Table of Contents

 

 

 

**UNITED STATESSECURITIES 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, 2009**

 
| **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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**WII COMPONENTS, 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)

** **

Securities registeredpursuant 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 markwhether the registrant has submitted electronically and posted on its corporateWebsite, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).  Yes o  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.  See definition of “large accelerated filer,” “acceleratedfiler,” and “smaller reporting company” in Rule 12b-2 of the ExchangeAct.:

 

| 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, 2009: not applicable.

 

As of  March 17, 2010, 100 shares of commonstock 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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**WIICOMPONENTS, INC.**

 

**FORM 10-K**

**YearEnded December 31, 2009**

 

**INDEX**

 
| **PART I**                                                                                                              |       |       |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|                                                                                                                         |       |       |
| Item 1. Business                                                                                                             |       | 1          |
| Item 1A. Risk  Factors                                                                                                       |       | 3          |
| Item 1B.  Unresolved Staff Comments                                                                                          |       | 8          |
| Item 2. Properties                                                                                                           |       | 8          |
| Item 3. Legal  Proceedings                                                                                                   |       | 9          |
| Item 4. Reserved                                                                                                             |       | 9          |
|                                                                                                                         |       |       |
| **PART II**                                                                                                             | ** ** | ** ** |
|                                                                                                                         |       |       |
| Item  5. Market For Registrant’s  Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities |       | 9          |
| Item 6. Selected Financial Data                                                                                              |       | 10         |
| Item 7. Management’s Discussion and Analysis of Financial Condition and  Results of Operations                          |       | 11         |
| Item 7A. Quantitative and Qualitative Disclosures  about Market Risk                                                         |       | 21         |
| Item 8. Financial Statements and Supplementary Data                                                                          |       | 22         |
| Item 9. Changes in and Disagreements With Accountants  on Accounting Financial Disclosure                                    |       | 40         |
| Item 9A(T). Controls and Procedures                                                                                          |       | 40         |
| Item  9B. Other Information                                                                                                  |       | 40         |
|                                                                                                                         |       |       |
| **PART III**                                                                                                            |       |       |
|                                                                                                                         |       |       |
| Item 10. Directors, Executive Officers and Corporate  Governance                                                             |       | 40         |
| Item 11. Executive Compensation                                                                                              |       | 42         |
| Item 12. Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                     |       | 49         |
| Item 13. Certain Relationships and Related Party  Transactions, and Director Independence                                    |       | 50         |
| Item 14. Principal Accountant Fees and Services                                                                              |       | 51         |
|                                                                                                                         |       |       |
| **PART IV**                                                                                                             |       |       |
|                                                                                                                         |       |       |
| Item 15. Exhibits, Financial Statement Schedules                                                                             |       | 52         |
| Item  16. Signatures                                                                                                         |       | 57         |

 

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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*In this report, the terms “WIIComponents,” “we,” “our,” “Company,” or “us” refer to WII Components, Inc.and its subsidiaries on a consolidated basis and their respective predecessors,unless otherwise indicated or the context otherwise requires.  In April 2003, WII Components, Inc.was formed by a group of investors to acquire Woodcraft Industries, Inc.,or Woodcraft, and its subsidiaries, PrimeWood, Inc., or PrimeWood, andBrentwood Acquisition Corp., or Brentwood. On January 9, 2007, WII Components, Inc. became a wholly ownedsubsidiary of WII Holding, Inc., 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.  WII Components conducts all of its operationsthrough its direct subsidiary, Woodcraft, and its indirect subsidiaries,PrimeWood, Brentwood and Grand Valley Acquisition, Inc., or GrandValley.  Grand Valley was merged with andinto Woodcraft Industries, Inc. on December 31, 2006.*

 

**PART I**

 

# **Item 1. Business**

 

**Our Company**

 

We believe we are one of the leading manufacturers ofhardwood cabinet doors, hardwood components and engineered wood products in theUnited States.  In 2009, we generatedapproximately 93% of our sales from the kitchen and bath cabinet manufacturingindustry.  We believe our reputation forhigh quality and reliable performance has enabled us to establish strong,long-standing relationships with our customers, which include most of the topcabinet manufacturers in the United States. Our customers, in turn, distribute their products through various saleschannels, including specialty kitchen and bath cabinet dealers, home centerretailers and homebuilders.  We generatednet sales of approximately $32.2 million for the three months ended December 31,2009 and approximately $130.5 million for the year ended December 31,2009.

 

We believe that we have one of the broadest productofferings of doors and related components for the kitchen and bath cabinetmanufacturing industry.  Our productsinclude: (1) hardwood cabinet door components, face frames and drawerfronts, (2) fully assembled hardwood cabinet doors, (3) rigidthermofoil, or RTF, cabinet doors and components, (4) veneer raisedpanels, or VRPs, and (5) a variety of laminated and profile-wrappedcomponents.  We produce over 100,000 SKUsfor our customers, representing a wide array of styles, sizes, designs and woodspecies.  In addition, we offer a varietyof value-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 twelve manufacturing facilities located inMinnesota, North Dakota, Ohio, Oregon, Pennsylvania, Kansas, North Carolina,West Virginia, and Kentucky that allow us to distribute our productsnationwide.  In 2005, we acquiredsubstantially all of the assets of Dimension Moldings, Inc., and as aresult of the acquisition we commenced operations at a second Ohio facilitylocated in Middlefield, Ohio.  In 2005,we also acquired a rough mill facility in Greenville, Pennsylvania andcommenced operations at a manufacturing facility in Lansing, Kansas.  In 2007, we commenced operations atmanufacturing 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 2008, we commenced operations at amanufacturing facility in Conover, North Carolina.  In the fourth quarter of 2009, we commencedoperations at a manufacturing facility in Moorefield, West Virginia that addsminimal production capacity to the Company. Overall, we have made substantial capital investments to broaden thescope of our manufacturing operations from rough milling through finalproduction, which maximizes our yield from raw materials and allows us to meetthe 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 senior management team has an average of19 years of industry experience and 18 years with our Company.  Our President and Chief Executive Officer,John Fitzpatrick, has over 25 years of experience in managingmanufacturing-based companies and has led our senior management team since July 2000.

 

**Our History**

 

Our subsidiary, Woodcraft Industries, Inc., wasfounded in 1945 in St. Cloud, Minnesota, and began as a manufacturer ofmillwork products, including store fixtures and shipping pallets.  In 1968, through an acquisition and byutilizing our millwork expertise, we began manufacturing kitchen cabinetcomponents.  In 1989, we entered the doorassembly business.  Over the past35 years, through strategic acquisitions and expansion of ourmanufacturing capabilities, we have become a leading U.S. 

 

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hardwood cabinet door and hardwood component manufacturer focusedprimarily on the kitchen and bath cabinet industry.  We acquired our PrimeWood subsidiary in 1998,our Brentwood subsidiary in 2002, our Grand Valley subsidiary in 2004, andsubstantially all of the assets of Dimension Moldings, Inc. in 2005.  On December 31, 2006, Grand Valley wasmerged with and into Woodcraft.  WIIComponents, Inc. was incorporated in Delaware in April 2003, inconnection with the acquisition of Woodcraft and its subsidiaries.

 

On January 9, 2007, WII Holding, Inc. (“Parent”)acquired all of the outstanding capital stock of WII Components, Inc.through the merger of a newly formed wholly owned subsidiary of Parent with andinto 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 beenservicing our top ten customers for an average of approximately 17 years, witha minimum of two years.  In 2009, salesto Masco Corporation and Elkay accounted for 43% and 17%, respectively, of ournet sales.  No other customer accountedfor more than 10% of our sales in 2009. We have experienced lower sales volume over the past three years withmost of our top ten customers due to the overall market decline related tolower demand for new homes and remodeling of existing homes.

 

**Sales and Marketing**

 

Substantially all of our sales are made directly tocabinet manufacturers without the use of third party sales representatives ordistributors.  Our sales and marketinggroup is organized primarily by product and geography.  The group includes a sales director for allproduct lines, a marketing director for hardwood products, and four accountmanagers.  Over the past few years, oursales and marketing efforts have been focused on strengthening relationshipswith our most important customers and introducing new products to targetedmarkets.  Due to our long-standingrelationships with our key customers, sales and marketing involvesrelationships 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 2009, as well as our other markets, includingstore fixtures.  In 2009, approximately99.7% of our net revenues resulted from sales in the United States, while thebalance resulted from sales in Canada and Mexico.

 

We do not rely on imported product components for anysignificant portion of our business. However, we do purchase imported components for use in our domesticmanufacturing process and for direct sale to our customers.  In 2009, our sales of imported productsaccounted for less than 1% of our total sales.

 

**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.

 

**Supply of Raw Materials**

 

The primary raw materials we purchase are green,kiln-dried, and semi-processed hardwood lumber, MDF, hardwood veneer and PVCfoil.  Hardwood lumber accounts for thelargest portion of our material costs. We purchase our lumber directly from hardwood mills, which allows us toboth leverage our scale and avoid the costs associated with intermediaries.  We purchase from a network of over 50regional mills throughout the Northern and Appalachian hardwood forest areas inclose proximity to our manufacturing facilities.  No single supplier accounted for more than 8%of our material purchases in 2009, and we are not dependent on any singlesupplier for any raw material product. Our top ten suppliers accounted for approximately 32% of the key rawmaterials we purchased in 2009.

 

We purchase a variety of species of hardwood lumber,with hard maple, cherry, and red oak accounting for our largest volumes.  The prices of the various species havefluctuated historically on independent supply and demand curves and are nothighly correlated to one another. Generally, we have been able to pass lumber price changes through to ourcustomers in a three to nine month time period by working in a partnership withthem.  Our ability to pass through theseprice changes to our customers is dependent on prevailing economic and competitiveconditions.

 

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**Competition**

 

We operate in the highly competitive kitchen and bathcabinet door and component industry.  Ourcompetitors include other independent kitchen and bath cabinet door andcomponent manufacturers and vertically integrated cabinet manufacturers whoproduce their own doors and components. We estimate that the cabinet door and component market segment in whichwe compete represented approximately $1.2 billion of the overall U.S.cabinet market in 2009.  We believe thatindependent cabinet door and component manufacturers, like us, accounted forapproximately $0.6 billion of this segment in 2009, while verticallyintegrated cabinet manufacturers accounted for the remainder.

 

We are one of the three largest manufacturers in theindependent cabinet component industry. We believe that in 2009 we accounted for approximately 23% of totaloutsourced cabinet door and component market sales, and together with ourprincipal competitors Conestoga Wood Products and Appalachian Wood Products,based on publicly available information and management estimates, accounted forapproximately 47% of this market in 2009.

 

**Environmental Matters**

 

Our operations and properties are subject to extensivefederal, state, local and foreign environmental laws relating to protection ofthe environment and human health and safety. Environmental laws and regulations are subject to frequent amendment andhave become more stringent over time.  Wecould incur in the future significant costs associated with compliance with, orliabilities under, environmental laws and regulations, including equipmentcosts, disposal costs, cleanup costs, civil and criminal penalties, injunctiverelief and denial or loss of, or imposition of significant restrictions on,environmental permits.  In addition, wecould in the future be subject to suit by private parties in connection withalleged violations of or liabilities under environmental laws and regulations.

 

**Employees**

 

As of December 31,2009, we had approximately 1,005 full-time employees, 7 part-time employees,and 50 leased employees.  Currently, noneof our employees are covered by a collective bargaining agreement.

 

**Item1A. Risk Factors**

 

Our ability to predictresults or the effect of certain events on our operating results is inherentlyuncertain.  Therefore, we wish to cautioneach reader of this annual report to carefully consider the following factorsand certain other factors discussed herein and in other past filings with theSecurities and Exchange Commission.

 

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

 

Salesto the kitchen and bath cabinet market accounted for approximately 93% of ourtotal sales for the year ended December 31, 2009.  Sales in this market are driven by new homeconstruction 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 andremodeling of existing homes.  During thesecond half of 2006, the home building, repair and remodeling industryexperienced a slowdown as a result of general economic conditions.  The slowdown has continued into 2009, and based on the Kitchen Cabinet ManufacturersAssociation data for 2009, the kitchen cabinet market is estimated to be downapproximately 28%.  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 andresults of operations.***

 

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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 financial crisis may also have an adverse effect on the U.S., which wouldhave a negative impact on demand for our products. In addition, tightening ofcredit markets may have an adverse 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 toa number of debt agreements, including our Senior Credit Facility, theindenture governing the Senior Notes and the purchase agreements governing thepay-in-kind notes issued by our Parent (the “Parent Notes”), which containcovenants that restrict our ability to incur indebtedness, pay dividends, makeinvestments, grant liens, sell our assets and engage in certain otheractivities.  In addition, our Senior Credit Facility and Parent Notesrequire us to comply with certain consolidated financial ratios and financialtests. Our ability to meet these financial ratios and financial tests may beaffected by events beyond our control, including a prolonged downturn in thehousing market.  On March 30, 2009,we amended 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.  On March 30, 2009, Parent also amended andobtained waivers to the Parent Notes to, among other things, waive the totalleverage ratio that we were required to maintain as of December 31, 2008,and to adjust the total leverage ratio we are required to maintain as of theend of each quarterly period through December 31, 2009 to reflect currenteconomic conditions.  On March 26,2010, we amended our Senior Credit Facility again to, among other things,adjust the interest coverage ratio and total leverage ratio that we arerequired to maintain as of March 31, 2010 and at the end of each quarterlyperiod through December 31, 2010. On March 26, 2010, Parent also amended the Parent Notes to, amongother things, adjust the total leverage ratio we are required to maintain as ofthe end of each quarterly period through December 31, 2010.  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.

 

***Toservice our indebtedness, we will require a significant amount of cash.  Our ability to generate cash depends on manyfactors beyond our control, and any failure to meet our debt serviceobligations could harm our business, financial condition and results ofoperations.***

 

Our cash interest expense for the year ended December 31, 2009 wasapproximately $11.0 million.  Our abilityto make payments on and to refinance our indebtedness, including the SeniorNotes, and to fund working capital needs and planned capital expenditures willdepend on our ability to generate cash in the future.  This, to a certain extent, is subject togeneral economic, financial, competitive, business, legislative, regulatory andother factors that are beyond our control.

