrote off $3.5 million of financing fees related to theold credit facility, and in 2008 the Company recognized $1.7 million of gainson the extinguishment of debt.

 

(5)   Depreciation and amortization does notinclude amortization of deferred financing fees (which are included in interestexpense) for the fiscal years ended December 31, 2004, 2005, 2006, 2007and 2008 of $1.0 million, $1.0 million, $1.1 million, $2.5 million and$1.5 million, respectively.

 

(6)   Includes capital expenditures in AccountsPayable at the end of the period, which have not been paid in cash.  See “Consolidated Statements of Cash Flows” included in the consolidated financialstatements elsewhere in this report for more information.

 

# **Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

# ** **

*                Youshould read the following discussion in conjunction with our consolidatedfinancial statements and related notes appearing elsewhere in this annualreport.  In addition to historicalinformation, this discussion contains forward-looking statements that involve risks,uncertainties and assumptions that could cause actual results to differmaterially from management’s expectations.*

 

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**Overview**

 

                We are one of theleading manufacturers of hardwood cabinet doors and 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.  In 2008, we generatedapproximately 93% of our sales from the kitchen and bath cabinet manufacturingindustry.  Our customers, in turn,distribute their products through various sales channels, including specialtykitchen and bath cabinet 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, Ohio, Oregon,Pennsylvania, Kansas, 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 engineered woodproducts 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 newly formed investment entity controlled by two investment fundsmanaged by Olympus Partners.  For ease ofreference, these funds are sometimes collectively referred to herein as the “Olympus Funds”.  The acquisition was consummated through a merger of WII MergerCorporation (“MergerCo”), a wholly owned subsidiary of Parent, with and into the Company withthe Company being 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 financialstatements, with no adjustments to the historical basis of the Company’s assets andliabilities.  The Company did not pushdown the new accounting basis because of the significance of the publiclytraded debt outstanding, which hinders the Parent’s ability tocontrol the form of ownership of the Company.

 

##### **Results of Operations**

##### ** **

                As discussed below, wecontinued to experience a slowdown in net sales for the twelve months ended December 31,2008 that began in the second half of 2006. This kitchen and bath industry-wide slowdown had a negative impact onour gross profit and operating income margin percentages due to fixed costsbecoming a higher percentage of sales.  In addition, we have continued to experience decreases in hardwoodmaterial prices, which generally are passed on to our customers through lowerselling prices in accordance with indexing agreements that reset approximatelyevery 3 to 6 months.  While the prices wepay for hardwood materials have continued to decline, the decline has slowed in2008 versus 2007, which has resulted in modest declines on our gross profit andoperating income margin percentages due to the lag of material cost adjustmentsfrom 2007 affecting 2008 selling prices.

 

***Year Ended December 31,2008 Compared to the Year Ended December 31, 2007***

 

                The years ended December 31,2008 and 2007 are shown in the table below. The following table sets forthselected operating data derived from our consolidated statements of earningsand presents this information as a percentage of net sales.

 

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| ** **               | ** ** | **Year Ended  December 31, 2008** | ** ** | **Year Ended  December 31, 2007** | ** ** |
|--------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **               | ** ** | **(Dollars in thousands)**             | ** ** |
|                     |       |                                   |       |                                   |       |
| Net sales                |       | $                                      | 193,373    |                                   | $          | 249,303 |   |
| *% of net sales*         |       | 100.0                                  | %          | 100.0                                  | %          |
| Cost of sales            |       | 166,635                                |       | 205,063                                |       |
| *% of net sales*         |       | 86.2                                   | %          | 82.3                                   | %          |
| Gross profit             |       | 26,738                                 |       | 44,240                                 |       |
| *% of net sales*         |       | 13.8                                   | %          | 17.7                                   | %          |
| Operating expenses       |       | 13,934                                 |       | 24,096                                 |       |
| *% of net sales*         |       | 7.2                                    | %          | 9.7                                    | %          |
| Operating income         |       | 12,804                                 |       | 20,144                                 |       |
| *% of net sales*         |       | 6.6                                    | %          | 8.0                                    | %          |
| Other expenses:          |       |                                   |       |                                   |       |
| Interest expense         |       | 13,024                                 |       | 15,460                                 |       |
| *% of net sales*         |       | 6.7                                    | %          | 6.2                                    | %          |
| Other (income) loss, net |       | (1,860                                 | )          | (453                                   | )          |
| *% of net sales*         |       | (1.0                                   | )%         | (0.2                                   | )%         |
| Income taxes             |       | 324                                    |       | 2,096                                  |       |
| *% of net sales*         |       | 0.2                                    | %          | 0.8                                    | %          |
| Net earnings             |       | 1,316                                  |       | 3,041                                  |       |
| *% of net sales*         |       | 0.7                                    | %          | 1.2                                    | %          |
|                          |            |                                        |            |                                        |            |  |  |

 

*                Net Sales.* Net sales decreased $56.0 million, or 22.5%, from$249.3 million for the year ended December 31, 2007 to$193.3 million for the year ended December 31, 2008.  Sales in our hardwood and engineered woodproduct line decreased $51.0 million and $5.0 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 generally increased or decreased as ourmaterial costs increase or decrease.

 

*                Cost of Sales.* Cost of sales decreased $38.5 million, or 18.8%, from$205.1 million for the year ended December 31, 2007 to$166.6 million for the year ended December 31, 2008.  This decrease in cost of sales is primarilyattributable to lower material, labor and overhead costs as a result of lowervolume of sales.

 

*                Gross Profit.* Gross profit decreased $17.5 million, or 39.6%, from$44.2 million for the year ended December 31, 2007 to$26.7 million for the same period in 2008 as a result of the factorsdescribed above.  As a percentage of netsales, our gross profit decreased 390 basis points from 17.7% for the yearended December 31, 2007 to 13.8% for the same period in 2008. Thisdecrease is related to (i) spreading fixed costs over lower sales volume and (ii) thenet effect of lower selling prices versus material cost reductions.

 

*Operating Expenses.* Operating expenses decreased $10.2 million, or 42.3%, from$24.1 million for the year ended December 31, 2007 to$13.9 million for the year ended December 31, 2008.  The decrease mainly consistsof approximately; (i) $7.2million of transaction expenses in 2007 related to the Transaction, (ii) $0.8million in 2007 related to efforts to refinance a portion of the outstandingdebt, (iii) $1.0 million of transaction incentives incurred in 2007 inconnection with the Transaction, (iv) $1.2 million related to lower stockcompensation expense and lower salaries due to reduced overall workforce in2008, (v) $0.2 million of lower professional fees, and (vi) $0.2million of lower incentive compensation expense.  These decreases were partially offset by $0.8million due to long-lived asset write-offs in conjunction with the closing ofour West Jordan, Utah facility.  As apercentage of sales, operating expenses decreased from 9.7% for the year ended December 31,2007 to 7.2% for the same period in 2008, as a result of the factors describedabove.

 

*OperatingIncome.*  Operating income decreased by$7.3 million, or 36.3%, from $20.1 million for the year ended December 31,2007 to $12.8 million for the year ended December 31, 2008 as aresult of the net effect of the factors described above.

 

*                Interest Expense.* Interest expense decreased $2.4 million, or 15.6%, from$15.4 million for the year ended December 31, 2007 to$13.0 million for the year ended December 31, 2008.  This decrease relates to (i) $0.9million in lower amortized deferred financing fees in 2008, and (ii) lowerinterest expense in 2008 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 for the First Lien Term Facility.

 

*Other(Income) Loss.*  Other income increased $1.4 million, or350.0%, from $0.4 million for the year ended December 31, 2007 to $1.8million for the year ended December 31, 2008.  This income represents interest received fromour interest bearing accounts and 2008 also includes a $1.7 million gain on theextinguishment of debt.

 

*                IncomeTax Expense.*  Income tax expense decreased$1.8 million, or 85.7% from $2.1 million for the year ended December 31,2007 to $0.3 million for the year ended December 31, 2008 as a result oflower earnings, and a lower effective tax rate. The effective tax rate decreased 2100 basis points from 40.8% in 2007 to19.8% in 2008 due to state taxes and permanent differences.

 

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*                NetEarnings.*  Net earnings decreased $1.7 million, or56.7%, from $3.0 million for the year ended December 31, 2007 to$1.3 million for the year ended December 31, 2008 as a result of thefactors described above.

 

***Year Ended December 31,2007 Compared to the Year Ended December 31, 2006***

 

                The years ended December 31,2007 and 2006 are shown in the table below. The following table sets forthselected operating data derived from our consolidated statements of earningsand presents this information as a percentage of net sales.

 

| ** **               | ** ** | **Year Ended  December 31, 2007** | ** ** | **Year Ended  December 31, 2006** | ** ** |
|--------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **               | ** ** | **(Dollars in thousands)**             | ** ** |
|                     |       |                                   |       |                                   |       |
| Net sales                |       | $                                      | 249,303    |                                   | $          | 285,633 |   |
| *% of net sales*         |       | 100.0                                  | %          | 100.0                                  | %          |
| Cost of sales            |       | 205,063                                |       | 237,289                                |       |
| *% of net sales*         |       | 82.3                                   | %          | 83.1                                   | %          |
| Gross profit             |       | 44,240                                 |       | 48,344                                 |       |
| *% of net sales*         |       | 17.7                                   | %          | 16.9                                   | %          |
| Operating expenses       |       | 24,096                                 |       | 18,024                                 |       |
| *% of net sales*         |       | 9.7                                    | %          | 6.3                                    | %          |
| Operating income         |       | 20,144                                 |       | 30,320                                 |       |
| *% of net sales*         |       | 8.0                                    | %          | 10.6                                   | %          |
| Other expenses:          |       |                                   |       |                                   |       |
| Interest expense         |       | 15,460                                 |       | 14,038                                 |       |
| *% of net sales*         |       | 6.2                                    | %          | 4.9                                    | %          |
| Other loss (income), net |       | (453                                   | )          | (88                                    | )          |
| *% of net sales*         |       | (0.2                                   | )%         | 0.0                                    | %          |
| Income taxes             |       | 2,096                                  |       | 6,627                                  |       |
| *% of net sales*         |       | 0.8                                    | %          | 2.3                                    | %          |
| Net earnings             |       | 3,041                                  |       | 9,743                                  |       |
| *% of net sales*         |       | 1.2                                    | %          | 3.4                                    | %          |
|                          |            |                                        |            |                                        |            |  |  |

 

*                Net Sales.* Net sales decreased $36.3 million, or 12.7%, from$285.6 million for the year ended December 31, 2006 to $249.3 millionfor the year ended December 31, 2007. Our hardwood product line decreased $24.4 million, attributable to (i) anoverall slowdown in the market that began in the third quarter of 2006, (ii) lowerselling prices of approximately 3% in conjunction with lower material costs,and (iii) to a lesser extent, a reduction due to the loss of market shareon a hardwood door program in 2007 that represented approximately 1% of oursales in 2006.  In addition, ourengineered wood products line decreased $11.9 million, which isattributable to softness in the engineered wood products industry and decreasesin market share.

 

*                Cost of Sales.* Cost of sales decreased $32.2 million, or 13.6%, from$237.3 million for the year ended December 31, 2006 to$205.1 million for the year ended December 31, 2007.  This decrease in cost of sales is primarilyattributable to lower material, labor, and overhead costs as a result of lowervolume of sales, but other factors include; (i) improved operationalperformance related to yield and labor productivities, (ii) lower stockcompensation expense, (iii) favorable LIFO cost of material adjustment in2007 resulting from the decline in hardwood materials cost, and (iv) lowerhardwood material costs. These were partially offset by (i) increasedmulti-density fiber board and particle board costs related to our engineeredwood products line and (ii) transaction incentives incurred in connectionwith the Transaction.

 

*                Gross Profit.* Gross profit decreased $4.1 million, or 8.5%, from $48.3 millionfor the year ended December 31, 2006 to $44.2 million for the sameperiod in 2007 as a result of the factors described above.  As a percentage of net sales, our grossprofit increased 80 basis points from 16.9% for the year ended December 31,2006 to 17.7% for the same period in 2007. This increase reflects (i) improved operational performance, (ii) lowerstock compensation expense, (iii) favorable LIFO cost of materialadjustment in 2007 resulting from the decline in hardwood raw materials cost, and(iv) lower hardwood material costs. This increase was partially offset with (i) board cost increasesrelated to our engineered wood product line and (ii) incentive bonuspayments incurred in connection with the Transaction.

 

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*                Operating Expenses.* Operating expenses increased $6.1 million, or 33.9%, from$18.0 million for the year ended December 31, 2006 to $24.1 millionfor the year ended December 31, 2007. The increase consists primarily of (i) $6.4 million, net of $0.8million from 2006, of transaction expenses related to the Transaction, (ii) $0.8million related to efforts to refinance a portion of the outstanding debt, (iii) $0.6million of management advisory fees, (iv) $0.6 million higher professionalfees, (v) $0.2 million of depreciation, and (vi) $1.0 million intransaction incentives incurred in connection with the Transaction.   These were partially offset with (i) $3.3million of lower stock compensation expense, and (ii) lower incentiveexpense.  As a percentage of sales,operating expenses increased from 6.3% for the year ended December 31,2006 to 9.7% for the same period in 2007, as a result of the factors describedabove.

 

*OperatingIncome.*  Operating income decreased by$10.2 million, or 33.7%, from $30.3 million for the year ended December 31,2006 to $20.1 million for the year ended December 31, 2007 as aresult of the net effect of the factors described above.

 

*InterestExpense.*  Interest expense increased $1.4 million, or10.0%, from $14.0 million for the year ended December 31, 2006 to$15.4 million for the year ended December 31, 2007.  This increase relates to (i) increasedamortization of deferred financing fees in connection with the Transaction, and(ii) a higher average debt balance due to the additional debt incurred inconjunction with the Transaction.

 

*OtherLoss (Income).*  Other income increased from $88,000 for theyear ended December 31, 2006 to $453,000 for the year ended December 31,2007.  This increase is due to interestreceived from our interest bearing accounts.

 

*Income Tax Expense.* Income tax expense decreased $4.5 million, or 68.2% from$6.6 million for the year ended December 31, 2006 to $2.1 million forthe year ended December 31, 2007 as a result of lower earnings, and ahigher effective tax rate.  The effectivetax rate increased 30 basis points from 40.5% in 2006 to 40.8% in 2007 due toadditional state taxes owed as a result of acquisitions and permanentdifferences associated with the Transaction.

 

*Net Earnings.* Net earnings decreased $6.7 million, or 69.1%, from $9.7 millionfor the year ended December 31, 2006 to $3.0 million for the yearended December 31, 2007 as a result of the factors described above.

 

**Liquidity and Capital Resources**

 

Our primary cash needs are working capital, capitalexpenditures and debt service.  We havehistorically financed these cash requirements through internally generated cashflow and funds borrowed under our prior and existing senior secured creditfacilities.

 

In conjunction with the Transaction, we entered into a senior creditfacility, the “Senior Credit Facility”), with Credit Suisse, Cayman Islands Branch, which provided for (i) asenior secured first lien term loan facility in an aggregate principal amountof $150.0 million (the “FirstLien Term Facility”) and (ii) asenior secured first lien revolving credit facility in an aggregate principalamount up to $25.0 million, subject to certain conditions, (the “Revolving Facility” and, together with the First Lien TermFacility, the “First LienFacilities”) of which $10.0million is available through a subfacility in the form of letters ofcredit.  Subject to certain conditions,the First Lien Term Facility may be increased by up to $30.0 million during thelife of the First Lien Term Facility at the request of the Company with theconsent from those lenders who agree to participate in such increase.  Subject to the foregoing, effective as of April 30,2007, no additional borrowings are available under the First Lien Term Facilitybeyond the $9.8 million outstanding at March 31, 2007.  As of December 31, 2008, the maximumamount of borrowings available to the Company under the Revolving Facility was$12.5 million.  As of December 31,2008 borrowings of $3.6 million were outstanding under the First Lien TermFacility and nothing was outstanding under the Revolving Facility.  As of December 31, 2008, 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 4.21% at December 31, 2008).  We must comply with certain financialcovenants under our Senior Credit Facility, including maintenance of aninterest coverage ratio and a total leverage ratio

 

On March 30, 2009,we entered into an amendment to our Senior Credit Facility, which among otherthings: (i) increased the applicable interest rate margin for borrowingsthereunder; (ii) eliminated the requirement that we maintain corporatedebt ratings; (iii) extended the date by which we must amend the indenturegoverning the Senior Notes to eliminate certain of the restrictive covenantscontained therein (including covenants related to the incurrence ofindebtedness and liens) or redeemed the Senior Notes to March 31, 2010; (iv) extendedour ability to continue to pay cash dividends to enable Parent to make cashinterest payments on the Parent Notes to March 31, 2010; (v) increasedthe maximum total leverage ratio we 

 

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may have at theend of each quarterly period from December 31, 2008 through December 31,2009, (vi) required payment of the remaining balance due under the First LienTerm Facility of approximately $3.6 million and (vii) decreased theminimum interest coverage ratio we are required to maintain at the end of eachquarterly period 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 our 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 December 31,2008, the weighted average interest rate for the Company’s outstanding debt was 9.9%.

 

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.  The subsidiary guarantors are generally notrestricted in their ability to dividend or otherwise distribute funds to theCompany except for restrictions imposed under applicable state corporate law. The Company is limited in its ability to pay dividends or otherwise makeother distributions to Parent under the Senior Credit Facility and theindenture governing the Senior Notes.  Specifically, as amended, theSenior Credit Facility prohibits the Company from making any distributions toParent except for limited purposes, including, but not limited to: (i) priorto March 31, 2010, the Company may pay cash dividends and distributions toParent to enable Parent to make cash interest payments on the Parent Notes,providedthat (x) after giving pro forma effect to such dividend ordistribution, the consolidated first lien leverage ratio does not exceed 1.0 to1.0, and (y) the amount of such dividends and distributions shall notexceed $3,225,000 in any calendar quarter, (ii) customary and reasonableout-of-pocket expenses, legal and accounting fees and expenses and overhead ofParent incurred in the ordinary course of business to the extent attributableto the business of the Company and its subsidiaries and in the aggregate not toexceed $500,000 in any fiscal year, and (iii) the Company may paymanagement fees of Parent not to exceed $750,000 in any fiscal year so long asno default has occurred.  The indenture provides that the Company cangenerally pay dividends and make other distributions to Parent in an amount notto exceed (i) 50% of 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 consolidated interestcoverage ratio of greater than 2.0 to 1.0. For the twelve month period ended December 31, 2008, the Company’s consolidated interest coverage ratiowas less than 2.0 to 1.0.

 

OnMarch 30, 2009, Parent amended and obtained a waiver to the Note PurchaseAgreements related to the Parent Notes to waive the total leverage ratio thatwe were required to maintain as of December 31, 2008 and to adjust the totalleverage ratio that we are required to maintain as of the end of each quarterlyperiod through December 31, 2009 to reflect current economic conditions. Inaddition, in connection with this amendment and waiver, the $150,000 quarterlyadvisory fee payable by Parent to Olympus Advisory Partners Inc (“OAP”), anaffiliate of the Olympus Funds, under the advisory services agreement discussedbelow, has been deferred by OAP for each quarter of 2009 and will be payable in2010 or thereafter.  See “CertainRelationships and Related Party Transactions, and Director Independence –Advisory Services Agreement” for additional information regarding the advisoryservices agreement.

 

As of December 31,2008, we had no capital lease obligations, and as of December 31, 2007, wehad $0.5 million of capital lease obligations, of which all was current.

 

The Company hasoutstanding Senior Notes.  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 itssubsidiaries.  As a result, the Companyhas not presented separate financial statements of the subsidiary guarantors.

 

As of December 31,2008, we had $14.7 million of cash and cash equivalents available for anycorporate purposes, compared to $19.6 million as of December 31,2007.  Cash and cash equivalents as of December 31,2007 includes approximately $6.4 million related to income tax refunds due backto previous stockholders of the Company, which is included in Other CurrentLiabilities on the Balance Sheet as of December 31, 2007, and paid duringthe three months ended March 31, 2008.