 

If our business does not generate sufficient cash flow from operationsor if future borrowings are not available to us in an amount sufficient toenable us to pay our indebtedness, including the Senior Notes, or to fund ourother liquidity needs, we may need to refinance all or a portion of ourindebtedness, including the Senior Notes, on or before the maturity thereof,sell assets, reduce or delay capital investments or seek to raise additionalcapital, any of which could have a material adverse effect on ouroperations.  In addition, we may not beable to effect any of these actions, if necessary, on commercially reasonableterms or at all.  Our ability torestructure or refinance our indebtedness, including the Senior Notes, willdepend on the condition of the capital markets and our financial condition atsuch time.  Any refinancing of our debtcould be at higher interest rates and may require us to comply with moreonerous covenants, which could further restrict our business operations.  The terms of existing or future debtinstruments, including the indenture governing the Senior Notes, may limit orprevent us from taking any of these actions. Our inability to generate sufficient cash flow to satisfy our debtservice obligations, or to refinance or restructure our obligations oncommercially reasonable terms or at all, would have an adverse effect, whichcould 

 

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be material, on our business, financial condition andresults of operations, as well as on our ability to satisfy our obligations inrespect of the Senior Notes.

 

In addition, if we are unable to meet their debt service obligationsunder the Senior Notes, the holders of the Senior Notes would have the right tocause the entire principal amount of the Senior Notes to become immediately dueand payable.  If the amounts outstandingunder these instruments are accelerated, we cannot assure you that our assetswill be sufficient to repay in full the money owed to our debt holders,including holders of the Senior Notes.

 

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

 

For the year ended December 31, 2009, our top tencustomers accounted for approximately 89% of our net sales.  During this period, our two largest customersaccounted for approximately 60% of our net sales.  The permanent loss of, or a significantdecrease in the level of purchases by, one or more of our major customers couldhave a material adverse effect on our results of operations.  Future consolidation in the cabinetmanufacturing market in which our customers operate could increase theconcentration of our sales and therefore increase these risks.

 

In addition, some of our key cabinet manufacturercustomers have the resources to manufacture internally the cabinet doors andcomponents that we sell to them.  Despitethese manufacturing capabilities, these customers have chosen to outsource doorand component production to us in part due to the quality of our products andin order to reduce costs, eliminate production risks and maintain companyfocus.  However, these customers may notcontinue to outsource door and component production in the future.  Increased levels of production insourcingcould result from a number of factors, 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 profitability is affected by the prices of our rawmaterials, which may fluctuate based on a number of factors beyond our control,including, among others, changes in supply and demand, general economicconditions, labor costs, competition and, in some cases, governmentregulation.  The prices for the hardwoodspecies we use in production of our hardwood doors and components are subject tosome volatility.  In the past calendaryear the price of hard maple, the primary hardwood specie we use, (accountingfor approximately 41% of our lumber purchases) decreased by approximately 14%,and the price of cherry, (accounting for approximately 31% of our lumberpurchases) decreased by 29%.  We have nolong-term supply contracts for the raw materials used in the manufacture of ourproducts.  This means that we are subjectto changes in the prices charged by our suppliers.  Recently, we have experienced moderateincreases in the price we pay for our hardwood materials.  Significant increases in the prices of rawmaterials could materially adversely affect our business, financial conditionand results of operations, especially if we are not able to recover these costsby increasing the prices we charge our customers for our products.  In 2009, the U.S. kitchen and bath industryrelied heavily on domestic maple, which is of a higher quality than importedmaple.  A shortage in the supply ofdomestic maple or certain other species of lumber could increase prices forthese raw materials, which could also have a material adverse effect on ourbusiness, financial condition and results of operations.  Generally, we have been able to pass throughcost increases to our customers in a three to nine month time period, but theprice increases may not fully offset the effects of increasing raw materialcosts.  Our ability to pass through theseprice changes to our customers is dependent on prevailing economic and competitiveconditions.

 

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

 

Our dependency upon regular deliveries from suppliersmeans that interruptions or stoppages in such deliveries could adverselyaffect our operations until arrangements with alternate suppliers could bemade.  If a substantial number of oursuppliers were unable to deliver materials to us for an extended period oftime, as the result of financial difficulties, catastrophic events affectingtheir facilities or other factors beyond our control, or if we were unable tonegotiate acceptable terms for the supply of materials with these oralternative suppliers, our business, financial condition and results ofoperations could suffer.  We may not beable to find acceptable alternatives, and any such alternatives could result inincreased costs to us.  Even ifacceptable alternatives are found, the process of locating and securing suchalternatives might be disruptive to our business.  Extended 

 

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unavailability 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 numerous federal, stateand local laws relating to the protection of the environment.  We believe we are in substantial compliancewith all applicable requirements.  Ourefforts to comply with environmental requirements does not remove the risk thatwe may be held liable, or incur fines or penalties, and that the amount ofliability, fines or penalties may be material, for, among other things,releases of hazardous substances from current properties or any associatedoffsite disposal location, or for contamination at our properties fromactivities conducted by previous occupants. Changes in environmental laws and regulations or the discovery ofpreviously unknown contamination or other liabilities relating to ourproperties and operations could result in significant environmental liabilities.  In addition, we might incur significantcapital and other costs to comply with increasingly stringent environmentallaws and enforcement policies, which would decrease our cash flow available toservice our indebtedness.

 

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

 

We operate in the highly fragmented and verycompetitive cabinet door and component industry.  Our competitors include international,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 with us.  To remain competitive, we will need to investcontinuously in manufacturing, customer service and product development.  We may have to adjust the prices of some ofour products to stay competitive.  Inthis regard, we have faced increased pricing pressure in light of the currenteconomic slowdown.  We may not havesufficient resources to continue to make such investments to maintain ourcompetitive position within each of the markets we serve.

 

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

 

The number of foreign-made kitchen cabinets sold inthe United States has increased slightly in the last ten years.  We believe that the number of foreign-madecabinet components sold in the United States has also increased, though we donot believe any detailed study of such a trend is currently available.  This increase in sales of imported componentsis the result of foreign wood component manufacturers improving the quality oftheir products and services and, in some cases, offering lower prices.  While we currently believe that the impact ofimported products in our target markets is limited by, among other factors, theneed for greater variety in terms of profiles, sizes and finishes, demand forhigher quality products and short lead times, there is no assurance that demandfor foreign-made products will not increase in such markets.  If domestic cabinet manufacturers continue toincreasingly rely on foreign imports for their components, our business,financial condition and results of operations could be materially andnegatively affected.

 

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

 

We periodically make capital investments to, amongother things, maintain and upgrade our facilities 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.

 

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

 

Our business is labor intensive.  As a result, our financial performance isaffected by the availability of qualified personnel and the cost of labor.  Currently, none of our employees arerepresented by labor unions.  However,there could be strikes or other types of conflicts with personnel that mayarise or we could become a target for union organizing activity.  Strikes, work stoppages or slowdownscould result in slowdowns or closures of our or our suppliers’ facilities.  In addition, organizations 

 

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responsible for shipping our products may be impacted by strikes.  Any interruption in the production ordelivery of our products could reduce sales of our products and increase ourcosts.

 

***The application of ASC350 resulted in the recognition of a significant non-cash impairment charge for2009. Going forward, we may incur impairment charges on our goodwill and otherintangible assets with indefinite lives, which could negatively impact ourbusiness, financial condition and results of operations.***

 

In accordance with ASC 350, we test goodwill and other intangibleassets for impairment during the fourth quarter of each year and on an interimdate should factors or indicators become apparent that would require an interimtest.  In recent periods we have takensignificant charges relating to the impairment of goodwill.  See Note 4 to our consolidated financialstatements and “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Critical Accounting Policies.”

 

As discussed in Note 4 to the consolidated financial statementsincluded in this Annual Report of Form 10-K, we performed our annualimpairment test as of December 31, 2009, and conclude that our goodwillwas impaired.  Therefore, we recognized$13.6 million in goodwill impairment charges during the fourth quarter offiscal 2009.

 

As of December 31,2009, goodwill and other intangible assets with indefinite lives representedapproximately 55% of our total assets. If in the future, we determine that there has been an impairment, ourfinancial results for the relevant period would be reduced by the amount of theimpairment, net of any income tax effects, which could have an adverse effecton our financial condition and results of operations.

 

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

 

Our continued success depends to a large extent uponthe continued services of our senior management and certain key employees.  The loss of the services of any of theseindividuals could have a material adverse effect on our business, financialcondition and results of operations.  Wehave no keyman life insurance on any of our employees.

 

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

 

We explore opportunities to acquire related businessesfrom time to time, some of which could be material to us.  If we make acquisitions, our ability tocontinue to grow will depend upon effectively integrating these acquiredcompanies, achieving cost efficiencies and managing these businesses as part ofour company.

 

We may not be able to effectively integrate theacquired companies or successfully implement appropriate operational, financialand management systems and controls to achieve the benefits expected to resultfrom these acquisitions.  Our efforts tointegrate these businesses could be affected by a number of factors beyond ourcontrol, including general economic conditions and increased competition.  In addition, the process of integrating thesebusinesses could cause the interruption of, or loss of momentum in, theactivities of our existing business.  Thediversion of management’s attention and any delays or difficulties encounteredin connection with the integration of these businesses could negatively impactour business and results of operations. Further, the benefits that weanticipate from these acquisitions may not materialize.

 

Additionally, we may be subject to unexpected claimsand liabilities arising from these acquisitions.  Such claims and liabilities could be costlyto defend, could be material in amount and may exceed either the limitations ofany applicable indemnification provisions or the financial resources of theindemnifying parties, in which event such unexpected claims and liabilitiescould materially and negatively affect our business and financial performance.

 

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

 

As of March 17, 2010, Parent owned 100% of ouroutstanding voting capital stock and Olympus Growth Fund IV, L.P. and OlympusExecutive Fund, L.P. (each of which is an investment fund managed by OlympusPartners) collectively owned 86.66% of the outstanding voting capital stock ofParent.  For ease of reference, wesometimes collectively refer to Olympus Growth Fund IV, L.P. and OlympusExecutive 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 

 

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Certain Beneficial Owners and Management and Related StockholderMatters.”  We cannot assure you that theinterests of Olympus Growth Fund IV, L.P. will not conflict with the interestsof the holders 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. Unresolved Staff Comments**

 

None.

 

**Item 2. Properties**

 

Our headquarters are located in St. Cloud,Minnesota.  We own eight and lease fourmanufacturing facilities.  We believethat our facilities are currently operating at approximately 40-45% of overallplant capacity.  We intend to increasecurrent levels of capacity utilization while handling an increased volume ofsales.  In addition, we have increasedcapacity over time through increases in operating efficiencies and growthinvestments at our hardwood component, door and engineered woodsfacilities.  We expanded our Molalla,Oregon plant in 2004 to create additional capacity for customers located on theWest Coast.  In 2006, we completed theexpansions of our (i) Cabinet Door plant in St. Cloud, Minnesota to createadditional door manufacturing capacity, and (ii) Greenville, Pennsylvaniafacility to add incremental capacity for lumber drying and roughmilling.  In 2007, we completed the expansion of leasedfacilities in West Jordan, Utah and Monroe, Washington to add incremental doormanufacturing capacity.  Each of thesefacilities in Utah and Washington contributed minimal capacity to the Companyand were closed in the second half of 2008 due to the slowdown in theindustry.  In 2008, we completed theexpansion of a leased facility in Conover, North Carolina to add incrementaldoor manufacturing capacity.  In thefourth quarter 2009, we commenced operations at a manufacturing facility inMoorefield, West Virginia that adds minimal RTF production capacity.

 

Our Woodcraft subsidiary operates three facilities inMinnesota, two of which are located in St. Cloud and one of which islocated in Foreston.  Our Minnesotafacilities manufacture hardwood components, and one of our St. Cloud facilitiesalso produces approximately 50% of our hardwood doors.  The hardwood door plant in St. Cloudincludes high-volume hardwood door production together with flexible productioncells required to respond to customer KAT orders.  Our Woodcraft division also has a fourthfacility located in Bowling Green, Kentucky where we manufacture hardwoodcomponents for shipment to our Minnesota and Ohio facilities.  Our Woodcraft subsidiary in 2005 acquired afacility located in Middlefield, Ohio, which manufactures hardwood componentmoldings, and also purchased a facility located in Greenville, Pennsylvania,which manufactures hardwood components for shipment to our Minnesota and Ohiofacilities.  In the first quarter 2008,our Woodcraft subsidiary completed an expansion in Conover, North Carolina toproduce hardwood doors.

 

In Wahpeton, NorthDakota, our PrimeWood subsidiary manufactures RTF doors and components, VRPsand wrapped profiles.  We believe ourWahpeton facility, which supplies cabinet manufacturers throughout NorthAmerica, is one of the largest independent producers of engineered woods inNorth America.  We acquired this facilityin 1998 in connection 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.  Inthe fourth quarter 2009, our PrimeWood subsidiary commenced operations at amanufacturing facility in Moorefield, West Virginia that added minimal RTFproduction capacity.

 

Our Brentwood subsidiary operates a manufacturingfacility in Molalla, Oregon where we produce hardwood and RTF doors, primarilyfor distribution to our customers located on the West Coast.  Our Molalla facility focuses primarily on KATproduction of custom and semi-custom products. We acquired this facility in 2002 in connection with our acquisition ofBrentwood, Inc.  In 2007, ourBrentwood subsidiary completed an expansion in Monroe, Washington to producehardwood doors, which ultimately was closed in the second half of 2008 due tothe slowdown in the industry.

 

Our former Grand Valley subsidiary (which is now partof Woodcraft) operates a manufacturing facility in Orwell, Ohio where weproduce hardwood doors through KAT production, primarily for semi-customproducts.  We acquired this facility in2004 in connection with our acquisition of the former Grand Valley subsidiary.

 

The following chart sets forth information regardingour headquarters and our twelve manufacturing 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                                        |
| Moorefield, West  Virginia |       | RTF Doors and  Components      |       | 10,000             |       | Leased                                       |
| Conover, North  Carolina   |       | Hardwood Doors                 |       | 55,000             |       | Leased                                       |

 

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We also lease a number of non-manufacturing facilitiesutilized for warehousing.  Thesefacilities are deemed to not be material.

 

**Item 3. Legal Proceedings**

 

We are involved in various proceedings incidental tothe ordinary conduct of our business.  Wedo not presently believe that any of the proceedings currently pending willhave a material adverse effect on our business, financial condition, cash flowsor results of operations.

 

**Item 4.**

 

Reserved

 

**PART II**

 

**Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases 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 an affiliate of Olympus Funds. These payments totaled approximately $5.0 million in 2008 and weredeferred in 2009.  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 and outstanding.

 

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 Parent common stock wasconsidered contributed capital to the Company and had a fair value ofapproximately $397,000 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.  In2009, 1,121 shares of restricted stock were repurchased due to the terminationof a member of management.

 

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###### **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, 2009, 2008,2007, 2006 and 2005 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.

 
| ** **                                  | ** ** | **Year Ended  December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005****(1)** | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands)**        | ** ** |
| **Statement of Operations Data:**           |       |                              |       |   |   |   |   |   |   |   |   |
| Net sales                                   |       | $                                 | 130,455    |   | $ | 193,373 |   | $ | 249,303 |   | $ | 285,633 |   | $ | 259,603 |   |
| Cost of sales                               |       | 110,093                           |       | 166,635 |   | 205,063 |   | 237,289 |   | 217,625 |   |
| Gross profit                                |       | 20,362                            |       | 26,738 |   | 44,240 |   | 48,344 |   | 41,978 |   |
| Total operating expenses (2)                |       | 25,753                            |       | 13,934 |   | 24,096 |   | 18,024 |   | 14,805 |   |
| Operating (loss) income                     |       | (5,391                            | )          | 12,804 |   | 20,144 |   | 30,320 |   | 27,173 |   |
| Interest expense                            |       | 12,449                            |       | 13,024 |   | 15,460 |   | 14,038 |   | 13,561 |   |
| Other (income) loss, net (3)                |       | (23                               | )          | (1,860 | ) | (453 | ) | (88 | ) | (50 | ) |
| Income tax (benefit) expense                |       | (2,634                            | )          | 324 |   | 2,096 |   | 6,627 |   | 5,487 |   |
| Net (loss) earnings                         |       | $                                 | (15,183    | ) | $ | 1,316 |   | $ | 3,041 |   | $ | 9,743 |   | $ | 8,175 |   |
| **Other Financial Data:**                   |       |                              |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization (4)           |       | $                                 | 8,388      |   | $ | 8,762 |   | $ | 8,712 |   | $ | 7,926 |   | $ | 6,760 |   |
| Capital expenditures (5)                    |       | 1,700                             |       | 3,722 |   | 7,629 |   | 15,999 |   | 11,787 |   |
| Net cash provided by operating activities   |       | 3,873                             |       | 13,714 |   | 16,500 |   | 23,426 |   | 12,990 |   |
| **Balance Sheet Data (at end of  period):** |       |                              |       |   |   |   |   |   |   |   |   |
| Total assets                                |       | $                                 | 203,077    |   | $ | 221,006 |   | $ | 247,957 |   | $ | 230,314 |   | $ | 221,594 |   |
| Long-term debt, plus current maturities     |       | 108,350                           |       | 111,947 |   | 124,202 |   | 127,500 |   | 127,500 |   |
| Capital lease obligations                   |       | —                            |       | — |   | 530 |   | 1,111 |   | 2,466 |   |

 

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(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.

 

(2) Total operating expenses include $1.3 millionof stock compensation expense in 2005 related to stock option variableaccounting, $3.1 million of stock compensation expense in 2006 related to stockoption accounting, and $1.8 million of compensation expense in 2007 related tostock 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. Total operating expenses in 2009 include $0.5 million of accruedexpenses related to management advisory fees and $13.6 million for a goodwillimpairment charge.

 

(3) For the fiscal year ended December 31,2008, the Company recognized $1.7 million of gains on the extinguishment ofdebt.

 

(4) Depreciation and amortization does notinclude amortization of deferred financing fees (which are included in interestexpense) for the fiscal years ended December 31, 2005, 2006, 2007, 2008and 2009 of $1.0 million, $1.1 million, $2.5 million, $1.5 million and$1.5 million, respectively.

 

(5) Includes capital expenditures in Accounts Payable at the endof the period, which have not been paid in cash.  See “Consolidated Statements of Cash Flows”included in the consolidated financial statements elsewhere in this report formore information.

 

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

 

*You should read the followingdiscussion in conjunction with our consolidated financial statements andrelated notes appearing elsewhere in this annual report.  In addition to historical information, thisdiscussion contains forward-looking statements that involve risks,uncertainties and assumptions that could cause actual results to differ materiallyfrom management’s expectations.*

 

**Overview**

 

We are one of the leading manufacturers of hardwoodcabinet doors and components and engineered wood products in the UnitedStates.  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.  In 2009, we generated approximately 93% ofour sales from the kitchen and bath cabinet manufacturing industry.  Our customers, in turn, distribute theirproducts through various sales channels, including specialty kitchen and bathcabinet dealers, home center retailers and homebuilders.  We conduct all of our operations through ourWoodcraft, PrimeWood and Brentwood subsidiaries and we operate twelvemanufacturing facilities located in Minnesota, North Dakota, Ohio, Oregon,Pennsylvania, Kansas, North Carolina, West Virginia, and Kentucky that allow usto distribute our products nationwide.

 

In the past twelve years, we have consummated four strategicacquisitions that have enhanced our market position, product breadth andgeographic reach.  In June 1998, weacquired PrimeWood, a manufacturer of RTF, VRP and profile-wrapped engineeredwood products based in North Dakota.  In July 2002,we acquired Brentwood, a manufacturer of solid wood and RTF cabinet doorslocated in Oregon.  In April 2004,we acquired Grand Valley, a manufacturer of solid wood cabinet doors located inOhio.  In July 2005, we acquiredsubstantially all of the assets of Dimension Moldings, Inc. (DMI), an Ohiocorporation, which was in the business of manufacturing hardwood componentmoldings at a facility located in Middlefield, Ohio.  Following the acquisition, our Woodcraftsubsidiary manufactures hardwood component moldings at the Middlefieldfacility.

 

OnJanuary 9, 2007, WII Components, Inc.(the “Company”) was acquired by WII Holding, Inc. (“Parent”), a 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 Merger Corporation(“MergerCo”),a wholly owned subsidiary of Parent, with and into the Company with the Companybeing the surviving corporation in the transaction (the “Transaction”).  The aggregate purchase price paid by Parentfor all of the shares of capital stock of the Company and options to purchaseshares of capital stock of the Company in the Transaction was approximately$293.1 million, less indebtedness and certain expenses.  The Transaction has been accounted for as a recapitalizationin the Company’s financial statements, withno 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**

 

Asdiscussed below, we continued to experience a slowdown in net sales for thetwelve months ended December 31, 2009 that began in the second half of2006.  This kitchen and bathindustry-wide slowdown had a negative impact on our gross profit and operatingincome margin percentages due to fixed costs becoming a higher percentage ofsales.   In addition, we have continuedto experience decreases in hardwood material prices, which generally are passedon to our customers through lower selling prices in accordance with indexingagreements that reset approximately every three to nine months.  While the prices we pay for hardwoodmaterials continued to decline through April 2009, they stabilized by midyear and began to increase in December 2009.  These declines in our material costs through April 2009resulted in lower selling prices in the second half of 2009 due to our indexingagreements with our customers.  Our ability to pass through these pricechanges to our customers is dependent on prevailing economic and competitiveconditions.

 

***Year Ended December 31,2009 Compared to the Year Ended December 31, 2008***

 

The years ended December 31, 2009 and 2008 areshown in the table below. The following table sets forth selected operatingdata derived from our consolidated statements of operations and presents thisinformation as a percentage of net sales.

 

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| ** **                   | ** ** | **Year Ended********December 31, 2009** | ** ** | **Year Ended********December 31, 2008** | ** ** |
|------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                   | ** ** | **(Dollars in thousands)**                   | ** ** |
| Net sales                    |       | $                                            | 130,455    |                                         | $          | 193,373 |   |
| %*of net sales*              |       | 100.0                                        | %          | 100.0                                        | %          |
| Cost of sales                |       | 110,093                                      |       | 166,635                                      |       |
| %*of net sales*              |       | 84.4                                         | %          | 86.2                                         | %          |
| Gross profit                 |       | 20,362                                       |       | 26,738                                       |       |
| %*of net sales*              |       | 15.6                                         | %          | 13.8                                         | %          |
| Operating expenses           |       | 25,753                                       |       | 13,934                                       |       |
| %*of net sales*              |       | 19.7                                         | %          | 7.2                                          | %          |
| Operating (loss) income      |       | (5,391                                       | )          | 12,804                                       |       |
| %*of net sales*              |       | (4.1                                         | )%         | 6.6                                          | %          |
| Other expenses:              |       |                                         |       |                                         |       |
| Interest expense             |       | 12,449                                       |       | 13,024                                       |       |
| %*of net sales*              |       | 9.5                                          | %          | 6.7                                          | %          |
| Other (income) loss, net     |       | (23                                          | )          | (1,860                                       | )          |
| %*of net sales*              |       | (0.0                                         | )%         | (1.0                                         | )%         |
| Income tax (benefit) expense |       | (2,634                                       | )          | 324                                          |       |
| %*of net sales*              |       | (2.0                                         | )%         | 0.2                                          | %          |
| Net (loss) earnings          |       | (15,183                                      | )          | 1,316                                        |       |
| %*of net sales*              |       | (11.6                                        | )%         | 0.7                                          | %          |
|                              |            |                                              |            |                                              |            |  |  |

 

*NetSales.*  Net sales decreased $62.9 million, or32.5%, from $193.4 million for the year ended December 31, 2008 to$130.5 million for the year ended December 31, 2009.  Sales in our hardwood and engineered woodproduct line decreased $55.4 million and $7.5 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 5% 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, but with athree to nine month lag time, as our material costs increase or decrease.

 

*Cost ofSales.*  Cost of sales decreased $56.5 million,or 33.9%, from $166.6 million for the year ended December 31, 2008 to$110.1 million for the year ended December 31, 2009.  This decrease in cost of sales is primarilyattributable to (i) lower material, labor and overhead costs as a resultof lower volume of sales, and, to a lesser extent, (ii) lower hardwoodmaterial costs.

 

*GrossProfit.*  Gross profit decreased $6.3 million, or23.6%, from $26.7 million for the year ended December 31, 2008 to $20.4 millionfor the same period in 2009 as a result of the factors described above.  As a percentage of net sales, our grossprofit increased 180 basis points from 13.8% for the year ended December 31,2008 to 15.6% for the same period in 2009. As a percentage of sales, gross profit improved due to lower lumbercosts and improved operating efficiencies. This increase was partially offset with spreading fixed costs over lowersales volume.

 

*Operating Expenses.* Operating expenses increased $11.9 million, or 85.6%, from$13.9 million for the year ended December 31, 2008 to$25.8 million for the year ended December 31, 2009.  The increase primarily consists of (i) $13.6million goodwill impairment and (ii) $0.2 million due to increasedallowance for doubtful accounts expense in 2009.  The increase was partiallyoffset by (i) approximately $0.8 million lower salaries, includingbenefits, due to eliminated positions throughout 2008 and 2009, and (ii) $0.8million due to a long-lived asset write-off in conjunction with the closing ofour West Jordan, Utah facility in 2008, and, to a lesser extent, (iii) $0.2million lower professional fees, and (iv) $0.1 million lower travel costs. We concluded there were no triggering eventsor changes in circumstances requiring an interim goodwill impairment analysisto be completed during the first three quarters of 2009.  As a percentage of sales, operating expensesincreased from 7.2% for the year ended December 31, 2008 to 19.7% for thesame period in 2009, as a result of the factors described above.

 

*OperatingIncome.*  Operating income decreased by$18.2 million, or 142.2%, from $12.8 million for the year ended December 31,2008 to a loss of $5.4 million for the year ended December 31, 2009as a result of the net effect of the factors described above.

 

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*InterestExpense.*  Interest expense decreased $0.6 million, or4.6%, from $13.0 million for the year ended December 31, 2008 to$12.4 million for the year ended December 31, 2009.  This decrease relates to lower interestexpense in 2009 due to the $3.5 million principal reduction during the threemonths ended March 31, 2009 on the First Lien Term Facility.

 

*Other(Income) Loss.*  Other income decreased $1.8 million from $1.9million for the year ended December 31, 2008 to $23,000 for the year endedDecember 31, 2009.  This incomerepresents interest received from our interest bearing accounts and 2008 alsoincludes a $1.7 million gain on the extinguishment of debt.

 

*Income Tax Expense.* Income tax expense decreased $2.9 million from $0.3 million for theyear ended December 31, 2008 to a benefit of $2.6 million for the yearended December 31, 2009 as a result of lower earnings, and a lowereffective tax rate.  The effective taxrate decreased 500 basis points from 19.8% in 2008 to 14.8% in 2009 due tostate taxes and permanent differences.

 

*Net Earnings.* Net earnings decreased $16.5 million from $1.3 million for the yearended December 31, 2008 to $15.2 million net loss for the year ended December 31,2009 as a result of the factors described above.

 

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

 

The years ended December 31, 2008 and 2007 areshown in the table below. The following table sets forth selected operatingdata derived from our consolidated statements of earnings and presents thisinformation as a percentage of net sales.

 
| ** **               | ** ** | **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                                          | %          |
|                          |            |                                              |            |                                              |            |  |  |

 

*NetSales.*  Net sales decreased $55.9 million, or22.4%, from $249.3 million for the year ended December 31, 2007 to$193.4 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, but with athree to nine month lag time, as our material costs increase or decrease.

 

*Cost ofSales.*  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.

 

*GrossProfit.*  Gross profit decreased $17.5 million, or39.6%, from $44.2 million for the year ended December 31, 2007

 

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to $26.7 million forthe same period in 2008 as a result of the factors described above.  As a percentage of net sales, our grossprofit decreased 390 basis points from 17.7% for the year ended December 31,2007 to 13.8% for the same period in 2008. This decrease is related to (i) spreadingfixed costs over lower sales volume and (ii) the net effectof 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.

 

*InterestExpense.*  Interest expense decreased $2.4 million, or15.6%, 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, mainlydue to the $11.5 million principal reduction during the three months ended March 31,2008, and for the First Lien Term Facility.

 

*Other(Income) Loss.*  Other income increased $1.4 million, or280.0%, from $0.5 million for the year ended December 31, 2007 to $1.9million 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.

 

*Income Tax 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 forthe year ended December 31, 2008 as a result of lower earnings, and alower effective tax rate.  The effectivetax rate decreased 2100 basis points from 40.8% in 2007 to 19.8% in 2008 due tostate taxes and permanent differences.

 

*Net Earnings.* Net earnings decreased $1.7 million, or 56.7%, from $3.0 millionfor the year ended December 31, 2007 to $1.3 million for the yearended December 31, 2008 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.  On March 30, 2009, werepaid all amounts outstanding under the First Lien Term Facility and noadditional borrowings are available thereunder. As of December 31, 2009, the maximum amount of borrowings availableto the Company under the Revolving Facility was $12.5 million.  As of December 31, 2009, we had nooutstanding borrowings under the Revolving Facility.  Borrowings under the Revolving Facility bearinterest at a fluctuating rate equal to either the base rate plus 2.75%per annum or LIBOR plus 3.75% per annum (effective rate of 5.25% at December 31,2009).  We must comply with certainfinancial covenants under our Senior Credit Facility, including maintenance ofan interest coverage ratio and a total leverage ratio.  We were in compliance with all of ourcovenants as of December 31, 2009. 