 

*Cashflow from operating activities.*  As of December 31,2008, we had $14.7 million of cash and cash equivalents available for workingcapital purposes.  As of December 31,2007, we had $19.6 million of cash and cash equivalents available for workingcapital purposes.  Cash provided byoperating activities for the years ended December 31, 2008 and 2007 was$13.7 million and $16.5 million, respectively. The decreased source of cash provided by operating activities is mainlyattributable to (i) lower net earnings, (ii) lower accounts payable,and (iii) payment of $6.2 million in 2008 for income tax refunds that weredue to previous stockholders of the Company in accordance with the Transactionagreement.

 

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The $6.2 million taxrefund was received by the Company in 2007 as a source of cash.  The decreased source of cash provided byoperating activities was offset partially by lower accounts receivable andinventories due to lower sales volume in 2008. Accounts receivable days outstanding decreased by approximately fourdays from 2007 to 2008 due to minimal sales the last two weeks of 2008 sincethe majority of our customers were closed for a two week period.

 

*Cashflow from investing activities.*  Net cash usedin investing activities was $3.7 million for the year ended December 31,2008 and $12.9 million for the year ended December 31, 2007.  Capital expenditures in 2008 were $3.7million compared to $7.9 million for the year ended December 31,2007.  The decrease in capitalexpenditures in 2008 is primarily due to lower capital expenditures needed forcapacity requirements.  Net cash used ininvesting activities for 2007 includes $5.0 million due to DMI earn-out payments.

 

*Cashflow from financing activities.*  Net cash usedin financing activities for the year ended December 31, 2008 totaled $14.9million primarily due to (i) capital lease payments of $0.5 million, (ii) principalpayments on the Senior Credit Facility of $0.8 million, (iii) purchase of$9.8 million of Senior Notes, and (iv) a distribution on behalf of theParent of $4.5 million to the Parent for payment on the Parent Notes.  The cash used in financing activities waspartially offset with cash provided by financing activities due to a $0.7million increase for the amount Due to Parent related to income taxobligations.  Net cash provided byfinancing activities for the year ended December 31, 2007 totaled $7.9million primarily due to (i) capital contributions of $21.7 million thatfunded debt issuance costs of $3.6 million and stock option payments of $7.9million, (ii) borrowings of long-term debt under the Senior CreditFacility of $10.2 million that funded the payoff of the 2005 Senior CreditFacility of $7.5 million, (iii) capital lease payments of $0.6 million, (iv) principalpayments on the Senior Credit Facility of $5.8 million, (v) the amount Dueto Parent increasing by $4.1 million, and (vi) a distribution on behalf ofthe Parent for costs in conjunction with the Merger or ongoing operations of$2.6 million, which includes $0.9 million to the Parent for payment on theParent Notes.

 

For the twelve monthperiods ended December 31, 2008 and December 31, 2007, our twolargest customers accounted for approximately 55% and 54%, respectively, of ournet sales.  As of December 31, 2008and December 31, 2007, our two largest customers accounted forapproximately 47% and 52%, 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 provide assurancesthat our business will generate sufficient cash flow from operations, thatanticipated net sales growth and operating improvements will be realized orthat future borrowings will be available under our Senior Credit Facility in anamount sufficient to enable us to service our indebtedness, including theSenior 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.  The Company can not provideassurance it will be able to obtain waivers for non-compliance in the future,if necessary.

 

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 2008, and has had a negative impact on our resultsof operations for the twelve months ended December 31, 2008.  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 

 

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reviewing our costs ofdoing business on a routine basis, controlling working capital in a slowerbusiness climate, and minimizing our capital 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.

 

**Scheduleof Contractual Obligations**

 

The following table details our projected payments forour contractual obligations as of December 31, 2008.  The table is based upon available informationand certain assumptions that we believe are reasonable.

 
| ** **                          | ** ** | **Payments Due by Period** | ** ** | ** **    | ** ** |
|-------------------------------------|------------|----------------------------|------------|---------------|------------|
| **Contractual Obligations**         | ** ** | **Less than  1 year**      | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5  years** | ** ** | **Total** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands)** | ** ** | ** **    | ** ** |
| Long-term debt obligations          |       | $                          | 3,597      |          | $          | 0 |   | $ | 108,350 |   | $ | — |   | $ | 111,947 |   |
| Interest expense on fixed rate debt |       | 10,835                     |       | 21,670        |       | 1,483 |   | — |   | 33,988 |   |
| Operating lease obligations         |       | 653                        |       | 584           |       | 483 |   | — |   | 1,720 |   |
| Total contractual cash obligations  |       | $                          | 15,085     |          | $          | 22,254 |   | $ | 110,316 |   | $ | — |   | $ | 147,655 |   |

 

In addition to the summary of contractual obligations,we will incur annual interest on outstanding variable rate debt.  As of December 31, 2008, variableinterest rate debt was $3.6 million at a weighted average interest rate of4.2%.

 

From time to time,we acquire the use of certain assets, such as warehouses, forklifts, trailers,and office equipment through operating leases. Many of these operating leases have termination penalties.  However, because the assets are used in theconduct of our business operations, it is unlikely that any significant portionof these operating leases would be terminated prior to the normal expiration oftheir lease terms.  In conjunction withthe discontinued manufacturing at our West Jordan, Utah facility, the Companywill continue to pay the monthly lease of approximately $17,000 through March 17,2011 or until the lessor obtains another lessee.  We consider the risk related to terminationpenalties to be minimal on all other leases.

 

**Off-Balance Sheet Arrangement**

 

With the exception ofroutine operating leases, we had no off-balance sheet financing arrangements atDecember 31, 2008, 2007 and 2006.

 

**Inflation**

 

Our cost of sales is subject to inflationary pressureson labor costs, prices of the raw materials we use and various overheadcosts.  We generally have been able overtime to offset the effects of inflation and price fluctuations through acombination of sales price increases and operational efficiencies.  We currently believe that raw material costpressure has moderated.  We continue toattempt to pass along these costs, but such efforts typically lag behind inmaterial costs and we can not guarantee a full offset.

 

**Seasonality**

 

Our sales historically have been moderately seasonal,reflecting the temporary slow down in consumer purchasing activity during thewinter holiday season and the summer months.

 

**Critical Accounting Policies**

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of America(GAAP) requires management to make estimates, assumptions and judgments thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Because of the uncertainty inherent in thesematters, actual results 

 

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could differ from those estimates. We believe that the estimates, assumptions and judgments involved in theaccounting policies below have the greatest potential impact on our financialstatements.

 

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, unless noted differently below.  We have not changed these policies from thosepreviously disclosed.

 

*Revenue Recognition.* We recognize revenues and related cost of sales when title passes, whichis usually upon shipment of product under FOB shipping point terms.  Returns are estimated and provided for at thetime of sale based on historical experience and current trends.

 

*Allowance for Doubtful Accounts.* We make estimates of potentially uncollectible accounts receivable.  Our reserves are based on an analysis ofcustomers’accounts and historical write-off experience. Our analysis includes the age of the receivable, customercreditworthiness and general economic conditions.  We believe the results could be materiallydifferent if historical trends do not reflect actual results or if economicconditions worsened.

 

***Goodwill.***  We evaluate goodwill for impairment annually orwhenever an indicator of impairment occurs. If events or circumstances change, including reductions in anticipatedcash flows generated by operations, goodwill could become impaired and resultin a charge to earnings.  If a goodwill impairment charge was recorded,the Company’s compliance with financing arrangement covenant ratios would notbe impacted as these ratios exclude non-cash charges.

** **

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.

 

Weplaced limited weight on the comparable public company trading multiplesbecause the public companies are not considered sufficiently similar toWoodcraft to draw meaningful fair value comparisons.  For example, the OEM cabinet manufacturersare burdened by consumer brand and style risk and other building productscompanies are competing in markets which have greater commoditization and/orgreater exposure to new home construction than Woodcraft.  Additionally, the large conglomeratebusinesses are typically more diversified to draw meaningful fair valuecomparisons to Woodcraft.

 

Weplaced limited weight on the comparable transactions because there have been nocomparable transactions since 2007. Given the significant changes in the overall economic conditions andtheir impact on our industry since 2007, comparable transaction multiples from2007, in our opinion, are not relevant for purposes of establishing fair valueas of December 31, 2008.  Thecomparable transaction valuation multiple analysis from 2007 aggregated meanand median valuation multiples that were slightly higher than the transactionmultiple associated with our January 2007 transaction.  Although a net discount could be applied tothese multiples in valuing our business because of our smaller size (partiallyoffset by a premium, in our opinion, for our more attractive business model),we believe any such discount is unnecessary because of the occurrence ofcyclical multiple expansion, as discussed below.

 

**In January 2007, Woodcraft was acquired througha competitive bidding process which established a fair market value based on amultiple of EBITDA for the prior twelve month period.  This multiple was then adjusted to accountfor the cyclical multiple expansion occurring as a result of the slowdown inhousing that had been occurring since 2006. We believe valuation multiples in cyclical industries tend to compressat higher points in a cycle and expand at lower points in a cycle.  We refer to this trend as**“cyclical multiple expansion.” As of December 31,2008, we have advanced two years further into the current housing downturn and,in our opinion, are closer to the lower point in this cycle.  Accordingly, we believe this has resulted inexpanded multiples.  Moreover, given theseverity of the current downturn, we would expect the magnitude of suchmultiple expansion to be significant.  Toaccount for these expanded multiples, we have applied premiums of 30 - 40% tothe January 2007 Woodcraft transaction multiple to compute a low and highrange of fair value.  The low and highpremium was based on similar multiple expansions experienced by companieswithin similar industries from 2006 through 2008.  The companies used to calculate the cyclicalmultiple expansion for our annual goodwill analysis have been consistent fromyear to year.  If the number ofcomparable companies increases or decreases or the cyclical multiple expansioncalculations change within these comparable companies, our goodwill impairmentanalysis could be affected.

** **

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Based on the fair marketvalue methodology and assumptions discussed above, as compared to the Company’sDecember 31, 2008 net worth and interest-bearing indebtedness, we haveconcluded that no goodwill impairment existed and that the fair value of ourassets exceeded the carrying value by approximately 10 to 15%.

 

*Impairment of Long-Lived Assets.* We evaluate the carrying value of long-lived assets, such as property,plant and equipment, for impairment when events or changes in circumstancesindicate that the carrying amount of an asset or group of assets may not berecoverable.  Assets are grouped andevaluated for impairment at the lowest level for which there is identifiablecash flows.  If impairment indicators arepresent and the estimated future undiscounted cash flows are less than thecarrying value of the asset or group of assets, the carrying value is reducedto its estimated fair value.  Fair valueis estimated based on the best information available, including prices forsimilar assets or results of valuation techniques such as discounting estimatedfuture cash flows.

 

Due to the lower sales and earnings for the twelvemonths ended December 31, 2008, the Company performed a SFAS 144impairment test.  Based on anundiscounted cash flows model, the Company’s carrying value of long-lived assets wasadequate and no write-down was necessary. Separate from the undiscounted cash flow model, it was determined atriggering event occurred, in conjunction with the decision to discontinuemanufacturing operations at our West Jordan, Utah facility.  This long-lived asset impairment totaled $0.7million due to certain long-lived assets that will not be utilized in thefuture.

 

*Insurance Benefit Accruals.* Each accounting period, we estimate an amount to accrue for costsincurred but not yet reported under our self-funded employee medical andworkers compensation insurance plans.  Webase our determination on an evaluation of past rates of claim payouts andtrends in the amount of payouts.  Thisdetermination requires significant judgment and assumes past patterns arerepresentative of future payment patterns. A significant shift in usage and payment patterns within these planscould necessitate significant adjustments to these accruals in futureaccounting periods.

 

*Purchase Accounting.* We accounted for our acquisitions under the purchase method ofaccounting and, accordingly, the acquired assets and liabilities assumed arerecorded at their respective fair values. The recorded values of assets and liabilities are based on third-partyestimates and valuations when available. The remaining values are based on management’s judgments and estimates.  Our financial position and results fromoperations may be affected by changes in estimates and judgments.  TheTransaction has been accounted for as a recapitalization in the Company’s financialstatements, with no adjustments to the historical basis of the Company’s assets andliabilities.  The Company did not pushdown the basis because of the significance of the publicly traded debtoutstanding, which hinders the Parent’s ability tocontrol the form of ownership of the Company.

 

*Income Taxes.*** **The Company and its Parent file a consolidated federalincome tax return, and federal income taxes are allocated to the Company basedupon the respective taxable earnings or loss. The Company accounts for income taxes in accordance with the liabilitymethod of accounting, which requires recognition of deferred tax assets andliabilities for the expected future tax consequences of events that wereincluded in the consolidated financial statements and tax returns.  Under this method, deferred tax assets andliabilities are determined based on the difference between the financialstatement and tax bases of assets and liabilities using enacted tax ratesexpected to be in effect for the year in which the differences are expected toreverse.  The Company records a valuationallowance when it is more likely than not that the net deferred tax assets willnot be realized.

 

The Company is subject toaudits in the tax jurisdictions in which it operates.  Upon audit, these taxing jurisdictions couldretroactively disagree with our tax treatment of certain items.  Consequently, the actual liabilities withrespect to any year may be determined long after financial statements have beenissued.  The Company establishes taxreserves for estimated tax exposures. These potential exposures result from varying applications of statutes,rules, regulations, case law and interpretations.  The settlement of these exposures primarilyoccurs upon finalization of tax audits. However, the amount of the exposures can also be impacted by changes intax laws and other factors.  The Companybelieves that it has established the appropriate reserves for these estimatedexposures.  However, actual results maydiffer from these estimates.  Theresolution of these tax matters will not have a material effect on theconsolidated financial condition of the Company, although a resolution couldhave a material impact on the Company’s consolidated statement of operationsfor a particular future period and on the Company’s effective tax rate.

 

**New Accounting Standards**

 

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements (SFAS 157)*. SFAS 157 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles and expands disclosures aboutfair value measurements.  This Statementapplies under other accounting pronouncements that require or permit fair value

 

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measurements, the FASBhaving previously concluded in those accounting pronouncements that fair valueis the relevant 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 our financialstatements.

 

The Company iscurrently evaluating the remaining aspects of SFAS 157 for which the effectivedate was deferred under FSP No. 157-2. Areas impacted by the deferral relate to non-financial assets andliabilities that are measured at fair value, but are recognized or disclosed atfair value on a nonrecurring basis.  Thisdeferral applies to such items as long-lived asset groups measured at fairvalue for an impairment assessment.  Weare to apply the effects of these remaining aspects of SFAS 157 to fair valuemeasurements prospectively beginning January 1, 2009.  We do not expect them to have a materialimpact on our consolidated results of operations or financial condition.

 

In December 2007, the FASB issued SFAS No. 141 (R),Business Combinations or SFAS 141(R). SFAS 141(R) establishes principles and requirements for how anacquirer recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, any non-controlling interest in theacquirer and the goodwill acquired.  SFAS141(R) also establishes disclosure requirements to enable the evaluationof the nature and financial effects of the business combination.  SFAS No. 141(R) is effective forfiscal years beginning after December 15, 2008.  The Company does not expect the adoption ofSFAS No. 141(R) to have any significant impact on the Company’saccounting treatment for business combinations on a prospective basis beginningin 2009.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities-an amendment of FASBStatement No. 133” (SFAS 161).  SFAS161 will require increased disclosure about: (i) an entity’s strategiesand objectives for using derivative instruments, (ii) the location andamounts of derivative instruments in an entity’s financial statements, (iii) howderivative instruments and related hedged items are accounted for under SFAS133, “Accounting for Derivative Instruments and Hedging Activities,” and (iv) howderivative instruments and related hedged items affect its financial position,financial performance, and cash flows. Certain disclosures will also be required with respect to derivativefeatures that are credit-risk related. SFAS 161 is effective for the Company beginning January 1, 2009 ona prospective basis.  The Company doesnot expect the adoption of SFAS 161 to have a material impact on its consolidatedresults of operations or financial condition.

 

**Item 7A. Quantitative and QualitativeDisclosures about Market Risk**

 

We are subject to various market risks such asfluctuating lumber prices and interest rates.

 

*Commodity Price Risk.* Hardwood lumber accounts for the largest portion of our material costs.Our profitability is therefore affected by the prices of lumber which mayfluctuate based on a number of factors beyond our control, including, amongothers, changes in supply and demand, general economic conditions, labor costs,competition and, in some cases, government regulation.  Though we are 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.

 

*Interest Rate Risk.* We are exposed to market risk relating to changes in interest rates inrespect of a portion of our long-term debt. As of December 31, 2008, we had $3.6 million outstanding under theFirst Lien Term Facility all of which bears interest at a variable rate. Webelieve that a one percent (1%) increase in the interest rates currently ineffect would not have a material adverse effect on our financial condition orresults of operations.

 

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# **Item 8. Financial Statements andSupplementary Data**

# ** **

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

Board of Directors and Stockholders WII Components, Inc.**St. Cloud, Minnesota

 

We have audited the accompanying consolidated balance sheets of WII Components, Inc. (a DelawareCorporation and wholly-owned subsidiary of WII Holding, Inc.) andsubsidiaries (the “Company”) as of December 31,2008 and 2007 the related consolidated statements of earnings, stockholders’ equity, andcash flows for the years then ended.  Ouraudits of the basic consolidated financial statements included the financialstatement schedule listed in the Index appearing under Item 15.  Thesefinancial statements and financial statement schedule are the responsibility ofthe Company’s management.  Our responsibility is to expressan opinion on these financial statements and financial statement schedule basedon our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  TheCompany is not required to have, nor were we engaged to perform, an audit ofits internal control over financial reporting.  Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’s internalcontrol over financial reporting.  Accordingly, we express no suchopinion.  An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of WIIComponents, Inc. and subsidiaries**asof December 31, 2008 and 2007, and the results of their operations andtheir cash flows for the years then ended, in conformity with accountingprinciples generally accepted in the United States of America.  Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic consolidatedfinancial statements taken as a whole, presents fairly in all material respectsthe information set forth therein.

 
| */s/ Grant Thornton LLP* | * * |
|--------------------------|----------|
|                     |     |
| Minneapolis,  Minnesota  |     |
| March 30,  2009     |     |

 

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# **Item 8. Financial Statements andSupplementary Data**

# ** **

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Board of Directorsand Stockholders ofWII Components, Inc.**St. Cloud, Minnesota

 

We have audited theaccompanying consolidated statements of earnings, stockholders’ equity and cashflows of WII Components, Inc. and subsidiaries (the “Company”) for theyear ended December 31, 2006.  Our audit also included the financialstatement schedule for the year ended December 31, 2006, listed in theIndex at Item 15.  These financial statements and financial statementschedule are the responsibility of the Company’s management.  Ourresponsibility is to express an opinion on the financial statements andfinancial statement schedule based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement.  The Company is not required to have, norwere we engaged to perform, an audit of its internal control over financialreporting.  Our audit included consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express no such opinion.  An audit alsoincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, theresults of the operations and cash flows of WII Components, Inc. andsubsidiaries for the year ended December 31, 2006, in conformity withaccounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule for the year ended December 31,2006, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

 
| */s/ Deloitte & Touche LLP* | * * |
|--------------------------------------|----------|
|                                 |     |
| Minneapolis,  Minnesota              |     |
| March 27,  2007                 |     |

 

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###### **Table of Contents**

 

###### **WII COMPONENTS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2008 AND 2007**

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

 
| ** **                                                                                      | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **ASSETS**                                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| CURRENT ASSETS:                                                                                 |       |       |       |       |       |
| Cash and cash equivalents                                                                       |       | $          | 14,721     |       | $          | 19,574 |   |
| Accounts receivable—net of allowance for doubtful accounts of $239  and $131, respectively |       | 6,603      |       | 13,669     |       |
| Inventories                                                                                     |       | 13,442     |       | 20,825     |       |
| Deferred income taxes                                                                           |       | 1,318      |       | 1,866      |       |
| Other current assets                                                                            |       | 850        |       | 614        |       |
| Total current assets                                                                            |       | 36,934     |       | 56,548     |       |
| PROPERTY, PLANT, AND EQUIPMENT - AT COST:                                                       |       |       |       |       |       |
| Land                                                                                            |       | 3,439      |       | 3,439      |       |
| Buildings and yards                                                                             |       | 26,122     |       | 26,023     |       |
| Equipment                                                                                       |       | 59,845     |       | 57,148     |       |
| Less accumulated depreciation                                                                   |       | (32,869    | )          | (25,963    | )          |
| Property, plant, and equipment—net                                                         |       | 56,537     |       | 60,647     |       |
| GOODWILL AND OTHER ASSETS:                                                                      |       |       |       |       |       |
| Goodwill                                                                                        |       | 112,748    |       | 112,748    |       |
| Customer relationship—net                                                                  |       | 9,924      |       | 11,581     |       |
| Noncompete agreements—net                                                                  |       | 65         |       | 99         |       |
| Other assets                                                                                    |       | 4,798      |       | 6,334      |       |
| Total goodwill and other assets                                                                 |       | 127,535    |       | 130,762    |       |
| TOTAL                                                                                           |       | $          | 221,006    |       | $          | 247,957 |   |
| **LIABILITIES AND STOCKHOLDERS****’****EQUITY**                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| CURRENT LIABILITIES:                                                                            |       |       |       |       |       |
| Current maturities of capital lease obligations                                                 |       | $          | —     |       | $          | 530 |   |
| Current maturities of long-term debt                                                            |       | 3,597      |       | 754        |       |
| Accounts payable                                                                                |       | 1,187      |       | 3,302      |       |
| Accrued payroll                                                                                 |       | 2,935      |       | 4,185      |       |
| Other current liabilities                                                                       |       | 13,711     |       | 20,744     |       |
| Total current liabilities                                                                       |       | 21,430     |       | 29,515     |       |
| LONG-TERM DEBT—Net of current maturities                                                   |       | 108,350    |       | 123,448    |       |
| DEFERRED INCOME TAXES                                                                           |       | 5,217      |       | 6,396      |       |
| OTHER LONG-TERM LIABILITIES                                                                     |       | 1,947      |       | 2,729      |       |
| COMMITMENTS AND CONTINGENCIES (Note 7)                                                          |       |       |       |       |       |
| STOCKHOLDERS’ EQUITY:                                                                      |       |       |       |       |       |
| Common stock:                                                                                   |       |       |       |       |       |
| Voting                                                                                          |       | —     |       | —     |       |
| Nonvoting,                                                                                      |       | —     |       | —     |       |
| Additional paid-in capital                                                                      |       | 71,291     |       | 71,241     |       |
| Retained earnings                                                                               |       | 12,771     |       | 14,628     |       |
| Total stockholders’ equity                                                                 |       | 84,062     |       | 85,869     |       |
| TOTAL                                                                                           |       | $          | 221,006    |       | $          | 247,957 |   |

 

See notes toconsolidated financial statements.