 

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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 redeem 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 may have at the end of each quarterlyperiod from December 31, 2008 through December 31, 2009, (vi) requiredpayment of remaining balance due under the First Term Lien Facility ofapproximately $3.6 million and (vii) decreased the minimum interestcoverage ratio we are required to maintain at the end of each quarterly periodfrom December 31, 2008 through December 31, 2009.  The amendmentalso waived for the four fiscal quarters ended December 31, 2008, anydefault or event of default that may have arisen from our 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.

 

On March 26, 2010,we entered into an amendment to our Senior Credit Facility, which among otherthings: (i) 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 redeem the Senior Notes to March 31, 2011; (ii) increasedthe maximum total leverage ratio we may have at the end of each quarterlyperiod from March 31, 2010 through December 31, 2010; (iii) addedan asset-based borrowing base as a condition to borrowing under the SeniorCredit Facility; (iv) extended our ability to continue to pay cashdividends to enable Parent to make cash interest payments on the Parent Notesto March 31, 2011; and (v) decreased the minimum interest coverageratio we are required to maintain at the end of each quarterly period from March 31,2010 through December 31, 2010.

 

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. The Senior Credit Facility is scheduled to mature in January 2013.

 

As of December 31,2009, the weighted average interest rate for the Company’s outstanding debt was 10.1%.

 

Our Senior CreditFacility and the indenture for the Senior Notes impose certain restrictions onour ability to incur indebtedness, pay dividends, make investments, grantliens, sell our assets and engage in certain other activities.  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, 2011, 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, as well asany previously accrued but unpaid management fees for any previous fiscal yearswithout regard to this $750,000 limitation, so long as the amount accrued inany such previous fiscal year did not exceed $750,000, in each case,  so long as no default has occurred.  Theindenture provides that the Company can generally pay dividends and make otherdistributions to Parent in an 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 consolidatedinterest coverage ratio of greater than 2.0 to 1.0.  For the twelve month period ended December 31,2009, the Company’s consolidated interest coverage ratio was less than 2.0 to1.0.

 

On March 30, 2009,Parent amended and obtained a waiver to the Note Purchase Agreements related tothe Parent Notes to waive the total leverage ratio that we were required tomaintain as of December 31, 2008 and to adjust the total leverage ratiothat we are required to maintain as of the end of each quarterly period throughDecember 31, 2009 to reflect current economic conditions.  Inaddition, in connection with this amendment and waiver, the $150,000 quarterlyadvisory fee payable by Parent to an affiliate of the Olympus Funds under theadvisory services agreement discussed below, has been deferred for each quarterof 2009 and will be payable in 2010 or thereafter.  See “CertainRelationships and Related Party

 

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Transactions, andDirector Independence - Advisory Services Agreement” for additional informationregarding the advisory services agreement.

 

On March 26, 2010,Parent also amended the Parent Notes to, among other things, adjust the totalleverage ratio we are required to maintain as of the end of each quarterlyperiod through December 31, 2010.

 

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

 

The Company hasoutstanding Senior Notes in an aggregate principal amount of $108.4million.  The Senior Notes mature on February 15,2012.  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% ownedsubsidiaries of the Company, have fully and unconditionally guaranteed theSenior Notes on a joint and several basis. The Company has no assets or operations independent of its subsidiaries.  As a result, the Company has not presentedseparate financial statements of the subsidiary guarantors.

 

As of December 31,2009, we had $13.1 million of cash and cash equivalents available for anycorporate purposes, compared to $14.7 million as of December 31, 2008.

 

*Cash flow from operating activities.*  As of December 31, 2009, we had $13.1million of cash and cash equivalents available for working capitalpurposes.  As of December 31, 2008,we had $14.7 million of cash and cash equivalents available for working capitalpurposes.  Cash provided by operatingactivities for the years ended December 31, 2009 and 2008 was $3.9 millionand $13.7 million, respectively.  Thedecreased source of cash provided by operating activities is mainlyattributable to (i) lowernet income in 2009, (ii) higher inventories in 2009 of $1.0 million,whereas, inventories had declined $7.4 million in 2008, and (iii) anincrease in accounts receivable in 2009 of $4.2 million, whereas accountsreceivable had declined $7.1 million in 2008. Days of receivables outstanding increased by six days as of December 31,2009 versus December 31, 2008 mainly due to a majority of customers thatwere closed the last two weeks of December 2008 and certain customerpayment terms have been modified over the past year.  These were offset partially by (i) anincrease in accounts payable in 2009 of approximately $2.8 million, whereas,accounts payable had decreased $2.1 million in 2008, and (ii) a payment of$6.2 million in 2008 for income tax refunds that were due to previousstockholders of the Company in accordance with the Transaction agreement.

 

*Cashflow from investing activities.*  Net cash usedin investing activities was $1.6 million for the year ended December 31,2009 and $3.7 million for the year ended December 31, 2008.  Capital expenditures in 2009 were $1.7million compared to $3.7 million for the year ended December 31,2008.  The decrease in capitalexpenditures in 2009 is primarily due to lower capital expenditures needed forcapacity requirements.

 

*Cashflow from financing activities.*  Net cash usedin financing activities for the year ended December 31, 2009 totaled $3.9million primarily due to (i) principal payments on the Senior CreditFacility of $3.6 million, (ii) debt issuance costs of $0.1 million, and (iii) a$0.2 million decrease in the amount Due to Parent related to income taxobligations.  Net cash provided byfinancing 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.

 

For years ended December 31,2009 and December 31, 2008, our two largest customers accounted forapproximately 60% and 55%, respectively, of our net sales.  As of December 31, 2009 and December 31,2008, our two largest customers accounted for approximately 72% and 47%,respectively, of our consolidated accounts receivables balance.  The permanent loss of, or a significantdecrease in the level of purchases by, one or more of our major customers couldhave a material adverse effect on our results of operations and future cashflows.

 

We cannot provideassurances that our business will generate sufficient cash flow fromoperations, that anticipated net sales growth and operating improvements willbe realized or that future borrowings will be available under our Senior 

 

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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 2009, and has had a negative impact on our resultsof operations for the year ended December 31, 2009.  If this slowdown were to continue or worsenover an extended period of time, it could have a material adverse effect on ourbusiness, financial condition or results of operations which may includeimpairment charges of goodwill and other long-term assets.

 

Recently, the financialmarkets experienced a period of unprecedented turmoil, including thebankruptcy, restructuring or sale of certain financial institutions and theintervention of the U.S. federal government. While the ultimate outcome of these events cannot be predicted, they mayhave a material adverse effect on our liquidity and financial condition if ourability to borrow money from our existing lenders under our Senior CreditFacility to finance our operations were to be impaired.  The crisis in the financial markets may alsohave a material adverse impact on the availability and cost of credit in thefuture.  Our ability to pay our debt orrefinance our obligations under our Senior Credit Facility or the Senior Noteswill depend on our future performance, which will be affected by, among otherthings, prevailing economic conditions. The recent financial crisis may also have an adverse effect on the U.S.,which would have a negative impact on demand for our products.  In addition, tightening of credit markets mayhave an adverse 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.

 

We intend to continue tomanage the business in this slower economy and its effect on our industry bydiligently reviewing our costs of doing business on a routine basis,controlling working capital in a slower business climate, and minimizing ourcapital expenditure needs.  We note,however, that we expect our working capital requirements to increase byapproximately $6.0 to $7.0 million, beyond normal seasonality in our business,due to longer collection times on certain receivables and inventory increaseson certain product programs with our customers. We expect that the majority of this increase will occur in the firsthalf of 2010.

 

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, 2009.  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          |       | $                           | —     |          | $          | 108,350 |   | $ | — |   | $ | — |   | $ | 108,350 |   |
| Interest expense on fixed rate debt |       | 10,835                      |       | 12,318        |       | — |   | — |   | 23,153 |   |
| Operating lease obligations         |       | 393                         |       | 272           |       | 190 |   | — |   | 855 |   |
| Total contractual cash obligations  |       | $                           | 11,228     |          | $          | 120,940 |   | $ | 190 |   | $ | — |   | $ | 132,358 |   |

 

As of December 31,2009, we had no outstanding indebtedness with a variable interest rate.

 

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.  Therefore, weconsider the risk related to termination penalties to be minimal.

 

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**Off-Balance Sheet Arrangements**

 

With the exception ofroutine operating leases, we had no off-balance sheet financing arrangements atDecember 31, 2009, 2008 and 2007.

 

**Inflation**

 

Our cost of sales issubject to inflationary pressures on labor costs, prices of the raw materialswe use and various overhead costs.  Wegenerally have been able over time to offset the effects of inflation and pricefluctuations through a combination of sales price increases and operationalefficiencies.  We currently believe thatraw material cost pressure has increased in the fourth quarter 2009.  We continue to attempt to pass along thesecosts to our customers, but such efforts typically lag three to nine monthsbehind material cost changes and we can not guarantee a full offset.  Our ability to pass through these pricechanges to our customers is dependent on prevailing economic and competitiveconditions.

 

**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 could differ from those estimates.  We believe that the estimates, assumptionsand judgments involved in the accounting policies below have the greatestpotential impact on our financial statements.

 

The basis for developingthe estimates and assumptions within our critical accounting policies is basedon historical information and known current trends and factors.  The estimates and assumptions are evaluatedon an ongoing basis and actual results have been within the Company’s expectations, unless noted differentlybelow.  We have not changed thesepolicies from those previously 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 annuallyor whenever an indicator of impairment occurs. If events or circumstances change, including reductions in anticipatedcash flows generated by operations, goodwill could become further impaired andresult in 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 ASC 350 analysis as of December 31, 2009.  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 

 

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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, 2009.  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, 2009, we have advanced threeyears into the current housing downturn and, in our opinion, are closer to thelower point in this cycle.  Accordingly,we believe this has resulted in expanded multiples.  Moreover, given the severity of the currentdownturn, we would expect the magnitude of such multiple expansion to besignificant.  To account for theseexpanded multiples, we have applied premiums of 40-50% to the January 2007Woodcraft transaction multiple to compute a low and high range of fairvalue.  The low and high premium wasbased on similar multiple expansions experienced by companies within similarindustries from 2006 through 2009.   Thecompanies used to calculate the cyclical multiple expansion for our annualgoodwill analysis have been consistent from year to year.  If the number of comparable companiesincreases or decreases or the cyclical multiple expansion calculations changewithin these comparable companies, our goodwill impairment analysis could beaffected.

 

Based on the fair marketvalue methodology and assumptions as of December 31, 2009, the annual test for goodwill impairmentresulted in a fair value amount below the Company’s carrying value whichrequired further analysis to determine the goodwill impairment amount. The determination of the goodwill impairment was based on the fair value ofassets and liabilities as if the Company had been acquired using a hypotheticalbusiness combination with a purchase price equal to the market multiplevaluation balance as of December 31, 2009. This impairment analysis concluded the purchase price, as determined,was in excess of the net assets however this excess was below the recordedgoodwill balance at December 31, 2009. The difference between the recorded goodwill and excess fair value at December 31,2009 was the computed goodwill impairment of $13.6 million.  As of December 31, 2008, the Companydetermined its fair value exceeded its carrying value resulting in no goodwillimpairment.

 

*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 lower sales and earnings for the twelve monthsended December 31, 2009, the Company performed a ASC 360 * *impairment test.  Based on an undiscounted cash flows model,the Company’s carrying value of long-lived assets was adequate and nowrite-down was necessary.  Separate fromthe undiscounted cash flow model, it was determined a triggering event occurredin 2008, in conjunction with the decision to discontinue manufacturingoperations at our West Jordan, Utah facility. This long-lived asset impairment totaled $0.7 million in 2008 due tocertain long-lived assets that will not be utilized in the future.

 

*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

 

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are based on third-party estimates 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 rates expectedto 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 Financial Accounting Standards Board (“FASB”)  issued a new accounting standard, nowincluded in Accounting Standards Codification (“ASC”) 820 (formerly SFAS 157), “FairValue Measurements and Disclosures” to define fair value, establish a frameworkfor measuring fair value, and expand disclosures about fair valuemeasurements.  We adopted this standardeffective January 1, 2008.  Theadoption of this standard did not have a material effect on our financialposition or results of operations.

 

In December 2007,the FASB issued ASC 805 (formerly SFAS 141R), “Business Combinations”.  ASC 805 establishes principles andrequirements for how identifiable assets, liabilities assumed, non-controllinginterests in an acquirer, and goodwill are recognized and measured in anacquirer’s financial statements.  ASC 805also establishes disclosure requirements to assist users in evaluating thenature and financial effects of business combinations.  This standard is effective for fiscal yearsbeginning after December 15, 2008. The adoption of this statement did not have a material effect on theCompany’s financial position or results of operations.

 

In March 2008, theFASB issued ASC 815 (formerly SFAS 161) “Derivatives and Hedging”.  ASC 815 establishes, among other things,additional disclosure requirements for derivative instruments and for hedgingactivities.  ASC 815 is effective for theCompany beginning January 1, 2009 on a prospective basis.  The adoption of this statement did not have amaterial effect on the Company’s financial position or results of operations.

 

In April 2009, theFASB issued guidance that requires interim reporting period disclosure aboutthe fair value of certain financial instruments, effective for interimreporting periods ending after June 15, 2009.  The Company hasadopted these disclosure requirements.  Due to their nature, the carryingvalue of cash, receivables, payables and debt obligations approximates fairvalue.

 

In May 2009, theFASB issued SFAS No. 165, “SubsequentEvents” which was primarily codified into Topic 855 “Subsequent Events” in the ASC.  This guidance was issued in order toestablish principles and requirements for reviewing and reporting subsequentevents.  On February 24th 2010, the FASBissued Accounting Standards Update (ASU) 2010-09 to amend ASC 855, “SubsequentEvents”. As a result, SEC registrants will not disclose the date through whichmanagement evaluated subsequent events in the financial statements—either inoriginally issued financial statements or reissued financial statements. Theadoption of this guidance did not have an impact on our consolidated financialstatements.

 

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In June 2009,the FASB issued guidance that establishes the FASB Accounting StandardsCodification (the Codification) as the source of authoritative accountingprinciples recognized by the FASB to be applied by nongovernmental entities inthe preparation of financial statements in conformity with generally acceptedaccounting principles (GAAP).  Use of the new Codification is effectivefor interim and annual periods ending after September 15, 2009.  TheCompany has used the new Codification in reference to GAAP in this annualreport on Form 10-K and such use has not impacted the consolidatedresults of the Company.

 

In January 2010,the FASB issued ASU No. 2010-06, “FairValue Measurements and Disclosures (Topic 820)—Improving Disclosures about FairValue Measurements”.  Thisguidance will require reporting entities to provide information about movementsof assets among Levels 1 and 2 of the three-tier fair value hierarchyestablished by ASC 820 and provide a reconciliation of purchases, sales,issuance, and settlements of financial instruments valued with a Level 3method, which is used to price the hardest to value instruments.  Entities will have to provide fair valuemeasurement disclosures for each class of financial assets andliabilities.  The guidance will beeffective for any fiscal year that begins after December 15, 2010.  We do not anticipate the adoption of ASU No. 2010-06to have a material impact on our financial statements.

 

**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 such efforts typically lag threeto nine months behind material cost changes and we can not guarantee a fulloffset.  Our ability to pass throughthese price changes to our customers is dependent on prevailing economic andcompetitive conditions.

 

*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, 2009, we had no outstanding indebtedness whichbears 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, 2009 and 2008 and therelated consolidated statements of operations, stockholders’ equity, and cashflows for each of the three years in the period ended December 31,2009.  Our audits of the basicconsolidated financial statements included the financial statement schedule listedin the Index appearing under Item 15. These financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements and financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, anaudit of its internal control over financial reporting.  Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate 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 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, 2009 and 2008, and the results of their operations andtheir cash flows for each of the three years in the period ended December 31,2009, in conformity with accounting principles generally accepted in the UnitedStates of America.  Also, in our opinion,the related financial statement schedule, when considered in relation to thebasic consolidated financial statements taken as a whole, presents fairly inall material respects the information set forth therein.

* *

* *

*/s/ Grant Thornton LLP*

 

Minneapolis,Minnesota

March 31,2010

 

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###### **WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2009 AND 2008**

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

 
| ** **                                                                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **ASSETS**                                                                                      |       |     |       |     |       |
| CURRENT ASSETS:                                                                                 |       |     |       |     |       |
| Cash and cash equivalents                                                                       |       | $        | 13,102     |     | $          | 14,721 |   |
| Accounts receivable—net of allowance for doubtful  accounts of $325 and $239, respectively |       | 10,754   |       | 6,603    |       |
| Inventories                                                                                     |       | 14,407   |       | 13,442   |       |
| Deferred income taxes                                                                           |       | 1,927    |       | 1,318    |       |
| Other current assets                                                                            |       | 735      |       | 850      |       |
| Total current assets                                                                            |       | 40,925   |       | 36,934   |       |
| PROPERTY, PLANT, AND EQUIPMENT - AT COST:                                                       |       |     |       |     |       |
| Land                                                                                            |       | 3,439    |       | 3,439    |       |
| Buildings and yards                                                                             |       | 26,150   |       | 26,122   |       |
| Equipment                                                                                       |       | 61,112   |       | 59,845   |       |
| Less accumulated depreciation                                                                   |       | (39,422  | )          | (32,869  | )          |
| Property, plant, and equipment—net                                                         |       | 51,279   |       | 56,537   |       |
| GOODWILL AND OTHER ASSETS:                                                                      |       |     |       |     |       |
| Goodwill                                                                                        |       | 99,152   |       | 112,748  |       |
| Customer relationship—net                                                                  |       | 8,266    |       | 9,924    |       |
| Noncompete agreements—net                                                                  |       | 31       |       | 65       |       |
| Other assets                                                                                    |       | 3,424    |       | 4,798    |       |
| Total goodwill and other assets                                                                 |       | 110,873  |       | 127,535  |       |
| TOTAL                                                                                           |       | $        | 203,077    |     | $          | 221,006 |   |
| **LIABILITIES AND STOCKHOLDERS****’****EQUITY**                                            |       |     |       |     |       |
| CURRENT LIABILITIES:                                                                            |       |     |       |     |       |
| Current maturities of long-term debt                                                            |       | $        | —     |     | $          | 3,597 |   |
| Accounts payable                                                                                |       | 3,990    |       | 1,187    |       |
| Accrued payroll                                                                                 |       | 2,713    |       | 2,935    |       |
| Other current liabilities                                                                       |       | 13,226   |       | 13,711   |       |
| Total current liabilities                                                                       |       | 19,929   |       | 21,430   |       |
| LONG-TERM DEBT—Net of current maturities                                                   |       | 108,350  |       | 108,350  |       |
| DEFERRED INCOME TAXES                                                                           |       | 3,174    |       | 5,217    |       |
| OTHER LONG-TERM LIABILITIES                                                                     |       | 2,324    |       | 1,947    |       |
| COMMITMENTS AND CONTINGENCIES (Note 8)                                                          |       |     |       |     |       |
| STOCKHOLDERS’ EQUITY:                                                                      |       |     |       |     |       |
| Common stock:                                                                                   |       |     |       |     |       |
| Voting                                                                                          |       | —   |       | —   |       |
| Nonvoting,                                                                                      |       | —   |       | —   |       |
| Additional paid-in capital                                                                      |       | 71,341   |       | 71,291   |       |
| (Accumulated deficit) retained earnings                                                         |       | (2,041   | )          | 12,771   |       |
| Total stockholders’****equity                                                              |       | 69,300   |       | 84,062   |       |
| TOTAL                                                                                           |       | $        | 203,077    |     | $          | 221,006 |   |

 

See notes to consolidated financial statements.

 

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**WII COMPONENTS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTSOF OPERATIONS**

**(In thousands)**

 
| ** **                                         | ** ** | **Year Ended  December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                         | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| NET SALES                                          |       | $                                 | 130,455    |   | $ | 193,373 |   | $ | 249,303 |   |
| COST OF SALES                                      |       | 110,093                           |       | 166,635 |   | 205,063 |   |
| Gross profit                                       |       | 20,362                            |       | 26,738 |   | 44,240 |   |
| OPERATING EXPENSES:                                |       |                              |       |   |   |   |   |
| General and administrative                         |       | 9,048                             |       | 10,695 |   | 20,792 |   |
| Selling and marketing                              |       | 2,977                             |       | 3,185 |   | 3,253 |   |
| Goodwill impairment                                |       | 13,596                            |       | — |   | — |   |
| Loss (gain) on sale of assets                      |       | 132                               |       | 54 |   | 51 |   |
| Total operating expenses                           |       | 25,753                            |       | 13,934 |   | 24,096 |   |
| OPERATING (LOSS) INCOME                            |       | (5,391                            | )          | 12,804 |   | 20,144 |   |
| OTHER INCOME (EXPENSE):                            |       |                              |       |   |   |   |   |
| Interest income                                    |       | 16                                |       | 135 |   | 472 |   |
| Interest expense                                   |       | (12,449                           | )          | (13,024 | ) | (15,460 | ) |
| Other income (expense)                             |       | 7                                 |       | 1,725 |   | (19 | ) |
| Total other expense                                |       | (12,426                           | )          | (11,164 | ) | (15,007 | ) |
| INCOME BEFORE (BENEFIT) PROVISION FOR INCOME TAXES |       | (17,817                           | )          | 1,640 |   | 5,137 |   |
| INCOME TAX (BENEFIT) EXPENSE                       |       | (2,634                            | )          | 324 |   | 2,096 |   |
| NET (LOSS) EARNINGS                                |       | $                                 | (15,183    | ) | $ | 1,316 |   | $ | 3,041 |   |

 

See notes to consolidated financial statements.

 

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W**II COMPONENTS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTSOF STOCKHOLDERS**’ EQUITY

**(In thousands, exceptshare amounts)**

 
| ** **                                            | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | **(Accumulated  Deficit)** | ** ** | ** **   | ** ** |
|-------------------------------------------------------|------------|------------------|------------|----------------|------------|----------------------------|------------|--------------|------------|
| ** **                                            | ** ** | **Voting**       | ** ** | **Nonvoting**  | ** ** | **Paid-in**                | ** ** | **Retained** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Shares**       | ** ** | **Amount**     | ** ** | **Shares**                 | ** ** | **Amount**   | ** ** | **Capital** | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| BALANCE—January 1, 2007                     |       | 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 ASC 740                         |       |             |       |           |       |                       |       |         |       |   |   | 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 |   |
| Net loss                                              |       |             |       |           |       |                       |       |         |       |   |   | (15,183 | ) | (15,183 | ) |
| Stock-based compensation                              |       |             |       |           |       |                       |       |         |       | 50 |   |   |   | 50 |   |
| Amount due to Sellers                                 |       |             |       |           |       |                       |       |         |       |   |   | 371 |   | 371 |   |
| BALANCE—December 31, 2009                   |       | 100              |       | $              | —     |                       | —     |         | $          | — |   | $ | 71,341 |   | (2,041 | ) | $ | 69,300 |   |
|                                                       |            |                  |            |                |            |                            |            |              |            |  |  |  |  |  |  |  |  |  |  |  |

 

See notes to consolidated financial statements.

 

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**WII COMPONENTS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(In thousands)**

 
| ** **                                                                                  | ** ** | **Year Ended  December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                  | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| OPERATING ACTIVITIES:                                                                       |       |                              |       |   |   |   |   |
| Net (loss) earnings                                                                         |       | $                                 | (15,183    | ) | $ | 1,316 |   | $ | 3,041 |   |
| Adjustments to reconcile net (loss) earnings to net  cash provided by operating activities: |       |                              |       |   |   |   |   |
| Depreciation and amortization                                                               |       | 8,388                             |       | 8,762 |   | 8,712 |   |
| Amortization of debt issue costs                                                            |       | 1,510                             |       | 1,510 |   | 2,453 |   |
| Gain on extinguishments of debt                                                             |       | —                            |       | (1,725 | ) | — |   |
| Deferred income taxes                                                                       |       | (2,652                            | )          | (631 | ) | 3,392 |   |
| Loss on sale of property, plant, and equipment                                              |       | 132                               |       | 54 |   | 51 |   |
| Stock compensation expense                                                                  |       | 50                                |       | 50 |   | 1,130 |   |
| Goodwill impairment                                                                         |       | 13,596                            |       | — |   | — |   |
| Long-lived asset impairment                                                                 |       | —                            |       | 696 |   | — |   |
| Change in operating assets and liabilities:                                                 |       |                              |       |   |   |   |   |
| Accounts receivable                                                                         |       | (4,151                            | )          | 7,065 |   | (2,347 | ) |
| Inventories                                                                                 |       | (965                              | )          | 7,383 |   | 675 |   |
| Other current assets                                                                        |       | 115                               |       | (181 | ) | (73 | ) |
| Accounts payable                                                                            |       | 2,803                             |       | (2,116 | ) | (1,368 | ) |
| Accrued payroll and other current liabilities                                               |       | (301                              | )          | (976 | ) | (6,001 | ) |
| Current tax benefit due to Sellers                                                          |       | (9                                | )          | (6,710 | ) | 6,719 |   |
| Other long-term liabilities                                                                 |       | 540                               |       | (783 | ) | 116 |   |
| Total adjustments                                                                           |       | 24,828                            |       | 12,398 |   | 13,459 |   |
| Net cash provided by operating activities                                                   |       | 3,873                             |       | 13,714 |   | 16,500 |   |
| INVESTING ACTIVITIES:                                                                       |       |                              |       |   |   |   |   |
| Purchases of property, plant, and equipment                                                 |       | (1,700                            | )          | (3,722 | ) | (7,896 | ) |
| DMI earn-out payment                                                                        |       | —                            |       | — |   | (5,000 | ) |
| Proceeds from sale of property, plant, and equipment                                        |       | 131                               |       | 12 |   | 38 |   |
| Net cash used in investing activities                                                       |       | (1,569                            | )          | (3,710 | ) | (12,858 | ) |
| FINANCING ACTIVITIES:                                                                       |       |                              |       |   |   |   |   |
| Principal payments of long-term debt                                                        |       | (3,597                            | )          | (17,659 | ) | (14,031 | ) |
| Borrowings of long-term debt                                                                |       | —                            |       | 6,600 |   | 10,152 |   |
| Recapitalization - equity contribution                                                      |       | —                            |       | — |   | 21,747 |   |
| Debt issuance costs                                                                         |       | (136                              | )          | (29 | ) | (3,554 | ) |
| Recapitalization - repurchase of stock options                                              |       | —                            |       | — |   | (7,879 | ) |
| Due to Parent                                                                               |       | (190                              | )          | 709 |   | 4,058 |   |
| Payments made on behalf of Parent                                                           |       | —                            |       | (4,478 | ) | (2,609 | ) |
| Net cash (used in) provided by provided by financing  activities                            |       | (3,923                            | )          | (14,857 | ) | 7,884 |   |
| NET (DECREASE) INCREASE IN CASH                                                             |       | (1,619                            | )          | (4,853 | ) | 11,526 |   |
| Cash and cash equivalents—Beginning of period                                          |       | 14,721                            |       | 19,574 |   | 8,048 |   |
| Cash and cash equivalents—End of period                                                |       | $                                 | 13,102     |   | $ | 14,721 |   | $ | 19,574 |   |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                                         |       |                              |       |   |   |   |   |
| Cash paid for interest                                                                      |       | $                                 | 10,999     |   | $ | 11,992 |   | $ | 12,983 |   |
| Cash paid for income taxes                                                                  |       | $                                 | 216        |   | $ | 450 |   | $ | 714 |   |
| 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                                                                 |       | $                                 | 1,784      |   | $ | 1,947 |   | $ | 2,313 |   |
| Deferred income taxes                                                                       |       | $                                 | —     |   | $ | — |   | $ | 2,945 |   |
| Capital expenditures in accounts payable                                                    |       | $                                 | —     |   | $ | — |   | $ | 152 |   |
| Note receivable in connection with the sale of  property, plant and equipment               |       | $                                 | —     |   | $ | 55 |   | $ | 111 |   |
| Effect of adoption of ASC 740                                                               |       | $                                 | —     |   | $ | — |   | $ | 1,449 |   |

 

See notes to consolidated financial statements.

 

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**WII COMPONENTS, INC. ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

###### **DECEMBER 31, 2009 AND 2008**

 

**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 publiclytraded debt 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 centerretailers, and homebuilders.