 

 

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**WII COMPONENTS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTSOF EARNINGS**

**(In thousands)**

 
| ** **                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------|------------|-----------------------------|------------|
| ** **                               | ** ** | **2008**                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| NET SALES                                |       | $                           | 193,373    |   | $ | 249,303 |   | $ | 285,633 |   |
| COST OF SALES                            |       | 166,635                     |       | 205,063 |   | 237,289 |   |
| Gross profit                             |       | 26,738                      |       | 44,240 |   | 48,344 |   |
| OPERATING EXPENSES:                      |       |                        |       |   |   |   |   |
| General and administrative               |       | 10,695                      |       | 20,792 |   | 14,869 |   |
| Selling and marketing                    |       | 3,185                       |       | 3,253 |   | 3,287 |   |
| Loss (gain) on sale of assets            |       | 54                          |       | 51 |   | (132 | ) |
| Total operating expenses                 |       | 13,934                      |       | 24,096 |   | 18,024 |   |
| OPERATING INCOME                         |       | 12,804                      |       | 20,144 |   | 30,320 |   |
| OTHER INCOME (EXPENSE):                  |       |                        |       |   |   |   |   |
| Interest income                          |       | 135                         |       | 472 |   | 89 |   |
| Interest expense                         |       | (13,024                     | )          | (15,460 | ) | (14,038 | ) |
| Other income (expense)                   |       | 1,725                       |       | (19 | ) | (1 | ) |
| Total other expense                      |       | (11,164                     | )          | (15,007 | ) | (13,950 | ) |
| INCOME BEFORE PROVISION FOR INCOME TAXES |       | 1,640                       |       | 5,137 |   | 16,370 |   |
| INCOME TAXES                             |       | 324                         |       | 2,096 |   | 6,627 |   |
| NET EARNINGS                             |       | $                           | 1,316      |   | $ | 3,041 |   | $ | 9,743 |   |

 

See notes toconsolidated financial statements.

 

 

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**W****II COMPONENTS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTSOF STOCKHOLDERS**’ EQUITY

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

 
| ** **                                            | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** **  | ** ** | ** **   | ** ** |
|-------------------------------------------------------|------------|------------------|------------|----------------|------------|-------------|------------|--------------|------------|
| ** **                                            | ** ** | **Voting**       | ** ** | **Nonvoting**  | ** ** | **Paid-in** | ** ** | **Retained** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Shares**       | ** ** | **Amount**     | ** ** | **Shares**  | ** ** | **Amount**   | ** ** | **Capital** | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| BALANCE—January 1, 2006                     |       | 21,751,331       |       | $              | 217        |        | 854,261    |         | $          | 9 |   | $ | 51,927 |   | $ | 11,766 |   | $ | 63,919 |   |
| Stock compensation expense                            |       |             |       |           |       |        |       |         |       | 4,294 |   |   |   | 4,294 |   |
| Stock issued                                          |       | 10,750           |       | —         |       |        |       |         |       | 23 |   |   |   | 23 |   |
| Net earnings                                          |       |             |       |           |       |        |       |         |       |   |   | 9,743 |   | 9,743 |   |
| BALANCE—December 31, 2006                   |       | 21,762,081       |       | 217            |       | 854,261     |       | 9            |       | 56,244 |   | 21,509 |   | 77,979 |   |
| Net earnings                                          |       |             |       |           |       |        |       |         |       |   |   | 3,041 |   | 3,041 |   |
| Stock-based compensation                              |       | 100              |       |           |       |        |       |         |       | 100 |   |   |   | 100 |   |
| Recapitalization of stock                             |       | (21,762,081      | )          | (217           | )          | (854,261    | )          | (9           | )          |   |   | 226 |   | — |   |
|  Effect of adoption of FIN48                     |       |             |       |           |       |        |       |         |       |   |   | 1,449 |   | 1,449 |   |
| Amount due to Sellers                                 |       |             |       |           |       |        |       |         |       |   |   | (6,043 | ) | (6,043 | ) |
| Variable stock option pricing                         |       |             |       |           |       |        |       |         |       | 1,029 |   |   |   | 1,029 |   |
| Recapitalization-equity contribution                  |       |             |       |           |       |        |       |         |       | 21,747 |   | (256 | ) | 21,491 |   |
| Recapitalization and repurchase stock options         |       |             |       |           |       |        |       |         |       | (7,879 | ) | (2,689 | ) | (10,568 | ) |
| Expenses paid on behalf of Parent                     |       |             |       |           |       |        |       |         |       |   |   | (2,609 | ) | (2,609 | ) |
| BALANCE—December 31, 2007                   |       | 100              |       | —         |       | —      |       | —       |       | 71,241 |   | 14,628 |   | 85,869 |   |
| Net earnings                                          |       |             |       |           |       |        |       |         |       |   |   | 1,316 |   | 1,316 |   |
| Stock-based compensation                              |       |             |       |           |       |        |       |         |       | 50 |   |   |   | 50 |   |
| Amount due to Sellers                                 |       |             |       |           |       |        |       |         |       |   |   | 666 |   | 666 |   |
| Income tax benefit on stock option payments to Seller |       |             |       |           |       |        |       |         |       |   |   | 639 |   | 639 |   |
| Payments made on behalf of Parent                     |       |             |       |           |       |        |       |         |       |   |   | (4,478 | ) | (4,478 | ) |
| BALANCE—December 31, 2008                   |       | 100              |       | $              | —     |        | —     |         | $          | — |   | $ | 71,291 |   | $ | 12,771 |   | $ | 84,062 |   |

 

See notes toconsolidated financial statements.

 

 

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**WII COMPONENTS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(In thousands)**

 
| ** **                                                                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                           | ** ** | **2008**                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| OPERATING ACTIVITIES:                                                                |       |                        |       |   |   |   |   |
| Net earnings                                                                         |       | $                           | 1,316      |   | $ | 3,041 |   | $ | 9,743 |   |
| Adjustments to reconcile net earnings to net cash provided by  operating activities: |       |                        |       |   |   |   |   |
| Depreciation and amortization                                                        |       | 8,762                       |       | 8,712 |   | 7,925 |   |
| Amortization of debt issue costs                                                     |       | 1,510                       |       | 2,453 |   | 1,077 |   |
| Gain on extinguishments of debt                                                      |       | (1,725                      | )          | — |   | — |   |
| Deferred income taxes                                                                |       | (631                        | )          | 3,392 |   | (1,714 | ) |
| Loss (gain) on sale of property, plant, and equipment                                |       | 54                          |       | 51 |   | (132 | ) |
| Stock compensation expense                                                           |       | 50                          |       | 1,130 |   | 4,294 |   |
| Long-lived asset impairment                                                          |       | 696                         |       | — |   | — |   |
| Change in operating assets and liabilities:                                          |       |                        |       |   |   |   |   |
| Accounts receivable                                                                  |       | 7,065                       |       | (2,347 | ) | 3,360 |   |
| Inventories                                                                          |       | 7,383                       |       | 675 |   | (730 | ) |
| Other current assets                                                                 |       | (181                        | )          | (73 | ) | 899 |   |
| Accounts payable                                                                     |       | (2,116                      | )          | (1,368 | ) | (1,823 | ) |
| Accrued payroll and other current liabilities                                        |       | (976                        | )          | (6,001 | ) | 227 |   |
| Current tax benefit due to Sellers                                                   |       | (6,710                      | )          | 6,719 |   | — |   |
| Other long-term liabilities                                                          |       | (783                        | )          | 116 |   | 300 |   |
| Total adjustments                                                                    |       | 12,398                      |       | 13,459 |   | 13,683 |   |
| Net cash provided by operating activities                                            |       | 13,714                      |       | 16,500 |   | 23,426 |   |
| INVESTING ACTIVITIES:                                                                |       |                        |       |   |   |   |   |
| Purchases of property, plant, and equipment                                          |       | (3,722                      | )          | (7,896 | ) | (16,231 | ) |
| DMI earn-out payment                                                                 |       | —                      |       | (5,000 | ) | (2,000 | ) |
| Proceeds from sale of property, plant, and equipment                                 |       | 12                          |       | 38 |   | 205 |   |
| Change in other assets                                                               |       | —                      |       | — |   | — |   |
| Net cash used in investing activities                                                |       | (3,710                      | )          | (12,858 | ) | (18,026 | ) |
| FINANCING ACTIVITIES:                                                                |       |                        |       |   |   |   |   |
| Principal payments of long-term debt                                                 |       | (17,659                     | )          | (14,031 | ) | (2,256 | ) |
| Borrowings of long-term debt                                                         |       | 6,600                       |       | 10,152 |   | 900 |   |
| Recapitalization - equity contribution                                               |       | —                      |       | 21,747 |   | — |   |
| Issuance of common stock                                                             |       | —                      |       | — |   | 23 |   |
| Debt issuance costs                                                                  |       | (29                         | )          | (3,554 | ) | — |   |
| Recapitalization - repurchase of stock options                                       |       | —                      |       | (7,879 | ) | — |   |
| Due to Parent                                                                        |       | 709                         |       | 4,058 |   | — |   |
| Payments made on behalf of Parent                                                    |       | (4,478                      | )          | (2,609 | ) | — |   |
| Net cash (used in) provided by provided by financing activities                      |       | (14,857                     | )          | 7,884 |   | (1,333 | ) |
| NET (DECREASE) INCREASE IN CASH                                                      |       | (4,853                      | )          | 11,526 |   | 4,067 |   |
| Cash and cash equivalents—Beginning of period                                   |       | 19,574                      |       | 8,048 |   | 3,981 |   |
| Cash and cash equivalents—End of period                                         |       | $                           | 14,721     |   | $ | 19,574 |   | $ | 8,048 |   |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                                  |       |                        |       |   |   |   |   |
| Cash paid for interest                                                               |       | $                           | 11,992     |   | $ | 12,983 |   | $ | 12,884 |   |
| Cash paid for income taxes                                                           |       | $                           | 450        |   | $ | 714 |   | $ | 8,345 |   |
| NONCASH ACTIVITY:                                                                    |       |                        |       |   |   |   |   |
| Recapitalization - repurchase of common stock funded by the Parent                   |       | $                           | —     |   | $ | 226 |   | $ | — |   |
| Future tax benefit due to Sellers in:                                                |       |                        |       |   |   |   |   |
| Other current liabilities                                                            |       | $                           | 9          |   | $ | 6,719 |   | $ | — |   |
| Other long-term liabilities                                                          |       | $                           | 1,947      |   | $ | 2,313 |   | $ | — |   |
| Deferred income taxes                                                                |       | $                           | —     |   | $ | 2,945 |   | $ | — |   |
|                                                                                 |       |                        |       |   |   |   |   |
| Capital expenditures in accounts payable                                             |       | $                           | —     |   | $ | 152 |   | $ | 419 |   |
| Note receivable in connection with the sale of property, plant and  equipment        |       | $                           | 55         |   | $ | 111 |   | $ | 167 |   |
| DMI earn out-contingent consideration                                                |       | $                           | —     |   | $ | — |   | $ | 1,000 |   |
| Effect of adoption of FIN48                                                          |       | $                           | —     |   | $ | 1,449 |   | $ | — |   |

 

See notes toconsolidated financial statements.

 

 

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**WII COMPONENTS, INC. ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

###### **DECEMBER 31, 2008 AND 2007**

###### ** **

**1.NATURE OF BUSINESS**

 

***Company Background***  On January 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.”  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 fees and 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 financialstatements, with no adjustments to the historical basis of the Company’s assets andliabilities.  The Company did not pushdown the new accounting basis because of the significance of the publicly tradeddebt outstanding, which hinders the Parent’s ability tocontrol the form of ownership of the Company.

 

***Description ofBusiness***  The Company is a leading manufacturer of woodcabinet doors, hardwood components, and engineered wood products in the UnitedStates.  Its products are soldprincipally to leading national and regional kitchen and bathroom cabinetmanufacturers throughout the United States and North America.  Its reputation for high quality and reliableperformance has enabled the Company to establish strong, long-standingrelationships with its customers.  Itscustomers, in turn, distribute products through various sales channels,including specialty kitchen and bathroom cabinetry dealers, home center retailers,and homebuilders.

 

***Principles ofConsolidation***  The consolidated financial statements includethe accounts of the Company and its wholly owned subsidiaries; WoodcraftIndustries, Inc. and its wholly owned subsidiaries, PrimeWood, Inc. (“PrimeWood”) and Brentwood Acquisition, Corp. (“Brentwood”) andDimension Moldings, Inc. (“DMI”) (Note 5). Grand Valley was merged withand into Woodcraft Industries, Inc. on December 31, 2006.  All intercompany accounts and transactionshave been eliminated in the preparation of the consolidated financialstatements.

 

**2.SIGNIFICANT ACCOUNTING POLICIES**

 

***Cash Equivalents***  All highlyliquid investments with an original maturity when purchased of three months orless are considered to be cash equivalents. At times, certain bank deposits may be in excess of federally insuredlimits.

 

***Revenue Recognition*** Sales are recognized when revenue is realized or realizable and has beenearned.  The Company’s policy is to recognize revenue and therelated cost of sales when risk and title passes to the customer.  This is generally on the date of shipment,however, certain sales are shipped FOB destination and revenue is recognizedwhen received by the customer.  Freightbilled to customers is included in sales and shipping costs are included incost of sales.  The Company records anestimate for anticipated sales returns and customer discounts at the timerevenue is recognized based on historical experience and current trends.  Provisions for estimated sales returns andcustomer discounts are recorded as a reduction of net sales.

 

***Concentration ofCredit Risk***  The Company receives a significant portion ofits revenue from two customers.  Loss ofone or more of these customers could adversely affect the Company’s operating results in the nearterm.  There are no concentrations ofbusiness transacted within a market or geographic area that would severelyimpact business in the near term.  TheCompany’scustomers representing 10% or more of consolidated sales are as follows:

 
| ** ** | ** ** | **Year Ended December 31,** | ** ** |
|------------|------------|----------------------------------|------------|
| ** ** | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| A          |       | 37.3                             | %          | 36.3 | % | 36.2 | % |
| B          |       | 18.3                             |       | 17.9 |   | 17.0 |   |

 

 

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These two customers represented the following percentages ofconsolidated accounts receivable as of December 31:

 
| ** ** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------|------------|----------|------------|----------|------------|
| A          |       | 40.9     | %          | 43.6     | %          |
| B          |       | 6.2      |       | 8.7      |       |

 

***AccountsReceivable ***Accounts receivable comprises primarilytrade receivables related to the sale of the Company’s products to its customers.  Credit is granted in the normal course ofbusiness, without collateral or any other security, to support amountsdue.  The Company performs ongoingevaluations of its customers and continuously monitors collections and payments.  The Company records an allowance for doubtfulaccounts based on the aging of the underlying receivables, historicalexperience, and any specific collection issues it has identified.  Accounts outstanding longer than thecontractual payments terms are considered past due.  The Company writes off accounts receivablewhen they become uncollectible, and payments subsequently recorded on suchreceivables are credited to the allowance for doubtful accounts.  Accounts receivable balances written off havebeen within management’s expectations and have not exceeded allowancesprovided.

 

***Inventories ***Inventories as of December 31 consisted of thefollowing (in thousands):

 
| ** **      | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Raw materials   |       | $        | 6,977      |     | $          | 11,021 |   |
| Work in process |       | 2,761    |       | 5,187    |       |
| Finished goods  |       | 2,496    |       | 4,198    |       |
| LIFO adjustment |       | 1,208    |       | 419      |       |
|            |       | $        | 13,442     |     | $          | 20,825 |   |

 

The majority of inventory is valued at the lower of last-in, first-out(“LIFO”) cost or market. The remainder of the inventory is valued at the lowerof first-in, first-out method (“FIFO”) cost or market.  As of December 31, 2008, and 2007,inventory on the LIFO method represented 61% and 65% of the inventory balance,respectively.

 

***Property, Plant,and Equipment***  Property, plant, and equipment are recordedat cost.  Improvements are capitalizedand expenditures for maintenance and repairs are charged to operations asincurred.  Depreciation is computed usingthe straight-line method (for financial reporting purposes) and the acceleratedmethod (for income tax reporting purposes). Estimated useful lives for financial reporting purposes are as follows:

 
| Buildings and yards          |   | 20  - 40 years |   |
|------------------------------|--------|----------------|--------|
| Equipment (machinery)        |   | 7  - 10 years  |   |
| Equipment (computer related) |   | 3  - 5 years   |   |

 

Equipment includes assets under capital leases of $1.7 million andaccumulated depreciation and amortization related to such assets of $0.8million at December 31, 2007.  TheCompany did not have any capital leases outstanding at December 31, 2008.

 

Depreciation for the years ended December 31, 2008, 2007, and 2006was $7.1 million, $6.8 million, and $5.8 million, respectively.

 

***Goodwill*** The Company evaluates goodwill for impairment at least annually or whenevents or changes in circumstances indicate impairment.  The Company has elected to perform its annualtests for goodwill impairment as of December 31 of each year.  Fair value is measured using a marketmultiple valuation method.  As of December 31,2008 and 2007, the Company determined its fair value exceeded its carryingvalue resulting in no goodwill impairment.