 

***Principles of Consolidation*** The consolidated financial statements include the accounts of theCompany and its wholly owned subsidiaries; Woodcraft Industries, Inc. andits wholly owned subsidiaries, PrimeWood, Inc. (“PrimeWood”) andBrentwood Acquisition, Corp. (“Brentwood”) and Dimension Moldings, Inc. (“DMI”)(Note 6).  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 highly liquid investments with an original maturity when purchasedof three months or less are considered to be cash equivalents.  At times, certain bank deposits may be inexcess of federally insured limits.

 

***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,** | ** ** |
|------------|------------|-----------------------------------|------------|
| ** ** | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| A          |       | 43                                | %          | 37 | % | 36 | % |
| B          |       | 17                                |       | 18 |   | 18 |   |

 

These two customers represented the followingpercentages of consolidated accounts receivable as of December 31:

 

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| ** ** | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------|------------|----------|------------|----------|------------|
| A          |       | 57       | %          | 41       | %          |
| B          |       | 16       |       | 6        |       |

 

***Accounts Receivable ***Accounts receivable comprises primarily tradereceivables 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 andpayments.  The Company records anallowance for doubtful accounts based on the aging of the underlyingreceivables, historical experience, and any specific collection issues it hasidentified.  Accounts outstanding longerthan the contractual 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):

 
| ** **      | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Raw materials   |       | $        | 7,338      |     | $          | 6,977 |   |
| Work in process |       | 3,213    |       | 2,761    |       |
| Finished goods  |       | 2,322    |       | 2,496    |       |
| LIFO adjustment |       | 1,534    |       | 1,208    |       |
|            |       | $        | 14,407     |     | $          | 13,442 |   |

 

The majority of inventory is valued at the lower oflast-in, first-out (“LIFO”) cost or market. The remainder of the inventory isvalued at the lower of first-in, first-out method (“FIFO”) cost or market.  As of December 31, 2009 and 2008,inventory on the LIFO method represented 62% and 61% of the inventory balance,respectively.

 

If LIFO inventories had been valued at current costsdetermined on a FIFO basis the effect on costs of sales would be an increase of$0.3 million, $0.8 million, and $1.0 million for the years ended December 31,2009, 2008, and 2007, 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   |   |

 

The Company didnot have any capital leases outstanding at December 31, 2009 and December 31,2008.

 

Depreciation forthe years ended December 31, 2009, 2008, and 2007 was $6.7 million, $7.1million, and $6.8 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 31,2009 the Company determined its carrying value exceeded its fair valueresulting in goodwill impairment (see Note 4). As of December 31, 2008 and 2007, the Company determined its fairvalue exceeded its carrying value resulting in no goodwill impairment.

 

***Customer Relationship ***Customerrelationship relates to intangible assets recorded through previous acquisitionsfor relationships with significant customers. The original cost of these customer relationships is $16.6 million, andthe related accumulated amortization as of December 31, 2009 and 2008 is$8.4 million and $6.7 million, respectively. The intangible assets are being amortized over the estimated life of 10years. Amortization for the year ended December 31, 2009, 2008, and 2007was $1.7 million, $1.7 million, and $1.6 million, respectively.  Expected amortization is as follows for theyears ended December 31 (in thousands):

 

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| 2010       |   | $      | 1,657  |   |
|------------|--------|--------|--------|--------|
| 2011       |   | 1,658  |   |
| 2012       |   | 1,657  |   |
| 2013       |   | 1,658  |   |
| 2014       |   | 1,636  |   |
| Thereafter |   | — |   |

 

***Noncompete Agreement***  Noncompeteagreements primarily relate to agreements with the former owners of Brentwood,Grand Valley, and Dimension Moldings, Inc. The original cost of thesenoncompete agreements is $2.4 million, and the related accumulated amortizationas of December 31, 2009 and 2008 is $2.3 million and $2.3 million,respectively.  Noncompete agreementrights are being amortized over the applicable terms of the agreements(5 years, 7 years, and 5 years, respectively).  The noncompete agreement with the formerowner of Brentwood was fully amortized in July 2007.  The noncompete agreements with the formerowners of Grand Valley and Dimension Moldings, Inc. are expected to befully amortized by April 2011 and July 2010, respectively.  Amortization for the years ended December 31,2009, 2008, and 2007 was $34,000, $34,000, and $285,000, respectively.  As of December 31, 2009 the noncompeteintangible asset was $31,000.  Expectedamortization is as follows for the years ended December 31 (in thousands):

 
| 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 of Long-LivedAssets***  The Company evaluates the carrying valueof long-lived assets for impairment when events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable.  If impairment indicators are present and theestimated future undiscounted cash flows are less than the carrying value ofthe assets, the carrying value is reduced to the estimated fair value asmeasured by the associated undiscounted cash flows.  Due to the lower sales and earnings for thetwelve months ended December 31, 2009 and the current economicenvironment, the Company performed an ASC 360 impairment test.  Based on the undiscounted cash flowsanalysis, the Company determined the carrying value of long-lived assets wasnot impaired.  In December 2008, theCompany ceased operations in its West Jordan, Utah location and concludedcertain long-lived assets in this facility did not have any future use andrecorded an impairment of $0.7 million.

 

***Fair Value of FinancialInstruments***  The carrying amounts of cash and cashequivalents, accounts receivable, accounts payable and accrued liabilitiesapproximate fair value, because of the short maturity of theseinstruments.  The fair value of long-termdebt is based on quoted market prices for the same or similar issues or on thecurrent rates offered to the Company for a term equal to the same remainingmaturities.  The fair value of the FirstLien Term Facility (Note 7) approximates the carrying amount due to thevariable interest rate on this obligation. Based on quoted market values, the fair value of the Senior Notes wasdetermined to be $65.0 million and $37.9 million at December 31, 2009 and December 31,2008, respectively.

 

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

 
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Self-insurance reserve             |       | $                     | 2,236      |   | $ | 2,548 |   |
| Accrued interest expense           |       | 4,124                 |       | 4,184 |   |
| Due to Parent                      |       | 4,578                 |       | 4,768 |   |
| Accrued bonuses                    |       | 262                   |       | 38 |   |
| Payment due to former shareholders |       | —                |       | 8 |   |
| Other                              |       | 2,026                 |       | 2,165 |   |
|                               |       | $                     | 13,226     |   | $ | 13,711 |   |

 

The Company is partially self-insured for medical andworkers’compensation costs, subject to maximum individual stop-loss amounts.  The Company has established reserves relatedto insurance that are included in other current liabilities as noted above.

 

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The Company recordsincome tax liabilities as an amount due to Parent.

 

***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 of accounting,which requires recognition of deferred tax assets and liabilities for theexpected 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.

 

***UncertainTax Positions***On January 1, 2007, the Company adopted the provisions of ASC 740,“Income Taxes”*,* which clarifies the accountingfor uncertain tax positions recognized in an enterprise’s financial statements.  ASC740 prescribes a recognition threshold and measurement criteria for thefinancial statement recognition and measurement of an income tax provisiontaken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interestand penalties, accounting in interim periods, disclosure and transition

 

As a result of theimplementation of ASC 740, the Company recognized a $1.4 million decrease inthe liability for uncertain tax positions which, as required, was accounted foras an increase to the January 1, 2007 balance of retained earnings.  The decrease is the result of thederecognition of certain tax positions taken in prior years that managementfeels are sustainable based on audit results. As of and for the years ended December 31, 2009 and 2008, theactivity and balance of unrecognized tax benefits were not significant.  The Company is no longer subject to U.S.federal, state and local, or non-U.S. income tax examinations by tax authoritiesfor the years before December 31, 2004. The Company recognizes interest and penalties related to unrecognizedtax benefits within income tax expense. The Company recognizes interest accrued related to unrecognized taxbenefits in interest expense and penalties in operating expenses for allperiods presented.  During the yearsended December 31, 2009 and 2008, the amount of interest and penalties wasnot significant.  The Company files innumerous state jurisdictions with varying statutes of limitations which havebeen considered in conjunction with the unrecognized tax benefits analysis asof December 31, 2009 and 2008.

 

***Stock Options***  The Companymaintained 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** | ** ** |
|----------------------------------|------------|-----------------------------------------------------|------------|
| ** **                       | ** ** | **Options**                                         | ** ** | **Weighted********Average********Exercise********Price** | ** ** |
| Outstanding, beginning of period |       | 2,518,500                                           |       | $ | 2.86 |   |
| Granted                          |       | —                                              |       | $ | — |   |
| Exercised                        |       | —                                              |       | $ | — |   |
| Canceled                         |       | 2,518,500                                           |       | $ | 2.86 |   |
| Outstanding, end of period       |       | —                                              |       | $ | — |   |

 

Effective January 1,2006 the Company adopted ASC 718 *Compensation-StockCompensation*(ASC 718), which requires all share-based payments,including grants of stock options, to be recognized in the statement ofoperations as an operating expense, based on their fair values over therequisite service period.  In conjunctionwith the adoption of ASC 718, the Company utilized the prospective transitionmethod as permitted by ASC 718.  Underthis transition method, ASC 718 is 

 

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applied prospectively toall new awards issued as well as awards modified, repurchased, or canceledafter the effective date.  The Companycontinued to account for the 2,351,000 options outstanding at the effective dateof ASC 718 using the accounting principles originally applied to thoseoptions.  The Company recorded $1,029,000for the year ended December 31, 2007, of related stock-based compensationexpense.  The total income tax benefitfor share-based compensation arrangements was $400,000 for the year ended December 31,2007.

 

***Restricted Stock ***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 $397,000 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 of relatedcompensation expense recorded for each of the years ending December 31,2009 and December 31, 2008.  Theamount of compensation expense in 2007 was not significant.  The restricted stock becomes fully vestedafter seven years, or earlier, if certain milestones, as defined, are met.  The restricted stock was consideredcontributed capital to the Company from 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 Financial AccountingStandards Board (“FASB”)  issued a newaccounting standard, now included in Accounting Standards Codification (“ASC”)820 (formerly SFAS 157), “Fair Value Measurements and Disclosures” to definefair value, establish a framework for measuring fair value, and expanddisclosures about fair value measurements. The Company adopted this standard effective January 1, 2008.  The adoption of this standard did not have amaterial effect on its financial position or results of operations.

 

In March 2008, theFASB issued ASC 815 (formerly SFAS 161) “Derivatives and Hedging”.  ASC 815 establishes, among other things,additional disclosure requirements for derivative instruments and for hedgingactivities.  ASC 815 is effective for theCompany beginning January 1, 2009 on a prospective basis.  The adoption of this statement did not have amaterial effect on the Company’s financial position or results of operations.

 

In April 2009, theFASB issued guidance that requires interim reporting period disclosure aboutthe fair value of certain financial instruments, effective for interimreporting periods ending after June 15, 2009.  The Company hasadopted these disclosure requirements.  Due to their nature, the carryingvalue of cash, receivables, payables and debt obligations approximates fairvalue.

 

In May 2009, theFASB issued SFAS No. 165, “SubsequentEvents” which was primarily codified into Topic 855 “Subsequent Events” in the ASC.  This guidance was issued in order toestablish principles and requirements for reviewing and reporting subsequentevents.  On February 24th 2010, the FASBissued Accounting Standards Update (ASU) 2010-09 to amend ASC 855, SubsequentEvents.  As a result, SEC registrantswill not disclose the date through which management evaluated subsequent eventsin the financial statements—either in originally issued financial statements orreissued financial statements. The adoption of this guidance did not have animpact on the Company’s consolidated financial statements.

 

In June 2009,the FASB issued guidance that establishes the FASB Accounting StandardsCodification (the Codification) as the source of authoritative accountingprinciples recognized by the FASB to be applied by nongovernmental entities inthe preparation of financial statements in conformity with generally acceptedaccounting principles (GAAP).  Use of the new Codification is effectivefor interim and annual periods ending after September 15, 2009.  The Companyhas used the new Codification in reference to GAAP in this annual report on Form 10-K andsuch use has not impacted the consolidated results of the Company.

 

In January 2010,the FASB issued ASU No. 2010-06, “FairValue Measurements and Disclosures (Topic 820)—Improving Disclosures about FairValue Measurements”.  Thisguidance will require reporting entities to provide information about movementsof assets among Levels 1 and 2 of the three-tier fair value hierarchyestablished by ASC 820 and provide a reconciliation of purchases, sales,issuance, and settlements of financial instruments valued with a Level 3method, which is used to price the hardest to value instruments. Entities willhave to provide fair value measurement disclosures for each class of financialassets and liabilities.  The guidancewill be effective for any fiscal year that begins after December 15,2010.  The Company does not anticipatethe adoption of ASU No. 2010-06 to have a material impact on its financialstatements.

 

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**3. BUSINESS SEGMENTS**

 

The Company conducts 93% of its business within onereportable market segment: the wood kitchen and bath products segment.  The Company has two primary productcategories: hardwood products and engineered wood products. Hardwood 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 asfollows (in thousands):

 
| ** **               | ** ** | **Year Ended  December 31,** | ** ** |
|--------------------------|------------|-----------------------------------|------------|
| ** **               | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Hardwood products        |       | $                                 | 102,482    |   | $ | 157,877 |   | $ | 208,913 |   |
| Engineered wood products |       | 27,973                            |       | 35,496 |   | 40,390 |   |
| Total                    |       | $                                 | 130,455    |   | $ | 193,373 |   | $ | 249,303 |   |

 

Substantially all assets are located and sales aremade within North America.

 

**4. GOODWILL**

 

The changes in the carrying amount of goodwill were asfollows (in thousands):

 
| ** **                       | ** ** | **Year Ended  December 31,** | ** ** |
|----------------------------------|------------|-----------------------------------|------------|
| ** **                       | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Balance—Beginning of period |       | $                                 | 112,748    |   | $ | 112,748 |   | $ | 108,748 |   |
| Goodwill impairment              |       | (13,596                           | )          | — |   | — |   |
| DMI contingent consideration     |       | —                            |       | — |   | 4,000 |   |
| Balance—End of period       |       | $                                 | 99,152     |   | $ | 112,748 |   | $ | 112,748 |   |

 

The December 31, 2009 annual test for goodwillimpairment resulted in a fair value amount below the Company’s carrying valuewhich required further analysis to determine the goodwill impairmentamount.  The determination of the goodwill impairment was based on the fairvalue of assets and liabilities as if the Company had been acquired using ahypothetical business combination with a purchase price equal to the marketmultiple valuation balance as of December 31, 2009.  This impairment analysis concluded thepurchase price, as determined, was in excess of the net assets however thisexcess was below the recorded goodwill balance at December 31, 2009.  The difference between the recorded goodwilland excess fair value at December 31, 2009 was the computed goodwill impairmentof $13.6 million.  As of December 31,2008 and as of December 31, 2007, the Company determined its fair valueexceeded its carrying value resulting in no goodwill impairment.