 

***CustomerRelationship ***Customer relationship relates tointangible assets recorded through previous acquisitions for relationships withsignificant customers.  The original costof these customer relationships is $16.6 million, and the related accumulatedamortization as of December 31, 2008 and 2007 is $6.7 million and $5.0million, respectively.  The intangibleassets are being amortized over the estimated life of 10 years. Amortizationfor the year ended December 31, 2008, 2007, and 2006 was $1.7 million,$1.6 million, and $1.7 million, respectively. Expected amortization is as follows for the years ended December 31(in thousands):

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

 

 

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***NoncompeteAgreement***  Noncompete agreements primarily relate toagreements with the former owners of Brentwood, Grand Valley, and DimensionMoldings, Inc. The original cost of these noncompete agreements is $2.4million, and the related accumulated amortization as of December 31, 2008and 2007 is $2.3 million and $2.3 million, respectively.  Noncompete agreement rights are beingamortized over the applicable terms of the agreements (5 years,7 years, and 5 years, respectively). The noncompete agreement with the former owner of Brentwood was fullyamortized in July 2007.  Thenoncompete agreements with the former owners of Grand Valley and DimensionMoldings, Inc. are expected to be fully amortized by April 2011 and July 2010,respectively.  Amortization for the yearsended December 31, 2008, 2007, and 2006 was $34,000, $285,000, and$464,000, respectively.  As of December 31,2008 the noncompete intangible asset was $0.1 million.  Expected amortization is as follows for theyears ended December 31 (in thousands):

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

 

***Other Assets*** Other assets primarily represent financing fees and are amortized on astraight-line basis, which approximates the effective interest method, over theterm of the related financing agreement. In conjunction with the Transaction, the Company terminated its creditagreement and wrote off $0.3 million of financing fees and entered into a newcredit facility incurring additional financing fees of $3.6 million.

 

***Impairment ofLong-Lived Assets***  The Company evaluates thecarrying value of long-lived assets for impairment when events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable.  If impairment indicatorsare present and the estimated future undiscounted cash flows are less than thecarrying value of the assets, the carrying value is reduced to the estimatedfair value as measured by the associated undiscounted cash flows.  Due to the lower sales and earnings for thetwelve months ended December 31, 2008 and the current economicenvironment, the Company performed a SFAS 144 impairment test.  Based on the undiscounted cash flowsanalysis, the Company determined the carrying value of long-lived assets wasnot impaired.  Separate from theundiscounted cash flow analysis, the Company determined an event occurred whenthe West Jordan, Utah manufacturing operations were ceased in December 2008.  The Company concluded certain long-livedassets in this facility did not have any future use and recorded an impairmentof $0.7 million.

 

***Fair Value of Financial Instruments***  The carryingamounts of cash and cash equivalents, accounts receivable, accounts payable andaccrued liabilities approximate fair value, because of the short maturity ofthese instruments.  The fair value oflong-term debt is based on quoted market prices for the same or similar issuesor on the current rates offered to the Company for a term equal to the sameremaining maturities.  The fair value ofthe Term Loan (Note 6) approximates the carrying amount due to the variableinterest rate on this obligation.  Basedon quoted market values, the fair value of the Senior Notes was determined tobe $37.9 million and $120.2 million at December 31, 2008 and December 31,2007, respectively.

 

***Other CurrentLiabilities ***Other current liabilities consisted ofthe following (in thousands):

 
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Self-insurance reserve             |       | $                     | 2,548      |   | $ | 2,887 |   |
| Accrued interest expense           |       | 4,184                 |       | 4,663 |   |
| Due to Parent                      |       | 4,768                 |       | 4,058 |   |
| Accrued bonuses                    |       | 38                    |       | 177 |   |
| Payment due to former shareholders |       | 8                     |       | 6,719 |   |
| Other                              |       | 2,165                 |       | 2,240 |   |
|                               |       | $                     | 13,711     |   | $ | 20,744 |   |

 

The Company is partially self-insured for medical and workers’ compensation costs, subject to maximumindividual stop-loss amounts.  TheCompany has established reserves related to insurance that are included inother current liabilities as noted above.

 

The Company and its Parent file a consolidated federal income taxreturn, and federal income taxes are allocated to the Company based upon therespective taxable earnings or loss.  TheCompany records income tax liabilities as an amount due to Parent.

 

 

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***Income Taxes*** The Company and its Parent file a consolidated federal income taxreturn, and federal income taxes are allocated to the Company based upon therespective taxable earnings.  The Companyaccounts for income taxes in accordance with the liability method ofaccounting, which requires recognition of deferred tax assets and liabilitiesfor the expected future tax consequences of events that were included in theconsolidated financial statements and tax returns.  Under this method, deferred tax assets andliabilities are determined based on the difference between the financialstatement and tax basis of assets and liabilities using enacted tax ratesexpected to be in effect for the year in which the differences are expected toreverse.  The Company records a valuationallowance when it is more likely than not that the net deferred tax assets willnot be realized.

 

***Uncertain Tax Positions***  The Companyadopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48 *Accounting for Uncertaintyin Income Taxes-an interpretation of FASB Statement No. 109* (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes bydefining criteria that a tax position on an individual matter must meet beforethat position is recognized in the financial statements.  Additionally, FIN 48 provides guidance formeasurement, derecognition, classification, interest and penalties, accountingfor interim periods, disclosures and transition.  FIN 48 requires the recognition of thefinancial statement benefit of a tax position only after determining that therelevant tax authority would more likely than not sustain the position followingan audit. For tax positions meeting the more-likely-than-not threshold, theamount recognized in the financial statements is the largest benefit that has agreater than 50 percent likelihood of being realized upon ultimate settlementwith the relevant tax authority.

 

As a result of the implementation of FIN 48, the Company recognized a$1.4 million decrease in the liability for uncertain tax positions which, asrequired, was accounted for as an increase to the January 1, 2007 balanceof retained earnings.  The decrease isthe result of the derecognition of certain tax positions taken in prior yearsthat management feels are sustainable based on audit results.  As of and for the years ended December 31,2008 and 2007, the activity and balance of unrecognized tax benefits were notsignificant.  The Company is currentlyopen to an audit under the statute of limitations by the Internal RevenueService for the years ending December 31, 2004 through 2007.  The Company recognized interest and penaltiesrelated to unrecognized tax benefits within income tax expense.  During the years ended December 31, 2008and 2007, the amount of interest and penalties was not significant.  The Company files in numerous statejurisdictions with varying statutes of limitations which have been consideredin conjunction with the unrecognized tax benefits analysis as of December 31,2008 and 2007.

 

***Stock Options*** The Company maintained the amended 2003 Stock Option and Grant Plan (“2003 Plan”) through January 9, 2007, at which time the 2003 Plan wasterminated.  In addition, all of theoptions, which were outstanding at the time of the Transaction were deemed tobe fully vested and then terminated on January 9, 2007.  The 2003 Plan allowed the granting of bothincentive stock options and nonqualified stock options.  Under the terms for the amended 2003 Plan, amaximum of 3,000,000 shares of stock, subject to adjustment, were madeavailable for awards to officers, employees, directors, consultants, and otherkey persons of the Company.  Awardsincluded, but were not limited to, stock options, restricted stock,unrestricted stock awards, and substitute performance awards.  Option awards were generally granted with anexercise price equal to the calculated fair market value of the Company’s stock. Options generally vested over four years and had 10-year contractualterms.

 

Information regarding stock options under all plans is summarized asfollows:

 
| ** **                                     | ** ** | **Year Ended December 31,****2007** | ** ** | **Year Ended December 31,****2006** | ** ** |
|------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                                     | ** ** | **Options**                              | ** ** | **Weighted  Average  Exercise  Price**   | ** ** | **Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding, beginning of period               |       | 2,518,500                                |       | $                                        | 2.86       |   | 2,351,000 |   | $ | 2.62 |   |
| Granted                                        |       | —                                   |       | $                                        | —     |   | 250,000 |   | $ | 5.51 |   |
| Exercised                                      |       | —                                   |       | $                                        | —     |   | 10,750 |   | $ | 2.12 |   |
| Canceled                                       |       | 2,518,500                                |       | $                                        | 2.86       |   | 71,750 |   | $ | 4.26 |   |
| Outstanding, end of period                     |       | —                                   |       | $                                        | —     |   | 2,518,500 |   | $ | 2.86 |   |
| Vested or expected to vest, end of period      |       | —                                   |       | $                                        | —     |   | 2,415,673 |   | $ | 2.87 |   |
| Exercisable, end of period                     |       | —                                   |       | $                                        | —     |   | 1,452,125 |   | $ | 2.28 |   |
| Weighted average fair value of options granted |       |                                     | $          | —                                   |       |   |   | $ | 1.43 |   |   |
|                                                |            |                                          |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

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Effective January 1, 2006 the Company adopted Statement ofFinancial Accounting Standards No. 123(R), *Share BasedPayment* (SFAS No. 123(R)), which requires all share-basedpayments, including grants of stock options, to be recognized in the statementof operations as an operating expense, based on their fair values over therequisite service period.  Prior to 2006,the Company utilized the minimum value method for pro forma disclosure purposesunder SFAS No. 123, *Accounting for Stock-BasedCompensation*.  In conjunctionwith the adoption of SFAS 123(R), the Company utilized the prospectivetransition method as permitted by SFAS 123(R). Under this transition method, SFAS No. 123(R) is appliedprospectively to all new awards issued as well as awards modified, repurchased,or canceled after the effective date. The Company continued to account for the 2,351,000 options outstandingat the effective date of SFAS 123(R) using the accounting principlesoriginally applied to those options.  TheCompany recorded $1,029,000 and $4,294,000 for the years ended December 31,2007 and 2006 respectively, of related stock-based compensation expense.  The total income tax benefit for share-basedcompensation arrangements was $400,000 and $1,739,000 for the years ended December 31,2007 and 2006, respectively.  Inaccordance with the prospective transition method of SFAS 123(R), results forprior periods have not been restated.

 

On March 9, 2006 the Company issued 10,000 stock options under the2003 Plan to an employee.  The optionsvest over a four year period, and have an exercise price per share of $4.74 atthe date of issuance.  The Company usedthe Black-Scholes option pricing model to determine the fair value ofoptions.  The fair value of options wascalculated to be $1.80 per share.

 

On May 31, 2006 the Company issued 80,000 stock options under the2003 Plan to an employee.  The optionsvest over a four year period, and have an exercise price per share of $5.54 atthe date of issuance.  The Company usedthe Black-Scholes option pricing model to determine fair value of options.  The fair value of options was calculated tobe $2.21 per share.

 

 On May 31, 2006 the Companyissued 160,000 incentive stock options under the 2003 Plan to an employee.  The options fully vest at the earlier of asale event or June 30, 2009, and have an exercise price per share of $5.54at the date of issuance.  The options’ exercise price increases by $0.83 on July 1,2007, and each anniversary date thereafter until termination of theoptions.  The Company used a bi-nominaloption pricing model to determine the average fair value of these options dueto this adjusting exercise price.  Thefair value of these options was calculated to be $1.02 per share.  The activity for these options is immaterialand is therefore not stated separately, but included in the tables above withthe other option activity.

 

***RestrictedStock ***Parent issued Restricted Stock Agreementson August 31, 2007 and September 14, 2007 to certain Companymanagement personnel totaling 55,219 shares of Parent common stock.  The fair value of the Restricted Stock wasapproximately $397,023 on the date of the grant.  Based on the fair value of the RestrictedStock at the date of grant and related vesting, there was $50,000 and $101,000of related compensation expense recorded for the years ending December 31,2008 and December 31, 2007, respectively. The restricted stock becomes fully vested after seven years, or earlier,if certain milestones, as defined, are met. The restricted stock was considered contributed capital to the Companyfrom its Parent.

 

***Use of Estimates*** The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from those estimates.

 

***New Accounting Pronouncements ***In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements (SFAS 157)*. SFAS 157 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles and expands disclosures aboutfair value measurements.  This Statementapplies under other accounting pronouncements that require or permit fair valuemeasurements, the FASB having previously concluded in those accountingpronouncements that fair value is the relevant measurement attribute.  Accordingly, this Statement does not requireany new fair value measurements.

 

 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.

 

 

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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 our financialstatements.

 

The Company iscurrently evaluating the remaining aspects of SFAS 157 for which the effectivedate was deferred under FSP No. 157-2. Areas impacted by the deferral relate to non-financial assets andliabilities that are measured at fair value, but are recognized or disclosed atfair value on a nonrecurring basis.  Thisdeferral applies to such items as long-lived asset groups measured at fairvalue for an impairment assessment.  Weare to apply the effects of these remaining aspects of SFAS 157 to fair valuemeasurements prospectively beginning January 1, 2009.  We do not expect them to have a materialimpact on our consolidated results of operations or financial condition.

 

In December 2007, the FASB issued SFAS No. 141 (R),Business Combinations or SFAS 141(R). SFAS 141(R) establishes principles and requirements for how anacquirer recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, any non-controlling interest in theacquirer and the goodwill acquired.  SFAS141(R) also establishes disclosure requirements to enable the evaluationof the nature and financial effects of the business combination.  SFAS No. 141(R) is effective forfiscal years beginning after December 15, 2008.  The Company does not expect the adoption ofSFAS No. 141(R) to have any significant impact on the Company’s accountingtreatment for business combinations on a prospective basis beginning in 2009.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities-an amendment of FASBStatement 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 and relatedhedged items are accounted for under SFAS 133, “Accounting forDerivative Instruments and Hedging Activities”, and (iv) howderivative instruments and related hedged items affect its financial position,financial performance, and cash flows. Certain disclosures will also be required with respect to derivativefeatures that are credit-risk related. SFAS 161 is effective for the Company beginning January 1, 2009 ona prospective basis.  The Company doesnot expect the adoption of SFAS 161 to have a material impact on itsconsolidated results of operations or financial condition.

 

**3.BUSINESS SEGMENTS**

 

The Company conducts 93% of its business within one reportable marketsegment: the wood kitchen and bath products segment.  The Company has two primary productcategories: hardwood products and engineered wood products. Hardwood productsproduce a comprehensive line of hardwood doors and components.  Engineered wood products includes rigidthermofoil doors and components, veneer raised panels, and wrapped profiles.

 

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

 
| ** **               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Hardwood products        |       | $                                | 157,877    |   | $ | 208,913 |   | $ | 233,392 |   |
| Engineered wood products |       | 35,496                           |       | 40,390 |   | 52,241 |   |
| Total                    |       | $                                | 193,373    |   | $ | 249,303 |   | $ | 285,633 |   |

 

Substantially all sales are made within North America.

 

**4.GOODWILL**

 

The changes in the carrying amount of goodwill were as follows (inthousands):

 
| ** **                       | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Balance—Beginning of period |       | $                                | 112,748    |   | $ | 108,748 |   | $ | 107,748 |   |
| DMI contingent consideration     |       | —                           |       | 4,000 |   | 1,000 |   |
| Balance—End of period       |       | $                                | 112,748    |   | $ | 112,748 |   | $ | 108,748 |   |

 

 

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**5.RECAPITALIZATION AND OTHER ACQUISITION**

 

On January 9, 2007, the Company wasacquired by Parent, a newly formed investment entity controlled by the OlympusFunds.  The aggregate purchase price paidby Parent for all of the shares of capital stock of the Company and options topurchase shares of capital stock of the Company in the Transaction wasapproximately $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 consolidatedfinancial statements, with no adjustments to the historical basis of theCompany’s assets and liabilities.

 

In conjunction with the Transaction, theCompany entered into a senior credit facility (the “Senior Credit Facility”),with Credit Suisse, Cayman Islands Branch, which provided for (i) a seniorsecured first lien term loan facility in an aggregate principal amount of$150.0 million (the “First Lien Term Facility”) and (ii) a senior securedfirst lien revolving credit facility in an aggregate principal amount up to$25.0 million, subject to certain conditions (the “Revolving Facility” and,together with the First Lien Term Facility, the “First Lien Facilities”), ofwhich $10.0 million is available through a sub facility in the form of lettersof credit (See Note 6).

 

In conjunction with the Transaction, the Parent entered into NotePurchase Agreements with OCM Mezzanine Fund II, L.P. and Olympus Growth FundIV, L.P.  The Note Purchase Agreementwith OCM Mezzanine Fund II, L.P. consisted of $43.0 million seniorpayment-in-kind notes with no required principal amortization.  The Note Purchase Agreement with OlympusGrowth Fund IV, L.P. consisted of $43.0 million junior payment-in-kind noteswith no required principal amortization. These notes (the “ParentNotes”) are scheduled to maturein April 2012.  During the term ofthe Parent Notes, Parent is able at its option to pay interest on the ParentNotes through the issuance of additional notes. The Company is not liable for,and has not otherwise guaranteed, any of the obligations of Parent with respectto the Parent Notes.  The Company is,however, subject to a number of restrictive covenants under the Note PurchaseAgreements.  On March 30, 2009, theParent obtained waivers for the restrictive covenants in the Note PurchaseAgreements relating to the maximum total leverage ratio permitted for theperiod ending December 31, 2008. The Company was in compliance with all other covenants as of December 31,2008.  In addition, the Company islimited in its ability to pay dividends or otherwise make distributions toParent under the Senior Credit Facility and the indenture governing the 10%Senior Notes due 2012 (the “SeniorNotes”).  The Parent Notes are not reflected in theCompany’sconsolidated balance sheet as the Company did not push down the new accountingbasis because of the significance of the public debt holders’ influence on the Company’s ability to control the form ofownership.

 

Effective as of June 13, 2007, the Parent issued an additional$20.0 million of Parent Notes to Olympus Growth Fund IV, L.P., and purchased$20.0 million of Parent Notes from OCM Mezzanine Fund II, L.P.  During the twelve month period ended December 31,2008, the Company distributed $4.5 million to the Parent for payment on theParent Notes.  This distribution to theParent was recorded as 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, compoundingquarterly, on the sum of its liquidation value per share ($1,000) plus allaccumulated and unpaid dividends thereon. Dividends are payable as and when declared by Parent’s board of directors out of funds legallyavailable for the payment of dividends. Such dividends accrue, whether or not they have been declared andwhether or not there are profits, surplus or other funds of Parent legallyavailable for the payment of dividends, until such time as such dividends areactually paid by Parent.  The holders ofa majority of the outstanding preferred equity securities at any time and fromtime to time may demand that Parent redeem all or any portion of theoutstanding preferred equity securities by delivering to the holder(s) thereof(i) an amount of cash per share equal to the sum of its liquidation valueper share ($1,000) plus all accumulated and unpaid dividends thereon and (ii) anumber of shares of Parent’s common equity securities as determined in accordancewith the redemption 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 indenture to which Parent or any of itssubsidiaries is a party or is otherwise bound. The Company is not liable for, and has 

 

 

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not otherwiseguaranteed, any of these obligations of Parent with respect to the equitysecurities issued by Parent.  Theseequity securities are not reflected in the Company’s consolidated balance sheet as theCompany did not push down the new accounting basis because of the significanceof the public debt holders’ influence on the Company’s ability to control the form ofownership.

 

On December 11,2006, Parent and MergerCo, in anticipation of the consummation of theTransaction, entered into an employment agreement with Mr. JohnFitzpatrick, as Chief Executive Officer of MergerCo (the “New FitzpatrickEmployment Agreement”).  Pursuant to theNew Fitzpatrick Employment Agreement, upon consummation of the Transaction, theNew Fitzpatrick Employment Agreement superseded and preempted Mr. Fitzpatrick’s prior employment agreement with theCompany. On January 9, 2007, by operation of law upon consummation of theTransaction, the New Fitzpatrick Employment Agreement was assigned by MergerCoto the Company.  Under the NewFitzpatrick Employment Agreement, in the event (i) Mr. Fitzpatrickresigns for retirement purposes from the employment of the Company and itssubsidiaries after December 31, 2009 (or such earlier date as the Company’s board of directors and Mr. Fitzpatrickmutually agree upon) and (ii) Mr. Fitzpatrick provided at leasttwelve months’ prior written notice to the Company and Parent ofsuch resignation, then Mr. Fitzpatrick may elect to have Parent repurchaseup to 50% of the common equity securities and 50% of the preferred equitysecurities acquired by Mr. Fitzpatrick on January 9, 2007 inconnection with the Transaction at their respective fair market values.  Any such repurchase by Parent shall besubject to applicable restrictions contained in the Delaware GeneralCorporation Law and in Parent’s and its subsidiaries’ debt financing agreements withunaffiliated third parties.  If any suchrestrictions prohibit any such repurchase which Parent is otherwise required tomake, the repurchase obligation is suspended until such time as Parent may makesuch repurchase under such restrictions.

 

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 December 31, 2008,$9,000 is included in Other Current Liabilities and $1.9 million is included inOther Long-Term Liabilities under this agreement.

 

The Company recorded expenses of $9.9 million in the twelve monthsended December 31, 2007 related to the Transaction.  These expenses comprised $1.0 million ofcompensation expense related to accelerated vesting of stock options, $0.2million of employer related payroll taxes for the accelerated vesting of stockoptions, $1.3 million of transaction incentive expenses, $7.0 million oftransaction costs and $0.4 million of deferred financing costs related torefinanced indebtedness.  In addition tothese amounts, the Company capitalized $4.0 million of transaction costs intogoodwill related to the accelerated earn-out, and $3.6 million of deferredfinancing costs relating to the Senior Credit Facility.  Parent made a capital contribution of $21.7million to the Company in connection with these transaction costs.

 

On July 28, 2005, the Company acquiredsubstantially all of the assets of a moldings manufacturing company operatingunder the name of DMI.  The Company paidcash at closing of $9.3 million, of which one-half was funded by the saleof shares of the Company’s voting common stock to theCompany’s former stockholders, and the remainder withoperating cash and a draw down on the Company’s then-existingsenior secured credit facility.  Inaddition, the Company was required to pay up to an aggregate of $7.0 million ifcertain earnings targets are met at the end of each calendar year from 2005 to2010, which may be accelerated upon certain events.  The Company paid $2.0 million of the earn-outconsideration in the first quarter 2006. As a result of the change in control caused by the Transaction, theremaining $5.0 million potential earn-out obligation was accelerated and paidon January 9, 2007.  As a result ofthe additional earn-out consideration paid, the total purchase price, includingearn-out or acceleration obligations, resulted in goodwill of $5.1 million dueto the purchase price in excess of the net assets acquired.  The acquired assets of DMI are now operatedand owned by Woodcraft Industries, Inc., the Company’s subsidiary.

 

**6.FINANCING ARRANGEMENTS**

 

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

 
| ** **                                                          | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Senior Notes (10%) due 2012                                         |       | $                           | 108,350    |                        | $          | 119,850 |   |
| First Lien Term Facility, (4.2% at December 31, 2008) due 2009 |       | 3,597                       |       | 4,352                       |       |
| Total debt                                                          |       | 111,947                     |       | 124,202                     |       |
| Less current maturities                                             |       | 3,597                       |       | 754                         |       |
|                                                                |       | $                           | 108,350    |                        | $          | 123,448 |   |

 

 

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***Senior Notes ***The Company has outstanding 10% Senior Notes due in2012.  During the three months ended March 31,2008, the Company purchased and canceled approximately $11.5 million inprincipal amount of the Senior Notes for payment of $9.8 million resulting in again on extinguishment of debt of approximately $1.7 million.  The Company used available cash andborrowings under its Revolving Facility for payment thereof.

 

Each of the Company’s subsidiaries, which are all 100% owned subsidiariesof the Company, have fully and unconditionally guaranteed the Senior Notes on ajoint and several basis.  The Company hasno assets or operations independent of its subsidiaries.  As a result, the Company has not presentedseparate financial statements of the subsidiary guarantors.

 

***Credit Facility***** In conjunction with the Transaction, theCompany entered into the Senior Credit Facility, with Credit Suisse, CaymanIslands Branch, which provided for (i) the First Lien Term Facility in anaggregate principal amount of $150.0 million and (ii) the RevolvingFacility in an aggregate principal amount up to $25.0 million, subject tocertain conditions, of which $10.0 million is available through a sub facilityin the form of letters of credit. Subject to certain conditions, the First Lien Term Facility may beincreased by up to $30.0 million during the life of the First Lien TermFacility at the request of the Company with the consent from those lenders thatagree to participate in such increase. Subject to the foregoing, effective as of April 30, 2007, noadditional borrowings are available under the First Lien Term Facility beyondthe $9.8 million outstanding at March 31, 2007.  As of December 31, 2008, the maximumamount of borrowings available to the Company under the Revolving Facility was$12.5 million.  As of December 31,2008 borrowings of $3.6 million were outstanding under the First Lien TermFacility and nothing was outstanding under the Revolving Facility.  As of December 31, 2008, the outstandingprincipal of such indebtedness bears interest at a fluctuating rate equal to eitherthe base rate plus 2.75% per annum or LIBOR plus 3.75% per annum(effective rate of 4.21% and 7.58% at December 31, 2008 and December 31,2007, respectively).  The Company mustcomply with certain financial covenants under its Senior Credit Facility, includingmaintenance of an interest coverage ratio and a total leverage ratio.  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.  See Note 12 below for a description ofcertain amendments and waivers made to the Senior Credit Facility during thefirst quarter of 2009.

 

***2005 Senior Credit Facility ***Our previous senior credit facility (which is referredto herein as the “2005 SeniorCredit Facility”) was amendedand restated in September 2005, provided for revolving credit of up to$40.0 million subject to a borrowing base, a $7.5 million nonamortizingterm loan, and a $7.5 million nonamortizing capital expenditure loan to bedrawn upon through June 30, 2006. As of June 30, 2006, the nonamortizing capital expenditure loan hadexpired.  The outstanding principal boreinterest at a fluctuating rate equal to either the base rate plus 2.75% perannum or LIBOR plus 3.0% per annum.  The2005 Senior Credit Facility was terminated, and all outstanding borrowings wererepaid on January 9, 2007 in connection with the Transaction.

 

***Restrictions onIndebtedness ***Our Senior Credit Facility and theindenture for the Senior Notes impose certain restrictions on the Company’s ability to incur indebtedness, paydividends, make investments, grant liens, sell assets and engage in certainother activities.  The subsidiary guarantors are generally not restrictedin their ability to dividend or otherwise distribute funds to the Companyexcept for restrictions imposed under applicable state corporate law.  TheCompany is limited 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 leverage ratiodoes 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 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 consolidated interestcoverage ratio of greater than 2.0 to 1.0. For the twelve month period ended December 31, 2008, the Company’s consolidatedinterest coverage ratio was less than 2.0 to 1.0.

 

***Capital Leases*** The Company had $0.0 and $0.5 million in capital leases outstanding asof December 31, 2008 and December 31, 2007 respectively.

 

 

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**7. COMMITMENTS AND CONTINGENCIES**

 

***                Operating Leases*** The Company is obligated under various operating leases for warehousespace and plant equipment.  Rentalexpense under these agreements was approximately $1,085,000, $913,000, and$599,000 for the years ended December 31, 2008, 2007, and 2006.  Future minimum lease payments are as follows(in thousands) as of December 31, 2008:

 
| **Year Ending December 31** | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|
| 2009                             |       | $          | 653        |   |
| 2010                             |       | 326        |       |
| 2011                             |       | 258        |       |
| 2012                             |       | 243        |       |
| 2013                             |       | 240        |       |
|                             |       | $          | 1,720      |   |

 

                ***Woodcraft Industries, Inc.Retirement Assurance Plan*** The Company sponsors a 401(k) and profit sharing plan which coverscertain full-time employees who meet eligibility requirements as to age andlength of service.  Employees are allowedto make pretax contributions up to the maximum amount permitted by law.  Employer contributions to the plan are madeat the discretion of the Board of Directors. The Company’s contribution was approximately $554,000, $620,000,and $666,000 during the years ended December 31, 2008, 2007 and 2006,respectively.

 

***                Litigation*** In the normal course of business, the Company is subject to variousinstances of litigation.  In the opinionof the Company’s management and legal counsel, the ultimatesettlement of such matters will not have a material adverse effect on theCompany’sfinancial position, results of operations, or cash flows.

 

**8. INCOME TAXES**

 

                The provision forincome taxes consisted of the following (in thousands):

 
| ** **                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Current provision:             |       |                             |       |   |   |   |   |
| Federal                        |       | $                                | 835        |   | $ | (1,807 | ) | $ | 6,916 |   |
| State                          |       | 120                              |       | 478 |   | 1,425 |   |
|                           |       | 955                              |       | (1,329 | ) | 8,341 |   |
| Deferred tax (benefit) expense |       | (631                             | )          | 3,425 |   | (1,714 | ) |
| Provision for income taxes     |       | $                                | 324        |   | $ | 2,096 |   | $ | 6,627 |   |

 

                The provision forincome taxes differs from the amount of income tax determined by applying theU.S. federal tax rate to pretax income due to the following:

 
| ** **                                          | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                          | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Tax provision at federal rate                       |       | $                                | 573        |   | $ | 1,798 |   | $ | 5,730 |   |
| Increase (decrease) in income taxes resulting from: |       |                             |       |   |   |   |   |
| Nondeductible expenses                              |       | 25                               |       | 27 |   | 29 |   |
| Federal tax credits                                 |       | —                           |       | (125 | ) | (125 | ) |
| Section 199                                    |       | —                           |       | — |   | (209 | ) |
| State income taxes—net of federal benefit      |       | 127                              |       | 471 |   | 970 |   |
| Change in deferred tax rate                         |       | (119                             | )          | — |   | — |   |
| Other                                               |       | (282                             | )          | (75 | ) | 232 |   |
| Provision for income taxes                          |       | $                                | 324        |   | $ | 2,096 |   | $ | 6,627 |   |

 

                Net deferred taxassets (liabilities) consist of the following components as of December 31:

 
| ** **                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Depreciation                          |       | $        | (6,451     | )        | $          | (6,133 | ) |
| Noncompete agreements                 |       | 882      |       | 1,109    |       |
| Goodwill and other amortizable assets |       | (365     | )          | (297     | )          |
| Accruals                              |       | (338     | )          | (112     | )          |
| Inventory                             |       | (464     | )          | (956     | )          |
| Capital leases                        |       | 85       |       | 219      |       |
| Bad debt expense                      |       | 56       |       | 51       |       |
| NOL carryforward                      |       | 1,626    |       | —   |       |
| Federal benefit of FIN48              |       | —   |       | 33       |       |
| Accrued payroll and health insurance  |       | 1,070    |       | 1,556    |       |
| Net deferred tax liabilities          |       | $        | (3,899     | )        | $          | (4,530 | ) |
|                                  |       |     |       |     |       |
| Current                               |       | $        | 1,318      |     | $          | 1,866 |   |
| Noncurrent                            |       | (5,217   | )          | (6,396   | )          |
|                                  |       | $        | (3,899     | )        | $          | (4,530 | ) |

 

35

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The Company is subject toaudits in the tax jurisdictions in which it operates.  Upon audit, these taxing jurisdictions couldretroactively disagree with the Company’s tax treatment of certain items.  Consequently, the actual liabilities withrespect to any year may be determined long after financial statements have beenissued.  The Company establishes taxreserves for estimated tax exposures. These potential exposures result from varying applications of statutes,rules, regulations, case law and interpretations.  The settlement of these exposures primarilyoccurs upon finalization of tax audits. However, the amount of the exposures can also be impacted by changes intax laws and other factors.  The Companybelieves that it has established the appropriate reserves for these estimatedexposures.  However, actual results may differfrom these estimates.  The resolution ofthese tax matters will not have a material effect on the consolidated financialcondition of the Company, although a resolution could have a material impact onthe Company’sconsolidated statement of earnings for a particular future period and on theCompany’seffective tax rate.

 

**9. STOCKHOLDERS****’****EQUITY**

 

                The Company’s Amended and Restated Certificate ofIncorporation authorized the aggregate issuance of 30,000,000 shares of stockdivided into three classes: 28,000,000 shares of voting common stock, $0.01 parvalue; 1,000,000 shares of nonvoting common stock, $0.01 par value; and1,000,000 undesignated preferred stock, par value $0.01.

 

                As a result of theTransaction, all the outstanding capital stock (100 shares) of WII Components, Inc.was acquired by WII Holding, Inc. (“Parent”) through the Transaction of anewly formed wholly owned subsidiary of Parent with and into WII Components, Inc.

 

                The Companydistributed $4.5 million and $0.9 million to the Parent for payment on theParent Notes for the periods ended December 31, 2008 and December 31,2007, respectively.

 

**10. RELATED-PARTY TRANSACTIONS**

 

The Company hasnoncompete agreements with the former owners of Brentwood, Grand Valley, andDimension Moldings, 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’sconsolidated financial statements, while the remaining $2.3 million wasrecorded on the Parent’s financial statements. In addition, theaffiliate will be paid a $150,000 quarterly advisory fee by Parent for ongoingservices provided by Parent and its subsidiaries, including the Company.  In 2008, the affiliate lowered the quarterlyfee payable by Parent for the third and fourth quarters to $135,000.  The Company paid a total of $540,000 and$570,000 on account of Parent for the years ended December 31, 2007 andDecember 31, 2008, respectively.  Inconnection with the amendments to the Note Purchase Agreements related to theParent Notes, the $150,000 quarterly fee has been deferred by the affiliate for2009 and will be payable in 2010 or thereafter. 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.

 

In addition to themanagement services agreement, the Company also made payments on behalf of theParent of $4.5 million and $2.6 million for the years ended December 31,2008 and December 31, 2007.  TheCompany distributed these payments to the Parent for payments on the Parent notes,legal fees, and other expenses.  Certainof the Company’s debt 

 

36

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agreements providerestrictions on the ability of the Company to make distributions to or onaccount of the Parent.  See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations - Liquidity and Capital Resources”for a detailed discussion of such restrictions.

 

                Parent issued Restricted Stock Agreements on August 31,2007 and September 14, 2007 to certain Company management personneltotaling 55,219 shares of Parent common stock. The fair value of the Parents common stock was approximately $397,023 onthe date of the grant.  The restrictedstock becomes fully vested after seven years, or earlier, if certain milestones,as defined, are met.

 

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 December 31, 2008 and December 31, 2007, the Companyincluded a total of $4.8 million and $4.1 million, respectively as an amountdue to Parent for these income tax liabilities.

 

**11.QUARTERLY FINANCIAL DATA (UNAUDITED):**

 

**          Thefollowing is a condensed summary of actual quarterly results of operations for2008 and 2007 (in thousands):**

** **

** **
| ** **          | ** ** | **First**  | ** ** | **Second** | ** ** | **Third**  | ** ** | **Fourth** | ** ** | **Year**   | ** ** |
|---------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **2008:**           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales           |       | $          | 56,019     |       | $          | 56,104     |       | $          | 46,986     |       | $          | 34,264 |   | $ | 193,373 |   |
| Gross profit        |       | 7,827      |       | 9,391      |       | 6,590      |       | 2,930      |       | 26,738     |       |
| Operating income    |       | 4,228      |       | 6,065      |       | 3,504      |       | (993       | )          | 12,804     |       |
| Net earnings (loss) |       | 1,683      |       | 1,633      |       | 145        |       | (2,145     | )          | 1,316      |       |
|                |       |       |       |       |       |       |       |       |       |       |       |
| **2007:**           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales           |       | $          | 61,006     |       | $          | 67,776     |       | $          | 64,958     |       | $          | 55,563 |   | $ | 249,303 |   |
| Gross profit        |       | 10,749     |       | 13,671     |       | 10,635     |       | 9,185      |       | 44,240     |       |
| Operating income    |       | (2,462     | )          | 9,503      |       | 6,884      |       | 6,219      |       | 20,144     |       |
| Net earnings        |       | (2,341     | )          | 1,981      |       | 1,643      |       | 1,758      |       | 3,041      |       |

 

**12.SUBSEQUENT EVENTS:**

 

On March 30, 2009, theCompany entered into an amendment to its Senior Credit Facility, which amongother things: (i) increased the applicable interest rate margin forborrowings thereunder; (ii) eliminated the requirement that the Companymaintain corporate debt ratings; (iii) extended the date by which theCompany 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 period fromDecember 31, 2008 through December 31, 2009, (vi) required payment of theremaining balance due under the First Lien Term Facility of approximately $3.6million and (vii) decreased the minimum interest coverage ratio theCompany is required to maintain at the end of each quarterly period fromDecember 31, 2008 through December 31, 2009.  The amendment alsowaived for the four fiscal quarters ended December 31, 2008, any defaultor event of default that may have arisen from the Company’s failure to maintainthe maximum consolidated leverage ratio and the minimum consolidated interestcoverage ratio set forth in the Senior Credit Facility prior to the effectivedate of the amendment.

 

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**PART III**

 

**Item 9.Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

 

                There were no changes in or disagreements with theaccountants on accounting and financial disclosure.

 

**Item 9A.Controls and Procedures**

 

***DisclosureControls and Procedures.***  As required byRule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), we carried out an evaluation under the supervision and withthe participation of our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of our disclosure controls andprocedures as of December 31, 2008. For purposes of the foregoing, the term disclosure controls andprocedures means controls and other procedures of an issuer that are designedto ensure that information required to be disclosed by the issuer in thereports that it files or submits under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in the Securitiesand Exchange Commission’s rules and forms.  Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by an issuer in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the issuer’s management, including its principalexecutive and principal financials officers, or persons performing similarfunctions, 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 have concluded that they believe that, as of December 31,2008, our disclosure controls and procedures were effective at a reasonablelevel of assurance.  In reaching thisconclusion, the Chief Executive Officer and Chief Financial Officer noted thatwe failed to include in our Annual Report on Form 10-K for the year ended December 31,2007 a report by management on the Company’s internal control over financialreporting and the certifications contained in Exhibits 31.1 and 31.2 to thatAnnual Report and our Quarterly Report on Form 10-Q for the quarterlyperiod ended March 31, 2008 did not include the required certificationsrelating to the Company’s internal controls over financial reporting asrequired by applicable SEC regulations. We became aware of these reporting deficiencies subsequent to June 30,2008 and corrected our disclosure controls and procedures prior to September 30,2008 to correct these omissions and amended the appropriate reports.

 

***Changesin Internal Controls Over Financial Reporting.*** There were no changes in our internal controls over financial reportingduring our fourth fiscal quarter that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

 

***Management*****’*****s Report on Internal Control over FinancialReporting.*******Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as defined in Exchange Act Rule 13a-15(f). Prior tothe filing this annual, management conducted an evaluation of the effectivenessof our internal control over financial reporting based on the framework in “InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission.” Based on thisevaluation, management concluded that our internal control over financialreporting was effective as of December 31, 2008. This Annual Report doesnot include an attestation report of our registered public accounting firmregarding internal control over financial reporting. Management’s report wasnot subject to attestation by the Company’s registered public accounting firmpursuant to temporary rules of the Securities and Exchange Commission thatpermit the Company to provide only management’s report in this Annual Report.

 

# **Item9B. Other Information**

# ** **

As discussed above under “Management’sDiscussion and Analysis of Results of Financial Condition and Results ofOperations - Liquidity and Capital Resources,” on March 30, 2009, we enteredinto an amendment to our Senior Credit Facility, which among other things: (i)increased the applicable interest rate margin for borrowings thereunder; (ii)eliminated the requirement that we maintain corporate debt ratings; (iii)extended the date by which we must amend the indenture governing the SeniorNotes to eliminate certain of the restrictive covenants contained therein (includingcovenants related to the incurrence of indebtedness and liens) or redeemed theSenior Notes to March 31, 2010; (iv) extended our ability to continue to paycash dividends to enable Parent to make cash interest payments on the Parentquarterly period through December 31, 2009; (v) increased the maximum totalleverage ratio we may have at the end of each quarterly period from December31, 2008 through December 31, 2009, (vi) required payment of the remainingbalance due under the First Lien Term Facility of approximately $3.6 million and(vii) decreased the minimum interest coverage ratio we are required to maintainat the end of each quarterly period from December 31, 2008 through December 31,2009.  The amendment also waived for thefour fiscal quarters ended December 31, 2008, any default or event of defaultthat may have arisen from our failure to maintain the maximum consolidatedleverage ratio and the minimum consolidated interest coverage ratio set forthin the Senior Credit Facility prior to the effective date of the amendment.