 

**5. FAIR VALUE MEASUREMENTS**

 

The Company accounts for fair value measurements inaccordance with ASC 820, which defines fair value as the price that would bereceived for an asset or paid to transfer a liability (an exit price) in theprincipal or most advantageous market for the asset or liability in an orderlytransaction between market participants on the measurement date.  ASC 820 establishes three levels of inputsthat may be used to measure fair value:

 

·                  Level 1 — inputs utilizing quoted prices (unadjusted) in active marketsfor identical assets and liabilities.

·                  Level 2 — observable inputs other than quoted prices that areobservable for the asset or liability, either directly or indirectly, includingquoted prices for similar assets or liabilities in active markets, or quotedprices for identical or similar assets in markets that are not active.

·                  Level 3 — unobservable inputs in which there is little or no marketdata available, which require the reporting entity to develop its ownassumptions.

 

Ininstances where the determination of the fair value measurement is based oninputs from different levels of the fair value hierarchy, the level in the fairvalue hierarchy within which the entire fair value measurement falls is basedon the lowest level input that is significant to the fair value measurement inits entirety.

 

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EffectiveJanuary 1, 2009, the provisions of ASC 820 became applicable fornon-financial assets and liabilities recognized at fair value in the financialstatements on a nonrecurring basis. Repossessed equipment are assets measured at fair value on anonrecurring basis; that is, the assets are not measured at fair value on anongoing basis but are subject to fair value adjustments in certaincircumstances.

 

The following tablepresents the assets measured at fair value on a nonrecurring basis as of December 31,2009:

 
| ** **                  | ** ** | **Assets at Fair Value as of December 31, 2009** | ** ** |
|-----------------------------|------------|-------------------------------------------------------|------------|
| ** **                  | ** ** | **Level 1**                                           | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|                        |       |                                                  |       |   |   |   |   |   |   |
| Goodwill                    |       | $                                                     | —     |   | $ | — |   | $ | 99,152 |   | $ | 99,152 |   |
| Total assets at fair  value |       | $                                                     | —     |   | $ | — |   | $ | 99,152 |   | $ | 99,152 |   |

 

**6. RECAPITALIZATION AND OTHER ACQUISITION**

 

OnJanuary 9, 2007, the Company was acquired by Parent, a newly formedinvestment entity controlled by the Olympus Funds.  The aggregate purchase price paid by Parentfor all of the shares of capital stock of the Company and options to purchaseshares of capital stock of the Company in the Transaction was approximately$293.1 million, less indebtedness and certain expenses.  The aggregate purchase price and related feesand expenses were funded by borrowings under new credit facilities by theCompany and private offerings of debt and equity securities by Parent.  The Transaction has been accounted for as arecapitalization in the Company’s consolidatedfinancial statements, with no adjustments to the historical basis of theCompany’s assets and liabilities.

 

Inconjunction with the Transaction, the Company entered into a senior creditfacility (the “Senior Credit Facility”), with Credit Suisse, Cayman IslandsBranch, which provided for (i) a senior secured first lien term loanfacility in an aggregate principal amount of $150.0 million (the “First LienTerm Facility”) and (ii) a senior secured first lien revolving creditfacility in an aggregate principal amount up to $25.0 million, subject tocertain conditions (the “Revolving Facility” and, together with the First LienTerm Facility, the “First Lien Facilities”), of which $10.0 million isavailable through a sub facility in the form of letters of credit (See Note 7).

 

In conjunction with theTransaction, the Parent entered into Note Purchase Agreements with OCMMezzanine Fund II, L.P. and Olympus Growth Fund IV, L.P.  The Note Purchase Agreement with OCMMezzanine Fund II, L.P. consisted of $43.0 million senior payment-in-kind noteswith no required principal amortization. The Note Purchase Agreement with Olympus Growth Fund IV, L.P. consistedof $43.0 million junior payment-in-kind notes with no required principalamortization.  These notes (the “Parent Notes”) are scheduled to mature in April 2012.  During the term of the Parent Notes, Parentis able at its option to pay interest on the Parent Notes through the issuanceof additional notes. The Company is not liable for, and has not otherwiseguaranteed, any of the obligations of Parent with respect to the ParentNotes.  The Company is, however, subjectto a number of restrictive covenants under the Note Purchase Agreements.  On March 30, 2009, the Parent obtainedwaivers for the restrictive covenants in the Note Purchase Agreements relatingto the maximum total leverage ratio permitted for the period ending December 31,2008.  The Company was in compliance withall covenants as of December 31, 2009. In addition, the Company is limited in its ability to pay dividends orotherwise make distributions to Parent under the Senior Credit Facility and theindenture governing the 10% Senior Notes due 2012 (the “Senior Notes”).  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 OlympusGrowth Fund IV, L.P., and purchased $20.0 million of Parent Notes from OCMMezzanine Fund II, L.P.  During thetwelve month periods ended December 31, 2009 and December 31, 2008,the Company had no distributions and distributions totaling $4.5 million,respectively, to the Parent for payment on Parent Notes.  The 2008 distribution to the Parent wasrecorded 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,compounding quarterly, on the sum of its liquidation value per share 

 

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($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 of suchsecurities.  Parent is prohibited fromredeeming any preferred equity securities if any such redemption is prohibitedunder any credit facility or indenture to which Parent or any of itssubsidiaries is a party or is otherwise bound. The Company is not liable for, and has not otherwise guaranteed, any ofthese obligations of Parent with respect to the equity securities issued byParent.  These equity securities are notreflected in the Company’s consolidated balance sheet as the Company did notpush down the new accounting basis because of the significance of the publicdebt 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 New FitzpatrickEmployment Agreement, in the event (i) Mr. Fitzpatrick resigns forretirement purposes from the employment of the Company and its subsidiariesafter 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 General CorporationLaw 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, 2009, theentire liability for the agreement is $1.7 million and is included in OtherLong-Term Liabilities.

 

The Company recorded expenses of $9.9 million in thetwelve months ended December 31, 2007 related to the Transaction.  These expenses comprised of $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.

 

**7. FINANCING ARRANGEMENTS**

 

Long-term debt consisted of the following (inthousands):

 
| ** **                   | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Senior  Notes (10%) due 2012 |       | $                           | 108,350    |                        | $          | 108,350 |   |
| First  Lien Term Facility    |       | —                      |       | 3,597                       |       |
| Total  debt                  |       | 108,350                     |       | 111,947                     |       |
| Less  current maturities     |       | —                      |       | 3,597                       |       |
|                         |       | $                           | 108,350    |                        | $          | 108,350 |   |

 

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***Senior Notes ***The Company has outstanding 10% SeniorNotes due in 2012.  During the threemonths 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.

 

***CreditFacility***** Inconjunction with the Transaction, the Company entered into the Senior CreditFacility, with Credit Suisse, Cayman Islands Branch, which provided for (i) theFirst Lien Term Facility in an aggregate principal amount of $150.0 million and(ii) the Revolving Facility in an aggregate principal amount up to $25.0million, subject to certain conditions, of which $10.0 million is availablethrough a sub facility in the form of letters of credit.  On March 30, 2009, we repaid all amountsoutstanding under the First Lien Term Facility, and no additional borrowingsare available thereunder.  As of December 31,2009, the maximum amount of borrowings available to the Company under theRevolving Facility was $12.5 million.  Asof December 31, 2009 the Company had no outstanding borrowings under theRevolving Facility.  Borrowings under theRevolving Facility bear interest at a fluctuating rate equal to either the baserate plus 2.75% per annum or LIBOR plus 3.75% per annum (effective rateof 5.25% and 4.21% at December 31, 2009 and December 31, 2008,respectively).  The Company must complywith certain financial covenants under its Senior Credit Facility, includingmaintenance of an interest coverage ratio and a total leverage ratio.  Wewere in compliance with such covenants as of December 31, 2009.

 

On March 30, 2009, the Company entered into anamendment to its Senior Credit Facility, which among other things: (i) increasedthe applicable interest rate margin for borrowings thereunder; (ii) eliminatedthe requirement that the Company maintain corporate debt ratings; (iii) extendedthe date by which the Company must amend the indenture governing the SeniorNotes to eliminate certain of the restrictive covenants contained therein(including covenants related to the incurrence of indebtedness and liens) orredeem the Senior Notes to March 31, 2010; (iv) extended the Company’sability 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 the Company may have at the end of eachquarterly period from December 31, 2008 through December 31, 2009, (vi) requiredpayment of the remaining balance due under the First Lien Term Facility of approximately$3.6 million and (vii) decreased the minimum interest coverage ratio theCompany is required to maintain at 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 ofdefault that may have arisen from the Company’s failure to maintain the maximumconsolidated leverage ratio and the minimum consolidated interest coverageratio set forth in the Senior Credit Facility prior to the effective date ofthe amendment.

 

On March 26, 2010, the Company entered into anamendment to its Senior Credit Facility, which among other things: (i) extendedthe date by which the Company must amend the indenture governing the SeniorNotes to eliminate certain of the restrictive covenants contained therein(including covenants related to the incurrence of indebtedness and liens) orredeem the Senior Notes to March 31, 2011; (ii) increased the maximumtotal leverage ratio the Company may have at the end of each quarterly periodfrom March 31, 2010 through December 31, 2010; (iii) added anasset-based borrowing base as a condition to borrowing under the Senior CreditFacility; (iv) extended the Company’s ability to continue to pay cashdividends to enable Parent to make cash interest payments on the Parent Notesto March 31, 2011; and (v) decreased the minimum interest coverageratio the Company is required to maintain at the end of each quarterly periodfrom March 31, 2010 through December 31, 2010.

 

TheSenior Credit Facility is collateralized by substantially all assets of theCompany including real and personal property, inventory, accounts receivable,intellectual property and other intangibles. The Senior Credit Facility is scheduled to mature January 2013.

 

***Restrictions on Indebtedness ***OurSenior Credit Facility and the indenture for the Senior Notes impose certainrestrictions on the Company’s ability to incur indebtedness, pay dividends, makeinvestments, grant liens, sell assets and engage in certain other activities. The subsidiary guarantors are generally not restricted in their abilityto dividend or otherwise distribute funds to the Company except forrestrictions imposed under applicable state corporate law.  The Company islimited in its ability to pay dividends or otherwise make other distributionsto Parent under the Senior Credit Facility and the 

 

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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, 2011, 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, as well as any previously accrued but unpaid management fees for anyprevious fiscal years without regard to this $750,000 limitation, so long asthe amount accrued in any such previous fiscal year did not exceed $750,000, ineach case, so long as no default has occurred.  The indenture providesthat the Company can generally pay dividends and make other distributions toParent in an 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 consolidatedinterest coverage ratio of greater than 2.0 to 1.0.  For the twelve month period ended December 31,2009, the Company’s consolidated interest coverage ratio was less than 2.0 to1.0.

 

**8. COMMITMENTS AND CONTINGENCIES**

 

***Operating Leases*** The Company is obligated under various operating leases for warehousespace and plant equipment.  Rentalexpense under these agreements was approximately $924,000, $1,085,000, and $913,000for the years ended December 31, 2009, 2008, and 2007, respectively.  Future minimum lease payments are as follows(in thousands) as of December 31, 2009:

 
| **Year Ending December 31** | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|
| 2010                             |       | $          | 393        |   |
| 2011                             |       | 144        |       |
| 2012                             |       | 128        |       |
| 2013                             |       | 105        |       |
| 2014                             |       | 85         |       |
|                                  |            |            |            |  |

 

***WoodcraftIndustries, 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 $77,000, $554,000,and $620,000 during the years ended December 31, 2009, 2008 and 2007,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.

 

**9. INCOME TAXES**

 

The provision for income taxes consisted of thefollowing (in thousands):

 
| ** **                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Current provision:             |       |                             |       |   |   |   |   |
| Federal                        |       | $                                | (117       | ) | $ | 835 |   | $ | (1,807 | ) |
| State                          |       | 135                              |       | 120 |   | 478 |   |
|                           |       | 18                               |       | 955 |   | (1,329 | ) |
| Deferred tax (benefit) expense |       | (2,652                           | )          | (631 | ) | 3,425 |   |
| Provision for income taxes     |       | $                                | (2,634     | ) | $ | 324 |   | $ | 2,096 |   |

 

The provision for income taxes differs from the amountof income tax determined by applying the U.S. federal tax rate to pretax incomedue to the following:

 

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| ** **                                          | ** ** | **Year Ended  December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                          | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Tax provision at federal rate                       |       | $                                 | (6,236     | ) | $ | 573 |   | $ | 1,798 |   |
| Increase (decrease) in income taxes resulting from: |       |                              |       |   |   |   |   |
| Nondeductible expenses                              |       | 12                                |       | 25 |   | 27 |   |
| Federal tax credits                                 |       | —                            |       | — |   | (125 | ) |
| Goodwill impairment                                 |       | 4,320                             |       | — |   | — |   |
| Management fee                                      |       | (654                              | )          | — |   | — |   |
| State income taxes—net of federal benefit      |       | (62                               | )          | 127 |   | 471 |   |
| Change in deferred tax rate                         |       | (33                               | )          | (119 | ) | — |   |
| Other                                               |       | 19                                |       | (282 | ) | (75 | ) |
| Provision for income taxes                          |       | $                                 | (2,634     | ) | $ | 324 |   | $ | 2,096 |   |

 

Net deferred tax assets (liabilities) consist of thefollowing components as of December 31:

 
| ** **                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Depreciation                          |       | $        | (6,407     | )        | $          | (6,451 | ) |
| Noncompete agreements                 |       | 679      |       | 882      |       |
| Goodwill and other amortizable assets |       | 34       |       | (365     | )          |
| Accruals                              |       | 357      |       | (338     | )          |
| Inventory                             |       | (162     | )          | (464     | )          |
| Capital leases                        |       | 84       |       | 85       |       |
| Bad debt expense                      |       | 122      |       | 56       |       |
| NOL carryforward                      |       | 2,819    |       | 1,626    |       |
| Accrued payroll and health insurance  |       | 1,227    |       | 1,070    |       |
| Net deferred tax liabilities          |       | $        | (1,247     | )        | $          | (3,899 | ) |
|                                  |       |     |       |     |       |
| Current                               |       | $        | 1,927      |     | $          | 1,318 |   |
| Noncurrent                            |       | (3,174   | )          | (5,217   | )          |
|                                  |       | $        | (1,247     | )        | $          | (3,899 | ) |

 

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 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.