 

**Item 10. Directors, ExecutiveOfficers and Corporate Governance**

 

                The followingtable sets forth the names and ages (as of March 17, 2009) of ourexecutive officers and directors and the positions that they hold at WII Components, Inc.and, where applicable, at Parent. Directors of WII Components hold their positions until the annualmeeting of the stockholders at which their term expires or until theirrespective successors are elected and qualified.  Directors of Parent are elected pursuant tothe terms of a stockholders agreement among all of Parent’s existing stockholders.  See “Certain Relationships and RelatedTransactions - Stockholders Agreement.” Executive officers of WII 

 

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Components hold their positions until the annual meeting of the Boardof Directors or until their respective successors are elected and qualified.

 
| **Name**             | ** ** | **Age** | ** ** | **Position**                                                                                                                             |
|----------------------|------------|---------|------------|------------------------------------------------------------------------------------------------------------------------------------------|
| John Fitzpatrick     |       | 65      |       | Director, Chief  Executive Officer and President—Parent; andDirector, Chief Executive Officer and  President—WII Components    |
| Dale Herbst          |       | 40      |       | Chief Financial  Officer, Treasurer and Secretary—Parent; and Chief Financial Officer,  Treasurer and Secretary—WII Components |
| Joel Beyer           |       | 49      |       | Vice President  of Operations—PrimeWood                                                                                             |
| Robert S. Morris     |       | 54      |       | Director—Parent;  and Director—WII Components                                                                                  |
| Louis J.  Mischianti |       | 49      |       | Director—Parent;  and Director —WII Components                                                                                 |
| L. David  Cardenas   |       | 42      |       | Director—Parent;  and Director —WII Components                                                                                 |
| Keith Heffernan      |       | 39      |       | Director—Parent;  and Director —WII Components                                                                                 |

 

*                Mr. Fitzpatrick* has served as Woodcraft’s President and Chief Executive Officersince 2000.  Prior to joining us he wasChief Operating Officer at Nexcycle, Inc., a privately held consolidatorof specialty recycling businesses with over $120 million of sales in theUnited States, Canada and the United Kingdom. He also was a corporate officer of ITEQ and general manager for Graco, Inc.after spending 20 years with General Electric Company, where he heldvarious management positions in several divisions.  Mr. Fitzpatrick received a B.S. inMechanical Engineering from the University of Notre Dame and a M.B.A. from theUniversity of Pittsburgh.

 

                *Mr. Herbst* has served as Woodcraft’s Chief Financial Officer since2002.  Since joining us in 1992, he hasserved as a Controller, Accounting Manager and General Accountant.  Mr. Herbst received a B.S. in FinancialManagement and Accounting from the University of North Dakota.

 

*                Mr. Beyer* has served as Vice President of ourPrimeWood subsidiary since 1998.  Hejoined PrimeWood in 1977.  Mr. Beyerhas served in many capacities during his career with us, including Director ofOperations, Director of Engineering, Project Engineer and Production Manager.

 

*                Mr. Morris* joined our board of directors in January 2007.  Mr. Morris founded Olympus Partners in1988 and serves as the Managing Partner of Olympus Partners and its affiliatedinvestment partnerships.  Mr. Morrisserves as a Director of several Olympus portfolio companies, as a Director ofThe Waterside School, and as a Director of Hamilton College Endowment Fundwhere he heads The Polio Foundation’s research efforts in regenerationmedicine.  Mr. Morris received anA.B. from Hamilton College and a M.B.A. from the Amos Tuck School of Businessat Dartmouth College.

 

*                Mr. Mischianti* joined our board of directors in January 2007.  Mr. Mischianti joined Olympus Partnersas a Partner in 1994.  Mr. Mischiantiserves as a Director of several Olympus portfolio companies.  Mr. Mischianti received an A.B. fromYale University.

 

*                Mr. Cardenas* joined our board of directors in January 2007.  Mr. Cardenas joined Olympus Partners asa Principal in 1997 and has been a Partner of Olympus since 1998.  Mr. Cardenas serves as a Director ofseveral Olympus portfolio companies.  Mr. Cardenasreceived a B.S. from the University of Virginia and a M.B.A. from theUniversity of North Carolina.

 

*                Mr. Heffernan* joined our board of directors in January 2007.  Mr. Heffernan joined Olympus Partners asan Associate in 1998 and has been a Partner of Olympus since 2004.  Mr. Heffernan has served as a Directorof several Olympus portfolio companies.  Mr. Heffernanreceived a B.S. from the Wharton School of the University of Pennsylvania and aM.B.A. from the Stanford University Graduate School of Business.

 

**Board of Directors**

 

                As of March 17,2009, Parent has a five-member board of directors consisting of Messrs. Fitzpatrick,Morris, Mischianti, Cardenas and Heffernan. The bylaws of Parent permit the directors to increase the size of theboard of directors of Parent by resolution approved by a majority vote.  All of Parent’s stockholders are party to astockholders agreement whereby (i) Olympus Growth Fund IV, L.P. has theright to designate each representative to the board of directors of Parent andeach of its subsidiaries (including the Company) and (ii) the stockholdersof Parent agree to take all appropriate action to fix the size of the board ofdirectors of Parent at five (or such higher number as determined by OlympusGrowth Fund IV, L.P.) and to vote the shares over which they exercise votingpower in favor of the election of to the board of Parent and each of itssubsidiaries each 

 

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designee to the respective board thereof as designated by OlympusGrowth Fund IV, L.P..  As of March 17,2009 the board of directors of each of Parent and the Company consists of Messrs. Fitzpatrick,Morris, Mischianti, Cardenas and Heffernan. See “Certain Relationships and Related Party Transactions and DirectorIndependence - Stockholders Agreement.”

 

       As a private company, we do not have anaudit, compensation or nominating committee. We have not determined whether any member of our board of directors isan “audit committee financial expert” as defined in Item 407 of Regulation S-K.

 

**CompensationCommittee Interlocks and Insider Participation**

 

       Our board is currently composed of fivedirectors, of which Mr. Fitzpatrick is an executive officer of the Companyand he participated in deliberations of the board concerning executive officercompensation during 2008 (other than his own compensation).  For adescription of the transactions between us and our directors, and entitiesaffiliated with such directors, see the sections entitled “Executive Compensation” and “Certain Relationships and Related Party Transactions, andDirector Independence.” None of our executive officers has served as a member of the board of directorsor compensation committee of another entity that had one or more of itsexecutive officers serving as a member of our board of directors.

 

**Corporate Code of Ethics**

 

                We have a code ofconduct policy for all of our officer and employees.  The Company hereby undertakes to provide acopy of its code of ethics to any person without charge, upon request.  Such request may be made by contacting theHuman Resource Department at 320-252-1503.

 

**Item 11. Executive Compensation**

 

# ***              CompensationPolicies and Practices. ***The primary objectives of our executive compensationprogram are to (i) attract and retain the best possible executive talent, (ii) achieveaccountability for performance by linking base salary and bonuses to ourfinancial performance, and (iii) align executives’ compensation with stockholder value creation.

# ** **

**              Our executive compensationprograms are designed to encourage our executive officers to operate thebusiness in a manner that enhances stockholder value.  In addition, a substantial portion of ourexecutive**’soverall compensation is tied to our financial performance, specificallyEBITDA.  Our compensation philosophyprovides for a direct relationship between compensation and the achievement ofour EBITDA goals and includes management in upside rewards.

** **

                We have sought to achieve an overall compensationprogram that provides foundational elements such as base salary and benefitsthat are generally competitive with the marketplace, as well as an opportunityfor variable incentive compensation that is significant when financialperformance goals are met.

 

                Our executive compensation consists of the followingcomponents (i) base salary, (ii) annual cash bonus, and (iii) long-termincentive awards — stock option grants or restricted stock grants.

 

***                Base Salary. ***Base salary is established based on the experience,skills, knowledge and responsibilities required of the executive officer.  When establishing the 2008 base salaries ofthe executive officers, a number of factors were considered, including theindividual’s performanceand growth of duties and responsibilities. We seek to maintain base salaries that are competitive with themarketplace, to allow us to attract and retain executive talent.

 

                Salaries for executive officers are reviewed on anannual basis, at the time of a promotion or other change in level of responsibilities,as well as when competitive circumstances require review.  Increases in salary are determined uponincreased levels of responsibility and a performance evaluation relative to ouroverall financial performance, the performance of one of our applicabledivisions or a combination.  The basesalary of John Fitzpatrick is determined by the Board of Directors, and Mr. Fitzpatrick,in consultation with the Board of Directors, sets the salaries for the balanceof the executives.

 

***                Annual Cash Bonus Incentive. ***Executives directly affect the Company’s ability to attain its strategic andfinancial objectives.  The annual cashbonus is designed to motivate and provide incentive to executives to attainthose Company objectives.  The Board ofDirectors determines Mr. Fitzpatrick’s bonus percentage, and Mr. Fitzpatrick,in consultation with the Board of Directors, determines the percentage of basesalary that is bonus eligible for the other executives.  Success is measured on EBITDA of WoodcraftIndustries, Inc., Woodcraft Division, PrimeWood Division, BrentwoodDivision, or a 

 

40

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combination.  The percent of planned EBITDA achieved willdetermine the amount of bonus to be paid based on their sharing percentage andtheir bonus percentage (as a percent of salary).  The 2008 bonus plan for Mr. Fitzpatrick,Mr. Herbst, and Mr. Beyer provided for a target cash bonus of$222,671, $67,373, and $56,784, respectively, based upon their respective basesalaries for 2008.  In 2008 the cashbonuses for Messrs. Fitzpatrick, Herbst, and Beyer were based entirely onthe amount by which actual EBITDA exceeds certain planned levels for suchyear.  They will earn no bonus if EBITDAis below a planned threshold, 100% of their target cash bonuses if EBITDA meetsthe target threshold and up to 200% of their target cash bonuses if EBITDAmeets or exceeds a predetermined maximum EBITDA threshold.  The bonuses are pro rated between thresholdand target and between target and maximum and cannot exceed 200% of the targetcash bonus.

 

**                For 2008 Mr. Fitzpatrickearned, as incentive compensation, a percentage of his base salary, up to amaximum of 130%. The incentive compensation has been determined on the basis ofthe actual EBITDA of the Company as compared to the Company**’s planned EBITDA. Based on the Company’sperformance, Mr. Fitzpatrick will not receive a cash bonus for 2008

** **

                For 2008 Mr. Herbst earned, as incentivecompensation, a percentage of his base salary, up to a maximum of 90%. Theincentive compensation has been determined on the actual EBITDA of the Companyas compared to the Company’s planned EBITDA. Based on the Company’s performance, Mr. Herbst will not receive a cashbonus for 2008.

 

**                For 2008 Mr. Beyerearned, as incentive compensation, a percentage of his base salary, up to amaximum of 80%.  The incentivecompensation has been determined, in part on the basis of actual EBITDA of theCompany as compared to the Company**’s planned EBITDA and, in part, on the basis of actual EBITDA of thePrimeWood division as compared to the planned EBITDA for the PrimeWooddivision.  Based on the performance ofthe Company and PrimeWood, Mr. Beyer will not receive a cash bonus for2008

** **

***LongTerm Incentive Awards.***  Through January 9,2007, all of our executive officers had received equity compensation awards inthe form of either incentive stock options and/or non-qualified stockoptions.  We granted long term incentiveawards in the form of stock options because it is a common method for privately-heldcompanies to provide equity incentives to executive officers.  The options were designed to align theinterests of our executive officers with our stockholders’ long-term interests by providing themwith equity-based awards that vest over a period of time and become exercisableupon the occurrence of certain events, as well as to reward executive officersfor performance.  As a result of theTransaction, all of the foregoing options which were outstanding at the time ofthe Transaction were cashed out and terminated on January 9, 2007.

 

Parent issued RestrictedStock Agreements on August 31, 2007 and September 14, 2007 to all ofour executive officers.  Likewise withstock options, we granted long term incentive awards in the form of restrictedstock because it is a common method for privately-held companies to provideequity incentives to executive officers. The restricted stock is designed to align the interests of our executiveofficers with our stockholders’ long-term interests by providing them withequity-based awards that vest over a period of time upon the occurrence ofcertain events, as well as to reward executive officers for performance.  The restricted stock becomes fully vestedafter seven years, or earlier, if certain milestones, as defined, are met.

 

There were no RestrictedStock awards issued during 2008.

 

                ***Other Programs.***  Our Named Executive Officers can participatein our Company sponsored benefit programs at the same level as offered to allother employees.  These benefits includelife, health, dental, 401(k) matching, short-term disability, typicalholiday and vacation benefits, etc.  Alsooffered to the Named Executive Officers is a long-term disability plan, whichis also offered to other certain management members.

 

                ***Compensation Committee Report.***  The Board of Directors has reviewed anddiscussed with management the Compensation Discussion and Analysis provisionsincluded in this Form 10-K.  Basedon the reviews and discussions referred to above, the Board of Directors recommendsthat the Compensation Discussion and Analysis referred to above be included inthe Form 10-K.

 

| Board of Directors       |
|--------------------------|
| John Fitzpatrick (Chair) |
| Robert S. Morris         |
| Louis J. Mischianti      |
| L. David Cardenas        |
| Keith Heffernan          |

 

 

41

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***                SummaryCompensation Table.***  The following table sets forthinformation for 2008, 2007 and 2006 concerning compensation for servicesrendered in all capacities awarded to and earned by our Chief ExecutiveOfficer, Chief Financial Officer, and our only other officer who was serving asan executive officer on December 31, 2008.

 
|            |   |     |   |       |    |      |   |       |   |       |   |             |   | **Change  in**        |    |             |   |      |    |
|-----------------|--------|----------|--------|------------|---------|-----------|--------|------------|--------|------------|--------|------------------|--------|-----------------------|---------|------------------|--------|-----------|---------|
|            |   |     |   |       |    |      |   |       |   |       |   |             |   | **Pension  Value**    |    |             |   |      |    |
|            |   |     |   |       |    |      |   |       |   |       |   | **Non-Equity**   |   | **and  Nonqualified** |    |             |   |      |    |
| **Name and**    |   |     |   |       |    |      |   |       |   |       |   | **Incentive**    |   | **Deferred**          |    | **All**          |   |      |    |
| **Principal**   |   |     |   |       |    |      |   | **Stock**  |   | **Option** |   | **Plan**         |   | **Compensation**      |    | **Other**        |   |      |    |
| **Position**    |   | **Year** |   | **Salary** |    | **Bonus** |   | **Awards** |   | **Awards** |   | **Compensation** |   | **Earnings**          |    | **Compensation** |   | **Total** |    |
| John            |   | 2008     |   | $          | 342,571 | (10)      | — |       | $      | 7,558      | (1)    | —           |   | —                |    | (5               | )      | $         | 580,071 | (6) | $ | 930,200 |   |
| Fitzpatrick,    |   | 2007     |   | $          | 350,000 |      | — |       | $      | 15,115     | (2)    | —           |   | $                     | 658,800 | (4)              | (5     | )         | $       | 2,471,858 | (7) | $ | 3,495,773 |   |
| President and   |   | 2006     |   | $          | 350,000 |      | $      | 155,233    |   | —     |   | $                | 64,383 | (3)                   | —  |             | (5     | )         | $       | 4,400 | (8) | $ | 574,016 |   |
| Chief           |   |     |   |       |    |      |   |       |   |       |   |             |   |                  |    |             |   |      |    |
| Executive       |   |     |   |       |    |      |   |       |   |       |   |             |   |                  |    |             |   |      |    |
| Officer         |   |     |   |       |    |      |   |       |   |       |   |             |   |                  |    |             |   |      |    |
|            |   |     |   |       |    |      |   |       |   |       |   |             |   |                  |    |             |   |      |    |
| Dale Herbst,    |   | 2008     |   | $          | 149,717 | (10)      | — |       | $      | 5,039      | (1)    | —           |   | —                |    | (5               | )      | $         | 161,182 | (6) | $ | 315,938 |   |
| Chief Financial |   | 2007     |   | $          | 142,000 |      | — |       | $      | 10,077     | (2)    | —           |   | $                     | 250,000 | (4)              | (5     | )         | $       | 841,619 | (7) | $ | 1,243,696 |   |
| Officer,        |   | 2006     |   | $          | 141,346 |      | $      | 39,381     |   | —     |   | —           |   | —                |    | (5               | )      | $         | 3,534   | (8) | $ | 184,261 |   |
| Treasurer, and  |   |     |   |       |    |      |   |       |   |       |   |             |   |                  |    |             |   |      |    |
| Secretary       |   |     |   |       |    |      |   |       |   |       |   |             |   |                  |    |             |   |      |    |
|            |   |     |   |       |    |      |   |       |   |       |   |             |   |                  |    |             |   |      |    |
| Joel Beyer,     |   | 2008     |   | $          | 141,960 | (10)      | — |       | $      | 3,023      | (1)    | —           |   | —                |    | (5               | )      | $         | 120,969 | (6) | $ | 265,952 |   |
| Vice President  |   | 2007     |   | $          | 140,000 |      | — |       | $      | 6,046      | (2)    | —           |   | $                     | 20,000  | (4)              | (5     | )         | $       | 616,036 | (7) | $ | 782,082 |   |
| of Operations-  |   | 2006     |   | $          | 140,000 |      | $      | 7,280      |   | —     |   | —           |   | —                |    | (5               | )      | $         | 5,011   | (9) | $ | 152,291 |   |
| PrimeWood       |   |     |   |       |    |      |   |       |   |       |   |             |   |                  |    |             |   |      |    |
|                 |        |          |        |            |         |           |        |            |        |            |        |                  |        |                       |         |                  |        |           |         |  |  |  |  |  |  |  |

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(1)                                  Representsthe dollar amount recognized for financial statement reporting purposes with respectto 2008 in accordance with SFAS 123(R) of restricted stock awards ofParent common stock.  There were noforfeitures of such shares in 2008.  SeeNote 2 “Restricted Stock” to the Company’s consolidated financial statementsfor further discussion of such restricted stock grants.

 

(2)                                  Represents the dollar amount recognizedfor financial statement reporting purposes with respect to 2007 in accordancewith SFAS 123(R) of restricted stock awards of Parent common stock.  There were no forfeitures of such shares in2007.  See Note 2 “Restricted Stock” tothe Company’s consolidated financial statements for further discussion of suchrestricted stock grants.

 

(3)                                  Representsthe dollar amount recognized for financial statement reporting purposes withrespect to 2006 in accordance with SFAS 123(R) of options granted to JohnFitzpatrick on May 31, 2006 to purchase 240,000 shares of the Company’s commonstock.  See Note 2 “StockOptions” to the Company’s consolidated financial statements for further discussion of suchstock options.

 

(4)                                  Represents one-time transaction incentivespaid in conjunction with the Transaction.

 

(5)                                  The Company has no pension plan ornonqualified deferred compensation plan.

 

(6)                                  Consists of contributions by us to theapplicable executive’s 401(k) account. It also includes compensation related to an escrow payment and incometax benefits for the previous stockholders related to the cancellation of stockoptions due to the Transaction. Contributions to the 401(k) account for John Fitzpatrick, DaleHerbst, and Joel Beyer was $3,680 for each individual.  Compensation related to the escrow paymentand income tax benefits for the cancellation of stock options due to theTransaction for John Fitzpatrick, Dale Herbst, and Joel Beyer include $576,391,$157,502, and $117,289, respectively.

 

(7)                                  Consists of contributions by us to theapplicable executive’s 401(k) account and compensation related to thecancellation of stock options due to the Transaction.  Contributions to the 401(k) account forJohn Fitzpatrick, Dale Herbst, and Joel Beyer was $3,600 for eachindividual.  Compensation related to thecancellation of stock options due to the Transaction for John Fitzpatrick, DaleHerbst, and Joel Beyer include $2,468,258, $838,019, and $612,436, respectively.

 

(8)                                  Consistsof contributions by us to the applicable executive’s 401(k) account.

 

(9)                                  Includes$3,794 in contributions by us to the executive’s 401(k) account; and $1,217 intaxable wages related to an escrow payment in 2006 due to stock options held bythe executive in conjunction with the April 2003 acquisition by us ofBehrman Capital III L.P.

 

(10)                            Includes base salary in EmploymentAgreements, subject to periodic adjustments. The amounts may not directly coincide with the base salary listed belowas of December 31, 2008 due to increases or decreases that occurredthroughout the year.

 

42

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***               ******Restricted Stock******.***  There were no Restricted Stock awards issued during2008.

 

                ***2008Bonus Plan for Messrs. Fitzpatrick, Herbst, and Beyer. ***The 2008 bonus plan for Mr. Fitzpatrick,Mr. Herbst, and Mr. Beyer provided for a target cash bonus of$222,671, $67,373, and $56,784, respectively, based upon their respective basesalaries for 2008 of $342,571, $149,717, and $141,960, respectively.  In 2008, the cash bonuses for Messrs. Fitzpatrick,Herbst, and Beyer were based entirely on the amount by which actual EBITDAexceeded certain planned levels for such year. They were not entitled to earn a bonus if actual EBITDA for the yearended December 31, 2008 was below the planned threshold for such period,were entitled to 100% of their target cash bonuses if actual EBITDA met thetarget threshold and were entitled to up to 200% of their target cash bonusesif EBITDA met or exceeded a pre-determined maximum EBITDA threshold.  The bonuses are pro rated between thresholdand target and between target and maximum and cannot exceed 200% of the targetcash bonus.  Based on the Company’s performance, Messrs. Fitzpatrick,Herbst, and Beyer will not receive acash bonus for 2008.

 

**Grants of Plan-Based Awards**

 

                The followingtable summarizes information regarding our 2008 bonus plans.  No equity-based incentive awards were grantedduring 2008.

 
| ** **       | ** ** | ** **           | ** ** | ** **           | ** ** | ** **                                                         | ** ** | ** **                      | ** ** | ** **                  | ** ** | **All Other**                        | ** ** | ** **   | ** ** | ** ** | ** ** |
|------------------|------------|----------------------|------------|----------------------|------------|--------------------------------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|--------------------------------------|------------|--------------|------------|------------|------------|
| ** **       | ** ** | ** **           | ** ** | ** **           | ** ** | ** **                                                         | ** ** | ** **                      | ** ** | ** **                  | ** ** | **Stock**                            | ** ** | **Exercise** | ** ** | ** ** | ** ** |
| ** **       | ** ** | ** **           | ** ** | ** **           | ** ** | ** **                                                         | ** ** | ** **                      | ** ** | ** **                  | ** ** | **Awards:**                          | ** ** | **or Base**  | ** ** | ** ** | ** ** |
| ** **       | ** ** | ** **           | ** ** | ** **           | ** ** | **Estimated Future Payouts Under  Non-Equity Incentive Plan  (1)** | ** ** | **Number of  Shares of  Stock** | ** ** | **Price of  Stock  Awards** | ** ** | **Grant Date  Fair Value  of Stock** | ** ** |
| **Name**         | ** ** | **Grant Date**       | ** ** | **Approval Date**    | ** ** | **Threshold ($)**                                                  | ** ** | **Target ($)**                  | ** ** | **Maximum ($)**             | ** ** | **(#)**                              | ** ** | **($/Sh)**   | ** ** | **Awards** | ** ** |
| John Fitzpatrick |       | January 1, 2008 |       | January 1, 2008 |       | $                                                                  | 14,845     |                            | $          | 222,671                     |       | $                                    | 445,342    |         | —     |       | $          | — |   | $ | — |   |
| Dale Herbst      |       | January 1, 2008 |       | January 1, 2008 |       | $                                                                  | 4,492      |                            | $          | 67,373                      |       | $                                    | 134,746    |         | —     |       | $          | — |   | $ | — |   |
| Joel Beyer       |       | January 1, 2008 |       | January 1, 2008 |       | 3,786                                                              |       | $                               | 56,784     |                        | $          | 113,568                              |       | —       |       | $          | —     |   | $ | — |   |

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(1)                                  Please see “2008 Bonus Plan for Messrs. Fitzpatrick, Herbst, and Beyer” and “Annual Cash Bonus Incentive” under the “SummaryCompensation Table” above for adescription of the 2008 Bonus Plan. Actual payments in respect to 2008 are shown in the “Summary Compensation” table in the column titled “Bonus”.

 

                ***Restricted Stock Plan. ****  *In 2007, Parent issued restrictedstock awards to certain Company management personnel, with such grants consistingof 55,218.83 shares of Parent’s restricted common stock in the aggregate.  The shares of restricted stock vest 25% peryear for the fiscal years ending 2007 through 2010, if (i) Parent’s EBITDAmeets the applicable target EBITDA for such period and (ii) the applicableparticipant holding such restricted stock award is still an employee of Parentor one of its subsidiaries.  If, withrespect to any particular fiscal year, the applicable EBITDA target for suchyear is not achieved, half of the applicable amount will vest in thatyear.  In addition, if applicable EBITDAtarget is not achieved in a given fiscal year, a “catch up” provision allowsthe portion of such restricted stock which would otherwise remain unvested dueto the failure to achieve such EBITDA target to become vested in subsequentfiscal years, if subsequent performance targets are achieved.  All of the shares of restricted stock becomefully vested upon the occurrence of any of the following events: (i) afterseven years, provided that the applicable participant is still an employee ofParent or one its subsidiaries; and (ii) upon a sale event involving achange of control of Parent or all or substantially all of Parent’s assets on aconsolidated basis, if certain targeted rates of return on Olympus Growth FundIV, L.P.’s investment are achieved or of the board of directors of Parent soelects.  The shares of restricted stockare voting shares of common stock of Parent. We did not issue any plan-based equity awards in 2008.

 

                In addition tocertain other restrictions on such shares, the shares of restricted stock aresubject to certain repurchase rights in favor of Parent and Olympus Growth FundIV, L.P. (as Parent’s majority shareholder) in the event that the holder ofsuch shares ceases to be employed by Parent and its subsidiaries for anyreason.  The repurchase price forunvested shares of restricted stock is the lesser of the holder’s original costto purchase such shares and fair market value, whereas the repurchase price forvested shares of restricted stock is the fair market value of the shares unlessthe holder is terminated for cause, in which case the repurchase price forvested shares is the lesser of the holder’s original cost and fair marketvalue.

 

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###### **Table of Contents**

 

###### **Outstanding Equity Awards at FiscalYear-End**

###### ** **

The following table summarizes information regardingour Named Executive Officer’s outstanding equity awards at as of December 31, 2008.  There were no option awards outstanding as ofDecember 31, 2008.

** **
| ** **       | ** ** | **Stock Awards**                                                  | ** ** |
|------------------|------------|-------------------------------------------------------------------|------------|
| **Name**         | ** ** | **Number  of shares or units of stock that have not vested  (#)** | ** ** | **Market value of shares or units of stock that have not vested  ($)(1)** | ** ** |
| John Fitzpatrick |       | 5,256                                                             | (2)        | $ | — |   |
| Dale Herbst      |       | 3,504                                                             | (2)        | $ | — |   |
| Joel Beyer       |       | 2,103                                                             | (2)        | $ | — |   |

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(1)          Represents the number of restricted stockshares that have not vested, multiplied by the fair market value per share asof December 31, 2008.  It wasdetermined that the value per share was nominal since the fair market value ofthe Parent was less than the total debt and preferred stock, including dividendsaccrued at the Parent.

 

(2)          The shares of restricted stock vest 25%per year for the fiscal years ending 2007 through 2010, if (i) Parent’sEBITDA meets the applicable target EBITDA for such period and (ii) theapplicable participant holding such restricted stock award is still an employeeof Parent or one of its subsidiaries. If, with respect to any particular fiscal year, the applicable EBITDAtarget for such year is not achieved, half of the applicable amount will vestin that year.  In addition, if applicableEBITDA target is not achieved in a given fiscal year, a “catch up” provisionallows the portion of such restricted stock which would otherwise remainunvested due to the failure to achieve such EBITDA target to become vested insubsequent fiscal years, if subsequent performance targets are achieved.  All of the shares of restricted stock becomefully vested upon the occurrence of any of the following events: (i) afterseven years, provided that the applicable participant is still an employee ofParent or one its subsidiaries; and (ii) upon a sale event involving achange of control of Parent or all or substantially all of Parent’s assets on aconsolidated basis, if certain targeted rates of return on Olympus Growth FundIV, L.P.’s investment are achieved or of the board of directors of Parent soelects.  The shares of restricted stockare voting shares of common stock of Parent.  Stock awards include the vested portionduring the twelve months ended December 31, 2008 for the Restricted Stockissued on August 31, 2007.

 

###### **Option Exercises and RestrictedStock Vested**

###### ** **

The following table summarizesinformation regarding the vesting of restricted stock held by out NamedExecutive Officer’sduring 2008.  No stock options wereexercised in 2008.

 
| ** **       | ** ** | **Stock awards**                     | ** ** |
|------------------|------------|--------------------------------------|------------|
| **Name**         | ** ** | **Number of shares vested  (#) (1)** | ** ** | **Value of shares vested  ($) (2)** | ** ** |
| John Fitzpatrick |       | 1,051                                |       | $ | — |   |
| Dale Herbst      |       | 701                                  |       | $ | — |   |
| Joel Beyer       |       | 421                                  |       | $ | — |   |

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(1)          Represents the number of restricted stockshares vested during 2008.

 

(2)          Represents the number of restricted stockshares vested during 2008, multiplied by the fair market value per share as of December 31,2008. It was determined that the value per share was nominal since the fairmarket value of the Company was less than the total debt and preferred stock,including dividends accrued at the Parent company.

 

 

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**PensionBenefits**

 

The Company has no pension benefit plan.

 

**Non-QualifiedDeferred Compensation**

 

The Company has no non-qualified deferred compensation plan.

 

**EmploymentAgreements**

 

On December 11,2006, Parent and a newly formed wholly owned subsidiary of Parent (“MergerCo”),in anticipation of the consummation of the Transaction entered into employmentagreements (each an “Employment Agreement”) with the Messrs. JohnFitzpatrick, as Chief Executive Officer, Dale Herbst, as Chief FinancialOfficer, and Joel Beyer, as Vice President of Operations (PrimeWood division). Pursuantto each Employment Agreement, upon consummation of the Transaction, theEmployment Agreements of Messrs. Fitzpatrick, Herbst and Beyer supersededand preempted their respective 2003 Agreements. On January 9, 2007, byoperation of law upon consummation of the Transaction, each EmploymentAgreement was assigned by MergerCo to the Company.

 

The table belowsummarizes certain severance provisions in the Employment Agreements of ourNamed Executive Officers. The Named Executive Officers will receive no cashseverance payments for termination with cause, voluntary termination withoutgood reason, disability, or any transaction involving a change in control ofParent or the Company.

 
| **Name**          | ** ** | **Benefit**                                | ** ** | **Termination without Cause, for Good Reason or  due to Disability**                                              |
|-------------------|------------|--------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|
| John  Fitzpatrick |       | Cash  severance and continued benefits (1) |       | $644,400

(plus,  under certain circumstances, a pro rata portion of the current year’s bonus)  (2) (3) |
| Dale  Herbst      |       | Cash  severance and continued benefits (1) |       | $150,000

(plus,  under certain circumstances, a pro rata portion of the current year’s bonus)  (3) (4) |
| Joel  Beyer       |       | Cash  severance and continued benefits (1) |       | $144,200

(plus,  under certain circumstances, a pro rata portion of the current year’s bonus)  (3) (4) |

----

(1)          Executives areentitled to continued salary payments and benefits through their applicableseverance period (24 months for Mr. Fitzpatrick and 12 months for Messrs. Herbstand Beyer).

 

(2)          If Mr. Fitzpatrickis entitled to 24 months of continued salary if he terminated without cause orif he resigns for good reason or as a result of a disability.

 

(3)          Executives are entitledto a pro rata portion (based on the number of calendar days of employmentduring such fiscal year) of any annual bonus that would have payable to theexecutive during the year in which the executive is terminated without cause orresigns for good reason or due to a disability; provided that such bonusamounts are only payable if the executive is employed by the Company for sixmonths or more of the applicable calendar year.

 

(4)          Messrs. Herbstand Beyer are entitled to 12 months of continued salary if he terminatedwithout cause or if he resigns for good reason or as a result of a disability.

 

***JohnFitzpatrick.*******Mr. Fitzpatrick’sEmployment Agreement, subject to subsequent annual adjustments, provides for abase salary of $322,200 and an annual performance-based bonus of up toone-hundred thirty percent (130%) of his base salary as of December 31,2008. Mr. Fitzpatrick’s Employment Agreement provides for annual reviewsof Mr. Fitzpatrick’s base salary to determine whether an adjustment tohis annual base salary is appropriate. Mr. Fitzpatrick’s EmploymentAgreement provides that Mr. Fitzpatrick, subject to his eligibility, beincluded in all employee benefit plans established by the Company. Mr. Fitzpatrick’sEmployment Agreement may be terminated at any time, with or without cause, byeither party. Mr. Fitzpatrick’s Employment Agreement also containsnon-disclosure provisions and prohibits Mr. Fitzpatrick from competingwith the Company during the term of his employment and for a period of twoyears thereafter. Mr. Fitzpatrick holds shares of restricted stockthat are subject to certain repurchase rights in favor of Parent and OlympusGrowth Fund IV, L.P. (as Parent’s majority shareholder) in the event that theholder of such shares ceases to be employed by Parent and its subsidiaries forany reason. The repurchase price for unvested shares of restricted stock is thelesser of the holder’s original cost to purchase such shares and fair marketvalue, whereas the repurchase price for vested shares of restricted stock isthe fair

 

 

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marketvalue of the shares unless the holder is terminated for cause, in which casethe repurchase price for vested shares is the lesser of the holder’s originalcost and fair market value.

 

***Dale Herbst.*******Mr. Herbst’sEmployment Agreement, subject to subsequent annual adjustments, provides for abase salary of $150,000 and an annual performance-based bonus of up to ninetypercent (90%) of his base salary as of December 31, 2008. Mr. Herbst’sEmployment Agreement provides for annual reviews of Mr. Herbst’s base salary to determine whether anadjustment to his annual base salary is appropriate. Mr. Herbst’sEmployment Agreement provides that Mr. Herbst, subject to his eligibility,be included in all employee benefit plans established by the Company. Mr. Herbst’sEmployment Agreement may be terminated at any time, with or without cause, byeither party. Mr. Herbst’s Employment Agreement also containsnon-disclosure provisions and prohibits Mr. Herbst from competing with theCompany during the term of his employment and for a period of one yearthereafter. Mr. Herbst holds shares of restricted stock thatare subject to certain repurchase rights in favor of Parent and Olympus GrowthFund IV, L.P. (as Parent’s majority shareholder) in the event that the holderof such shares ceases to be employed by Parent and its subsidiaries for anyreason. The repurchase price for unvested shares of restricted stock is thelesser of the holder’s original cost to purchase such shares and fair marketvalue, whereas the repurchase price for vested shares of restricted stock isthe fair market value of the shares unless the holder is terminated for cause,in which case the repurchase price for vested shares is the lesser of theholder’s original cost and fair market value.

 

***Joel Beyer.*******Mr. Beyer’sEmployment Agreement, subject to subsequent annual adjustments, provides for abase salary of $144,200 and an annual performance-based bonus of up to eightypercent (80%) of his base salary as of December 31, 2008. Mr. Beyer’sEmployment Agreement provides for annual reviews of Mr. Beyer’s basesalary to determine whether an adjustment to his annual base salary isappropriate. Mr. Beyer’s Employment Agreement provides that Mr. Beyer,subject to his eligibility, be included in all employee benefit plansestablished by the Company. Mr. Beyer’s Employment Agreement may beterminated at any time, with or without cause, by either party. Mr. Beyer’sEmployment Agreement also contains non-disclosure provisions and prohibits Mr. Beyerfrom competing with the Company during the term of his employment and for aperiod of one year thereafter. Mr. Beyer holds shares of restricted stockthat are subject to certain repurchase rights in favor of Parent and OlympusGrowth Fund IV, L.P. (as Parent’s majority shareholder) in the event that theholder of such shares ceases to be employed by Parent and its subsidiaries forany reason. The repurchase price for unvested shares of restricted stock is thelesser of the holder’s original cost to purchase such shares and fair marketvalue, whereas the repurchase price for vested shares of restricted stock is thefair market value of the shares unless the holder is terminated for cause, inwhich case the repurchase price for vested shares is the lesser of the holder’soriginal cost and fair market value.

 

# **DirectorsCompensation**

# ** **

Our directors do not receive compensation for attending board meetings,other than reimbursement of reasonable out-of-pocket expenses incurred inconnection with attending any board meeting or any committee meetings.

 

**Item 12. Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters**

 

As of March 17, 2009, all of the Company’s capital stock is owned by Parent. As ofMarch 17, 2009, the following table sets forth certain informationregarding the beneficial ownership of Parent’s Series A Preferred Stock, parvalue $0.01 per share (“ParentPreferred”), and Common Stock,par value $0.01 per share (“ParentCommon”), by (i) eachperson known to us to beneficially own more than 5% of the outstanding sharesof either Parent Preferred and Parent Common; (ii) each of our directors; (iii) eachnamed executive officer and (iv) all of our executive officers anddirectors as a group. Beneficial ownership is determined in accordance with therules of the SEC. These rules generally attribute beneficialownership of shares to persons who possess sole or shared voting and/orinvestment power with respect to the shares shown as beneficially owned. Unlessotherwise indicated in the footnotes to this table, the address of all listedstockholders is c/o WII Components, Inc., 525 Lincoln Avenue, SE, St.Cloud, Minnesota 56304.

 

 

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| ** **                                                  | ** ** | **Parent Preferred**           | ** ** | **Parent Common**                  | ** ** |
|-------------------------------------------------------------|------------|--------------------------------|------------|------------------------------------|------------|
| **Name of  Beneficial Owner**                               | ** ** | **Shares  Beneficially Owned** | ** ** | **Percentage  Beneficially Owned** | ** ** | **Shares  Beneficially Owned** | ** ** | **Percentage  Beneficially Owned** | ** ** |
| Olympus Funds(1)                                            |       | 75,395                         |       | 93                                 | %          | 609,949 |   | 86 | % |
| Robert S. Morris(1)                                         |       | 75,395                         |       | 93                                 | %          | 609,949 |   | 86 | % |
| Louis J. Mischianti(1)                                      |       | 75,395                         |       | 93                                 | %          | 609,949 |   | 86 | % |
| L. David Cardenas(1)                                        |       | 75,395                         |       | 93                                 | %          | 609,949 |   | 86 | % |
| Keith Heffernan(1)                                          |       | 75,395                         |       | 93                                 | %          | 609,949 |   | 86 | % |
| John Fitzpatrick(2)                                         |       | 940                            |       | 1                                  | %          | 16,014 |   | 2 | % |
| Dale Herbst(3)                                              |       | 212                            |       |                               | *          | 7,317 |   | 1 | % |
| Joel Beyer(4)                                               |       | 169                            |       |                               | *          | 4,732 |   |   | * |
| All directors and executive officers as a group (7 persons) |       | 76,716                         |       | 95                                 | %          | 638,012 |   | 90 | % |

----

*                 Represents less than 1% of theoutstanding voting capital stock.

 

(1)          Consists of 75,003.855 shares of ParentPreferred and 606,778.23 shares of Parent Common beneficially owned by OlympusGrowth Fund IV, L.P. and 392.059 shares of Parent Preferred and 3,171.74 sharesof Parent Common beneficially owned by Olympus Executive Fund, L.P. The sharesbeneficially owned by Olympus Growth Fund IV, L.P. are beneficially ownedindirectly by OGP IV, LLC, the general partner of Olympus Growth Fund IV, L.P.,and by Mr. Morris, the managing member of OGP IV, LLC. The sharesbeneficially owned by Olympus Executive Fund, L.P. are beneficially ownedindirectly by OEF, L.P., the general partner of Olympus Executive Fund, L.P.,and by RSM, Corporation, the managing general partner of OEF, L.P, and byRobert S. Morris, the president (and sole stockholder) of RSM, Corporation. Mr. Morris,a member of Parent’s board of directors, is the managing partner ofOlympus Partners and is the managing member of OGP IV, LLC and is the president(and sole stockholder) of the managing general partner of OEF, L.P., and, insuch capacities, has voting and investment power with respect to all sharesheld by the Olympus Funds and has a pecuniary interest in certain of thoseshares. Mr. Mischianti, a member of Parent’s board of directors, is apartner of Olympus Partners and is a member of OGP IV, LLC, and, in suchcapacities, has a pecuniary interest in certain of those shares. Messrs. Cardenasand Heffernan, also members of Parent’s board of directors, are partners ofOlympus Partners and are members of OGP IV, L.L.C. and, in such capacities,have a pecuniary interest in certain of the shares held by the Olympus Funds. Eachof Messrs. Morris, Mischianti, Cardenas and Heffernan disclaims beneficialownership of the shares owned by these entities, except to the extent of theirproportionate pecuniary interest therein. The address for Olympus Partners, theOlympus Funds and Messrs. Morris, Mischianti, Cardenas and Heffernan isc/o Olympus Partners, Metro Center, One Station Place, Stamford, Connecticut,06902.

 

(2)          Mr. Fitzpatrick’s shares are held bythe John P Fitzpatrick Revocable Trust U/A 12/31/01. Mr. Fitzpatrick is atrustee of the John P Fitzpatrick Revocable Trust U/A 12/31/01 and Mr. Fitzpatrickand members of his family are the primary beneficiaries. Mr. Fitzpatrick’s shares include Parent Common shares of7,605 and Parent Common Restricted shares of 8,409.

 

(3)          Mr. Herbst’s shares include Parent Common shares of1,711 and Parent Common Restricted shares of 5,606.

 

(4)          Mr. Beyer’s shares include Parent Common shares of1,369 and Parent Common Restricted shares of 3,363.

 

# **Item13. Certain Relationships and Related Party Transactions, and DirectorIndependence**

# ** **

**StockholdersAgreement**

 

On January 9, 2007, Parent and each of Parent’s stockholdersentered into a Stockholders Agreement (the “Parent Stockholders Agreement”). Underthe provisions of the Parent Stockholders Agreement, the authorized number ofdirectors on Parent’s board of directors is established at 5 directors (orsuch higher number as determined by Olympus Growth Fund IV, L.P.) and all ofthe parties agree to elect as members of our board of directors eachrepresentative designated from time to time by Olympus Growth Fund IV, L.P., asa nominee. Pursuant to the Parent Stockholders Agreement, Parent**’**s stockholders are subject to certaintransfer restrictions, including rights of first refusal and co-sale rights oncertain transfers by Olympus Growth Fund IV, L.P. The Olympus Growth Fund IV,L.P. (as the holders of a majority of Parent’s capital stock) and board ofdirectors of Parent have the right to force all of the other stockholders toparticipate in a sale event involving a change of control of Parent or all orsubstantially all of Parent**’**s assets on a consolidated basis. In addition, subjectto certain exceptions, all stockholders of Parent have pre-emptive rights onfuture sales of equity securities of Parent. Finally, pursuant to the ParentStockholders Agreement, Parent granted certain customary registration rights,including demand, piggyback and resale shelf registration rights. Demandregistration rights were granted only to the holders of a majority of Parent**’**s capital stock.

 

**AdvisoryServices Agreement**

 

The Parent entered into an Advisory Services Agreement, dated as of January 9,2007, with Olympus Advisory Partners, Inc., an affiliate of the OlympusFunds (“OAP”).  Under this agreement, OAP provides Parent and its subsidiaries,including the Company, with advice regarding corporate, business and financialstrategy, potential acquisitions, financial management and other issues. In addition to a quarterly consulting fee, in the event that Parent orany of its subsidiaries

 

 

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consummate acapital transaction (such as an acquisition of another company, a sale ofParent or any of its subsidiaries, or significant events relating to changes inthe capital structure of Parent and its subsidiaries), Parent is required topay OAP a fee for its role as Parent’s advisor.  Under the terms of thisagreement, Parent is obligated to pay OAP a quarterly advisory fee of $150,000,unless lowered by OAP.  In 2008, OAPlowered the quarterly fee payable by Parent for the third and fourth quartersto $135,000.  Accordingly, in 2008, theCompany paid $570,000 to OAP on account of Parent pursuant to thisagreement.  In connection with theamendments to the Note Purchase Agreements related to the Parent Notes, the$150,000 quarterly fee has been deferred by the affiliate for 2009 and will bepayable in 2010 or thereafter.  Although neither the Company nor any ofits subsidiaries is party to this Agreement, the Company has recorded thisexpense in its statement of operations because most of the services relate toits operations. Certain of the Company’s debt agreements provide restrictionson the ability of the Company to make distributions to or on account of theParent.  See “Management’s Discussion and Analysis of Financial Conditionand Results of Operations - Liquidity and Capital Resources” for a detaileddiscussion of such restrictions.

 

**IndemnificationAgreements**

 

We have entered into indemnification agreements with our executiveofficers, John Fitzpatrick and Dale Herbst. The form of indemnificationagreement provides that the directors and officers will be indemnified forexpenses incurred because of their status as a director or officer, asapplicable, to the fullest extent permitted by Delaware law and our certificateof incorporation and bylaws.

 

Our certificate of incorporation, as amended, contains a provisionpermitted by Delaware law that generally eliminates the personal liability ofdirectors for monetary damages for breaches of their fiduciary duty, includingbreaches involving negligence or gross negligence in business combinations,unless the director has breached his or her duty of loyalty, failed to act ingood faith, engaged in intentional misconduct or a knowing violation of law,paid a dividend or approved a stock repurchase or redemption in violation ofthe Delaware General Corporation Law or obtained an improper personal benefit. Thisprovision does not alter a director’s liability under the federal securitieslaws and does not affect the availability of equitable remedies, such as aninjunction or rescission, for breach of fiduciary duty. Our bylaws provide thatdirectors shall be, and in the discretion of the board of directors, ourofficers and non-officer employees may be, indemnified to the fullest extentauthorized by Delaware law, as it now exists or may in the future be amended,against all expenses and liabilities reasonably incurred in connection withservice for or on behalf of the company. Our bylaws also provide that the rightof our directors and officers to indemnification shall be a contract right andshall not be exclusive of any other right now possessed or hereafter acquiredunder any statute, bylaw, agreement, vote of stockholders, directors orotherwise.

 

Insofar as indemnification for liabilities arising under the SecuritiesAct may be permitted to our directors, officers and persons controlling us asdescribed above, we have been advised that in the opinion of the SEC suchindemnification is against public policy as expressed in the Securities Act andis therefore unenforceable. At present, there is no pending material litigationor proceeding involving any of our directors, officers, employees or agents inwhich indemnification will be required or permitted.

 

**Policiesand Procedures for Related Party Transactions**

 

As a privatecompany, our board of directors generally reviews our related partytransactions, although we have not historically had formal policies andprocedures regarding the review and approval of related party transactions

 

**DirectorIndependence**

 

The boards of Parent and the Company arecurrently composed of five directors, none of whom would qualify as anindependent director based on the definition of independent director set forthin Rule 4200(a) (15) of the NASDAQ Marketplace rules. Becauseaffiliates of Olympus Funds own approximately 87% of the voting stock ofParent, and we do not otherwise have any securities listed on any securitiesexchange, we are not subject to corporate governance rules that requirethat a board of directors be composed of a majority of independent directors.

 

**Item 14. Principal Accountant Feesand Services**

 

Aggregate fees billed by the Company’s principal accounting firm, GrantThornton LLP, for the fiscal years ended December 31, 2008, and 2007,respectively:

 
| ** **                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Audit Fees (a)                     |       | $                                | 140,000    |   | $ | 119,000 |   |
| Audit-Related Fees                 |       | —                           |       | — |   |
| Total audit and audit-related fees |       | 140,000                          |       | 119,000 |   |
| Tax Fees                           |       | —                           |       | — |   |
| Total Fees                         |       | $                                | 140,000    |   | $ | 119,000 |   |

----

(a)          Fees for audit services:

 

·                  Billed in 2008 for the audit of the Company’s annual financial statements and reviewsof the Company’s quarterly financial statements

 

·                  Billed in 2007 for the audit of the Company’s annual financial statements and reviewof the Company’s quarterly financial statements ended September 30,2007

 

 

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**PreapprovalPolicies**

 

The Company is not required to have a preapproval policy for servicesperformed by our independent registered pubic accounting firm.

 

**PART IV**

 

**Item 15. Exhibits, Financial Statement Schedules**

 

(a)                                  List of Financial Statements, FinancialStatement Schedules and Exhibits

 

(1)  *Financial Statements*. Consolidated Financial Statements of WII Components, Inc. and Subsidiariesas of December 31, 2008 and 2007 and for the years ended December 31,2008, 2007 and 2006.

 

Report of Independent Registered Public AccountingFirms

 

Consolidated Balance Sheets

 

Consolidated Statements of Earnings

 

Consolidated Statements of Stockholders’ Equity

 

Consolidated Statements of Cash Flows

 

Notes to Consolidated Financial Statements

 

(2)  *FinancialStatement Schedules*.  All schedules for which provision is madein the applicable accounting regulations of the SEC have been omitted as notrequired or not applicable, or the information required has been includedelsewhere by reference in the financial statements and related notes, exceptfor Schedule II.

 

(3)  *Exhibits:*

 
| **Exhibit No.** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.1                  |       | Amended and  Restated Agreement and Plan of Merger dated January 5, 2007, by among  WII Holding, Inc., a Delaware corporation, WII Merger Corporation, a  Delaware corporation, WII Components, Inc. and Behrman Capital III,  L.P., solely in its capacity as stockholders’ representative (incorporated herein by  reference to Exhibit 2.1 to the Company’s Annual  Report on Form 10-K filed March 30, 2007, File No. 333-115490) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.1                  |       | Third Amended  and Restated Certificate of Incorporation of WII Components, Inc.  (incorporated herein by reference to Exhibit 3.11 to the Company’s Annual  Report on Form 10-K filed March 30, 2007, File No. 333-115490)                                                                                                                                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.2                  |       | Bylaws of WII  Merger Corporation, which are the current Bylaws of WII Components, Inc.  as a result of the Amended and Restated Agreement and Plan of Merger  (incorporated herein by reference to Exhibit 3.12 to the Company’s Annual  Report on Form 10-K filed March 30, 2007, File No. 333-115490)                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.3                  |       | Restated  Articles of Incorporation of Woodcraft Industries, Inc. (incorporated  herein by reference to Exhibit 3.3 to the Company’s Registration Statement on  Form S-4, as amended, File No. 333-115490)                                                                                                                                                                                                                                                |

 

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| 3.4    |   | Restated Bylaws  of Woodcraft Industries, Inc. (incorporated herein by reference to  Exhibit 3.4 to the Company’s Registration Statement on  Form S-4, as amended, File No. 333-115490)                                                                                                                                                                                                                                                                                                                  |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 3.5    |   | Articles of  Incorporation of PrimeWood, Inc. (incorporated herein by reference to  Exhibit 3.5 to the Company’s Registration Statement on  Form S-4, as amended, File No. 333-115490)                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 3.6    |   | Bylaws of  PrimeWood, Inc. (incorporated herein by reference to Exhibit 3.6 to  the Company’s Registration Statement on Form S-4, as  amended, File No. 333-115490)                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 3.7    |   | Certificate of  Incorporation of Brentwood Acquisition Corp. (incorporated herein by  reference to Exhibit 3.7 to the Company’s Registration Statement on  Form S-4, as amended, File No. 333-115490)                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 3.8    |   | Bylaws of  Brentwood Acquisition Corp. (incorporated herein by reference to  Exhibit 3.8 to the Company’s Registration Statement on  Form S-4, as amended, File No. 333-115490)                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.1    |   | Indenture dated  as of February 18, 2004 by and among WII Components, Inc., and U.S.  Bank National Association (incorporated herein by reference to  Exhibit 4.3 to the Company’s Registration Statement on  Form S-4, as amended, File No. 333-115490)                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.2    |   | Registration  Rights Agreement dated as of February 18, 2004, by and among WII  Components, Inc. and the Initial Purchasers as defined therein (incorporated  herein by reference to Exhibit 4.5 to the Company’s Registration Statement on  Form S-4, as amended, File No. 333-115490)                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.3    |   | Form of WII  Components, Inc. 10% Senior Note due 2012 (incorporated herein by  reference to Exhibit 4.3 to the Company’s Registration Statement on  Form S-4, as amended, File No. 333-115490)                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.4    |   | Supplemental  Indenture, dated as of June 25, 2004 by and among WII  Components, Inc. and the Initial Purchasers as defined therein  (incorporated herein by reference to Exhibit 4.7 to the Company’s Amendment No. 1 to the  Registration Statement on Form S-4, as amended, File  No. 333-115490)                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.1   |   | WII  Holdings, Inc. 2003 Stock Option and Grant Plan (incorporated herein by  reference to Exhibit 10.1 to the Company’s Registration Statement on  Form S-4, as amended, File No. 333-115490) **                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2   |   | Form of  Director Indemnification Agreement (incorporated herein by reference to  Exhibit 10.2 to the Company’s Registration Statement on  Form S-4, as amended, File No. 333-115490)                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3   |   | First Lien Senior Secured Credit Agreement, dated as of  January 9, 2007, by and among WII Components, Inc. (as  successor-in-interest to WII Merger Corporation) as Borrower and Credit  Suisse, for itself and as Administrative Agent, Swing Line Lender, an L/C  Issuer and as Collateral Agent for all Lenders, and the Lenders Party thereto  (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly  Report on Form 10-Q filed May 23, 2007, File No. 333-115490) |

 

 

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| 10.4   |   | Amendment No. 1 To The Credit Agreement, dated as of  February 7, 2007, by and among WII Components, Inc., as Borrower,  and Credit Suisse, for itself and as Administrative Agent, Swing Line Lender,  an L/C Issuer and as Collateral Agent (incorporated herein by reference to  Exhibit 10.2 to the Company’s Quarterly  Report on Form 10-Q filed May 23, 2007, File No. 333-115490)                                                                  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.5   |   | Employment Agreement dated December 11, 2006, between WII  Components, Inc. (as successor-in-interest to WII Merger Corporation),  WII Holding, Inc. and John Fitzpatrick (incorporated herein by reference  to Exhibit 10.3 to the Company’s Quarterly  Report on Form 10-Q filed May 23, 2007, File No. 333-115490)  **                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.6   |   | Employment Agreement dated December 11, 2006, between WII  Components, Inc. (as successor-in-interest to WII Merger Corporation),  WII Holding, Inc. and Dale Herbst (incorporated herein by reference to  Exhibit 10.4 to the Company’s Quarterly  Report on Form 10-Q filed May 23, 2007, File No. 333-115490)  **                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.7   |   | Employment Agreement dated December 11, 2006, between WII  Components, Inc. (as successor-in-interest to WII Merger Corporation),  WII Holding, Inc. and Joe Beyer (incorporated herein by reference to  Exhibit 10.5 to the Company’s Quarterly  Report on Form 10-Q filed May 23, 2007, File  No. 333-115490) **                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.8   |   | Restricted Stock  Agreement dated August 31, 2007, between WII Holding, Inc.and John Fitzpatrick (incorporated  herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q  filed November 13, 2007, File No. 333-115490) **                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.9   |   | Restricted Stock  Agreement dated August 31, 2007, between WII Holding, Inc. and Dale  Herbst (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q  filed November 13, 2007, File No. 333-115490) **                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.10  |   | Restricted Stock  Agreement dated August 31, 2007, between WII Holding, Inc. and Joe  Beyer (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q  filed November 13, 2007, File No. 333-115490) **                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.11  |   | Amendment  No. 3 To The Credit Agreement, dated as of February 19, 2008, by  and among WII Components, Inc., as Borrower, the lenders party thereto  and Credit Suisse, acting through one or more of its branches, or any  Affiliate thereof, as Administrative Agent, Swing Line Lender, an L/C Issuer  and Collateral Agent (incorporated herein by reference to Exhibit 10.1  to the Company’s Form 8-K filed February 20, 2007, File  No. 333-115490) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.12  |   | Amendment  No. 2 To The Credit Agreement, dated as of June 12, 2007, by and  among WII Components, Inc., as Borrower, the lenders party thereto and  Credit Suisse, acting through one or more of its branches, or any Affiliate  thereof, as Administrative Agent, Swing Line Lender, an L/C Issuer and  Collateral Agent (incorporated by reference to  Exhibit 10.12 the Company’s Annual Report on Form 10-K for the  fiscal year ended December 31, 2007). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.13  |   | Purchase and  Exchange Agreement dated April 9, 2003 by and among WII  Holdings, Inc. and The Investors and Management Stockholders as defined  therein (incorporated herein by reference to Exhibit 2.1 to the Company’s Registration Statement on  Form S-4, as amended, File No. 333-115490)                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.14  |   | Amended and  Restated Credit Agreement dated as of September 23, 2005 by and among  WII Components, Inc., Antares Capital Corporation, and the Financial  Institutions party thereto (incorporated herein by reference to  Exhibit 10.14 to the Company’s Quarterly Report on Form 10-Q,  as amended, File No. 333-115490)                                                                                                                                           |

 

 

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| 10.15  |   | Bonus Letter  Agreement between the Company and John Fitzpatrick, dated May 31, 2006 (incorporated  by reference to Exhibit 10.1 of the Company’s Quarterly Report on  Form 10-Q for the period ending June 30, 2006)**                                                                                           |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.16  |   | Option Agreement  dated May 31, 2006, between the Company and John Fitzpatrick (incorporated  by reference to Exhibit 10.2 of the Company’s Quarterly Report on  Form 10-Q for the period ending June 30, 2006)**                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.17  |   | Option Agreement  dated May 31, 2006, between the Company and John Fitzpatrick (incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the period ending  June 30, 2006)**                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| *10.18 |   | Amendment  No. 4 To The Credit Agreement, dated as of March 30, 2009, by and  among WII Components, Inc., as Borrower, the lenders party thereto and  Credit Suisse, acting through one or more of its branches, or any Affiliate  thereof, as Administrative Agent, Swing Line Lender, an L/C Issuer and  Collateral Agent |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| *12.1  |   | Statement  Regarding Computation of Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 21.1   |   | Subsidiaries of  the Registrant (incorporated herein by reference to Exhibit 21.1 to the  Company’s  Amendment No. 1 to the Registration Statement on Form S-4, as  amended, File No. 333-115490)                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| *31.1  |   | Certification of  Chief Financial Officer, Treasurer, and Secretary of WII  Components, Inc., pursuant to Rules 13a-15(e) and 15d-15(e),  as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| *31.2  |   | Certification of  President and Chief Executive Officer of WII Components, Inc., pursuant  to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| *32.1  |   | Certification of  Chief Financial Officer, Treasurer, and Secretary of WII  Components, Inc., pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| *32.2  |   | Certification of  President and Chief Executive Officer of WII Components, Inc., pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Actof 2002                                                                                                                                  |

----

*                 Filed herewith.

 

**          Compensation arrangement.

 

 

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** **

**SCHEDULE II. VALUATION AND QUALIFYINGACCOUNTS**

 

**Allowance for Doubtful Accounts**

 

The transactions in theallowance for doubtful accounts for the years ended December 31, 2008,2007 and 2006 were as follows (in thousands):

 
| ** **                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Balance, beginning of year |       | $131                             |       | $104 |   | $118 |   |
| Provision                  |       | 139                              |       | 50 |   | 21 |   |
| Write-offs                 |       | (31                              | )          | (23 | ) | (35 | ) |
| Balance, end of year       |       | $239                             |       | $131 |   | $104 |   |

 

 

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**Item 16. Signatures**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this Annual Report to be signed on itsbehalf by the undersigned thereunto duly authorized, this 31st day of March 2009:

 

| ** ** | **WII  COMPONENTS, INC.** |
|------------|---------------------------|
| ** ** | ** **                | ** ** |
| ** ** | ** **                | ** ** |
|       | By:                       | /s/ John Fitzpatrick |
|       |                      | John Fitzpatrick,  President and Chief Executive Officer |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Annual Report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 
| **Signature**            | ** ** | **Title**                                                            | ** ** | **Date**            |
|--------------------------|------------|----------------------------------------------------------------------|------------|---------------------|
|                     |       |                                                                 |       |                |
| /s/ John Fitzpatrick     |       | President and Chief  Executive Officer (Principal Executive Officer) |       | March 31, 2009 |
| John Fitzpatrick         |       |                                                                 |       |                |
|                     |       |                                                                 |       |                |
| /s/ Dale B.  Herbst      |       | Chief Financial  Officer, Treasurer and Secretary                    |       | March 31, 2009 |
| Dale B. Herbst           |       | (Principal Financial  Officer and Principal Accounting Officer)      |       |                |
|                     |       |                                                                 |       |                |
| /s/ Robert S.  Morris    |       | Director                                                             |       | March 31, 2009 |
| Robert S. Morris         |       |                                                                 |       |                |
|                     |       |                                                                 |       |                |
| /s/ Louis J.  Mischianti |       | Director                                                             |       | March 31, 2009 |
| Louis J.  Mischianti     |       |                                                                 |       |                |
|                     |       |                                                                 |       |                |
| /s/ L. David  Cardenas   |       | Director                                                             |       | March 31, 2009 |
| L. David  Cardenas       |       |                                                                 |       |                |
|                     |       |                                                                 |       |                |
| /s/ Keith  Heffernan     |       | Director                                                             |       | March 31, 2009 |
| Keith Heffernan          |       |                                                                 |       |                |

 

 

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