 

**10. 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 shares of undesignated preferred stock, par value $0.01.

 

As a result of the Transaction, all the outstandingcapital stock (100 shares) of WII Components, Inc. was acquired by WIIHolding, Inc. (“Parent”) through the Transaction of a newly formed whollyowned subsidiary of Parent with and into WII Components, Inc.

 

The Company had no distributions and distributed $4.5million to the Parent for payment on the Parent Notes for the periods ended December 31,2009 and December 31, 2008, respectively.

 

**11. RELATED-PARTY TRANSACTIONS**

 

The Company hasnoncompete agreements with the former owners of Brentwood, Grand Valley, andDimension Moldings, Inc.

 

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The Parent has amanagement services agreement with an affiliate of Olympus Growth Fund IV,L.P., 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.  Under this agreement,the Parent paid approximately $3.0 million 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, unless loweredby the affiliate, for ongoing services provided to Parent and its subsidiaries,including the Company.   Effective July 1, 2008, the quarterlyadvisory fee was reduced to $135,000.  In2009, the quarterly advisory fee was not paid but continued to be accrued atthe reduced amount of $135,000 per quarter. In connection with the March 31, 2009 amendments to the Note PurchaseAgreements related to the Parent Notes, the quarterly fee payment was deferredfor 2009, and will be payable in 2010 or thereafter.  Currently, the Company is continuing toaccrue but not pay the quarterly advisory fee. The Company paid a total of $570,000 to the Parent for the year ended December 31,2008.  Although neither the Company nor any of its subsidiaries is partyto this Agreement, the Company has recorded this expense in its statement ofoperations because most of the services relate to its operations.

 

In addition to themanagement services agreement, the Company also made payments on behalf of theParent of $0 and $4.5 million for the years ended December 31, 2009 and December 31,2008, respectively.  The Company’sdistributions to the Parent are for payments on the Parent notes, legal fees,and other expenses.  Certain of theCompany’s debt agreements provide restrictions on the ability of the Company tomake distributions to or on account of the Parent.  See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources” for a detailed discussion of such restrictions.

 

Parent issued RestrictedStock Agreements on August 31, 2007 and September 14, 2007 to certainCompany management personnel totaling 55,219 shares of Parent commonstock.  The fair value of the Parentscommon stock was approximately $397,000 on the date of the grant.  The restricted stock becomes fully vestedafter 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, 2009 and December 31, 2008, the Companyincluded a total of $3.3 million and $4.8 million, respectively as an amountdue to Parent for these income tax liabilities.

 

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

 

**The following is a condensed summary ofactual quarterly results of operations for 2009 and 2008 (in thousands):**

** **
| ** **               | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** | **Year** | ** ** |
|--------------------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|----------|------------|
| **2009:**                |       |      |       |       |       |      |       |       |       |     |       |
| Net  sales               |       | $         | 32,805     |       | $          | 34,346    |       | $          | 31,087     |     | $          | 32,217 |   | $ | 130,455 |   |
| Gross  profit            |       | 4,467     |       | 5,877      |       | 5,053     |       | 4,965      |       | 20,362   |       |
| Operating  income (loss) |       | 1,423     |       | 2,764      |       | 2,240     |       | (11,818    | )          | (5,391   | )          |
| Net  loss                |       | (1,005    | )          | (245       | )          | (552      | )          | (13,381    | )          | (15,183  | )          |
|                     |       |      |       |       |       |      |       |       |       |     |       |
| **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    |       |

 

**13.SUBSEQUENT EVENTS:**

 

On March 26, 2010, the Company entered into anamendment to its Senior Credit Facility, which among other things: (i) extendedthe date by which the Company must amend the indenture governing the SeniorNotes to eliminate certain of the restrictive covenants contained therein(including covenants related to the incurrence of indebtedness and liens) orredeem the Senior Notes to March 31, 2011; (ii) increased the maximumtotal leverage ratio the Company may have at the end of each quarterly periodfrom March 31, 2010 through December 31, 2010: (iii) added anasset-based borrowing base as a condition to borrowing under the Senior CreditFacility; (iv) extended the Company’s ability to continue to pay cashdividends to enable Parent to make cash interest payments on the Parent Notesto March 31, 2011; and (v) decreased the 

 

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minimum interest coverageratio the Company is required to maintain at the end of each quarterly periodfrom March 31, 2010 through December 31, 2010. 

 

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**Item 9.Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure**

 

There were no changes inor disagreements with the accountants on accounting and financial disclosure.

 

**Item 9A(T).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, 2009. 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 financial 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 31,2009, our disclosure controls and procedures were effective at a reasonablelevel of assurance.

 

***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 Annual Report on Internal Control over FinancialReporting.*** Our management is responsible forestablishing and maintaining adequate internal control over financialreporting, as defined in Exchange Act Rule 13a-15(f). Prior to this annualfiling, management conducted an evaluation of the effectiveness of our internalcontrol 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, 2009. 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’s Discussion and Analysis ofResults of Financial Condition and Results of Operations - Liquidity andCapital Resources,” on March 26, 2010, we entered into an amendment to our Senior CreditFacility, which among other things: (i) extended the date by which the Companymust amend the indenture governing the Senior Notes to eliminate certain of therestrictive covenants contained therein (including covenants related to theincurrence of indebtedness and liens) or redeem the Senior Notes to March 31,2011; (ii) increased the maximum total leverage ratio the Company may haveat the end of each quarterly period from March 31, 2010 through December 31,2010; (iii) added an asset-based borrowing base as a condition toborrowing under the Senior Credit Facility; (iv) extended the Company’sability to continue to pay cash dividends to enable Parent to make cashinterest payments on the Parent Notes to March 31, 2011; and (v) decreasedthe minimum interest coverage ratio the Company is required to maintain at theend of each quarterly period from March 31, 2010 through December 31,2010.

 

**PART III**

 

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

 

The following table sets forth the names and ages (asof March 17, 2010) of our executive officers and directors and thepositions that they hold at WII Components, Inc. and, where applicable, atParent.  Directors of WII Components holdtheir positions until the annual meeting of the stockholders at which theirterm expires or until their respective successors are elected andqualified.  Directors of Parent areelected pursuant to the 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     |       | 66      |       | Director, Chief  Executive Officer and President—Parent; andDirector, Chief Executive Officer and  President—WII Components    |
| Dale Herbst          |       | 41      |       | Chief Financial  Officer, Treasurer and Secretary—Parent; and Chief Financial Officer, Treasurer  and Secretary—WII Components |
| Joel Beyer           |       | 50      |       | Vice President  of Operations—PrimeWood                                                                                             |
| Robert S. Morris     |       | 55      |       | Director—Parent;  and Director—WII Components                                                                                  |
| Louis J.  Mischianti |       | 50      |       | Director—Parent;  and Director —WII Components                                                                                 |
| L. David  Cardenas   |       | 43      |       | Director—Parent;  and Director —WII Components                                                                                 |
| Keith Heffernan      |       | 40      |       | 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 serves on the board ofdirectors of Baker Manufacturing Company and the Kitchen Cabinet ManufacturingAssociation.  Mr. Fitzpatrickreceived a B.S. in Mechanical Engineering from the University of Notre Dame anda M.B.A. from the University of Pittsburgh. Mr. Fitzpatrick was selected to serve as a director of the Companybecause he is the Chief Executive Officer and has been with our business overten years.  He has extensive knowledge ofour business, manufacturing, and the kitchen and bath cabinet industry

 

*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 currently serves as the Managing Partner of Olympus Partners and itsaffiliated investment 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 also serves onthe board of directors of Shemin Nurseries, Ann’s House of Nuts, ProfessionalService Industries, Homax Products, Tank Holdings, and The RitedoseCorporation.  Mr. Morris served as adirector on the board of Club Staffing from fourth quarter 2001 to secondquarter of 2006.  Mr. Morrisreceived an A.B. from Hamilton College and a M.B.A. from the Amos Tuck Schoolof Business at Dartmouth College.  Mr. Morriswas selected to serve as a director of the Company because he has extensiveexperience in serving as a director of portfolio companies of Olympus Partnersand has significant expertise in finance.

 

*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 serves on the board ofdirectors of Homax Products, Pepper Dining, Professional Service Industries,Tank Holdings, and the Ritedose Corporation. Mr. Mischianti served as a director on the board of ClientDistribution Services from fourth quarter 1999 to second quarter 2005, TravelCenters of America from fourth quarter 2000 to first quarter 2007, Global LinkLogistics from second quarter 2003 to second quarter 2006, and Meridian RailServices from fourth quarter 2004 to fourth quarter 2006.  Mr. Mischianti received an A.B. fromYale University.  Mr. Mischianti wasselected to serve as a director of the Company because he has extensiveexperience in serving as a director of portfolio companies of Olympus Partnersand has significant expertise in finance.

 

*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. Cardenasserves on the board of directors of Professional Service Industries and PhoenixServices.  Mr. Cardenas served as adirector on the board of Prime Advantage from third quarter 2000 to secondquarter 2008, Club Staffing from fourth quarter 2001 to second quarter 2006,Global Link Logistics from second quarter 2003 to second quarter 2006, andMeridian Rail Services from fourth quarter 2004 to fourth quarter 2006.  Mr. Cardenas received a B.S. from theUniversity of Virginia and a M.B.A. from the

 

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University of North Carolina. Mr. Cardenas was selected to serveas a director of the Company because he has extensive experience in serving asa director of portfolio companies of Olympus Partners and has significantexpertise in finance.

 

*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. Heffernanserved as a director on the board of Global Link Logistics from second quarter2003 to second quarter 2006, and Meridian Rail Services from fourth quarter2004 to fourth quarter 2006.  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.  Mr. Heffernan was selected to serve as adirector of the Company because he has extensive experience in serving as adirector of portfolio companies of Olympus Partners and has significantexpertise in finance.

 

**Board of Directors**

 

As of March 17, 2010, Parent has a five-memberboard of directors consisting of Messrs. Fitzpatrick, Morris, Mischianti,Cardenas and Heffernan.  The bylaws ofParent permit the directors to increase the size of the board of directors ofParent 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 designee to the respective board thereof as designated byOlympus Growth Fund IV, L.P..  As of March 17,2010 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.”

 

Nominees for directorship are selected in accordancewith certain criteria, including demonstrated business judgment, independence,skills and experience in the context of the need of the board.  Diversity is not a consideration in selectingnominees for directorship.

 

As a privatecompany, we do not have an audit, compensation or nominating committee.  We have not determined whether any member ofour board of directors is an “audit committee financial expert” as defined inItem 407 of Regulation S-K.

** **

**FamilyRelationships**

 

There are nofamily relationships between any of our executive officers or directors.

 

**CompensationCommittee Interlocks and Insider Participation**

 

Our board iscurrently composed of five directors, of which Mr. Fitzpatrick is anexecutive officer of the Company and he participated in deliberations of theboard concerning executive officer compensation during 2009 (other than his owncompensation).  For a description of the transactions between us and ourdirectors, and entities affiliated with such directors, see the sectionsentitled “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 of ethics and conduct policy for all ofour officers and employees.  The Companyhereby undertakes to provide a copy of its code of ethics to any person withoutcharge, upon request.  Such request maybe made by contacting the Human Resource Department at 320-252-1503.

 

**Item 11. Executive Compensation**

 

# ***Compensation Policies andPractices. ***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.

 

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**Our executive compensation programs are designed to encourage ourexecutive officers to operate the business in a manner that enhancesstockholder value.  In addition, asubstantial portion of our executive**’s overall 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 achievean overall compensation program that provides foundational elements such asbase salary and benefits that are generally competitive with the marketplace,as well as an opportunity for variable incentive compensation that issignificant when financial performance goals are met.

 

Our executivecompensation consists of the following components (i) base salary, (ii) annualcash bonus, and (iii) long-term incentive awards — stock option grants orrestricted stock grants.

 

***BaseSalary. ***Base salary is established based on theexperience, skills, knowledge and responsibilities required of the executiveofficer.  When establishing the 2009 basesalaries of the executive officers, a number of factors were considered,including the individual’s performance and growth of duties andresponsibilities.  We seek to maintainbase salaries that are competitive with the marketplace, to allow us to attractand retain executive talent.

 

Salaries for executiveofficers are reviewed on an annual basis, at the time of a promotion or otherchange in level of responsibilities, as well as when competitive circumstancesrequire review.  Increases in salary aredetermined upon increased levels of responsibility and a performance evaluationrelative to our overall financial performance, the performance of one of ourapplicable divisions or a combination. The base salary of John Fitzpatrick is determined by the Board ofDirectors, and Mr. Fitzpatrick, in consultation with the Board ofDirectors, sets the salaries for the balance of the executives.

 

***AnnualCash 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 combination.  The percentof planned EBITDA achieved will determine the amount of bonus to be paid basedon their sharing percentage and their bonus percentage (as a percent ofsalary).  The 2009 bonus plan for Mr. Fitzpatrick,Mr. Herbst, and Mr. Beyer provided for a target cash bonus of$222,229, $69,707, and $59,566, respectively, based upon their respective basesalaries for 2009.  In 2009 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 2009 Mr. Fitzpatrick earned, as incentive compensation, apercentage of his base salary, up to a maximum of 130%. The incentivecompensation has been determined on the basis of the actual EBITDA of theCompany as compared to the Company**’s planned EBITDA.  Based on theCompany’s performance, Mr. Fitzpatrick will not receivea cash bonus for 2009.

** **

For 2009 Mr. Herbstearned, as incentive compensation, a percentage of his base salary, up to amaximum of 90%. The incentive compensation has been determined on the actualEBITDA of the Company as compared to the Company’s planned EBITDA.  Based on the Company’s performance, Mr. Herbst will notreceive a cash bonus for 2009.

 

**For 2009 Mr. Beyer earned, as incentive compensation, a percentageof his base salary, up to a maximum of 80%. The incentive compensation has been determined, in part on the basis ofactual EBITDA of the Company as compared to the Company**’s planned EBITDA and, in part, on the basis ofactual EBITDA of the PrimeWood division as compared to the planned EBITDA forthe PrimeWood division.  Based on theperformance of the Company and PrimeWood, Mr. Beyer will not receive acash bonus for 2009.

** **

***Long-TermIncentive Awards.***  Through January 9, 2007,all of our executive officers had received equity compensation awards in theform of either incentive stock options and/or non-qualified stock options.  We granted long term incentive awards in theform 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 

 

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foregoing options whichwere outstanding at the time of the Transaction were cashed out and terminatedon 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 provide equityincentives to executive officers.  Therestricted stock is designed to align the interests of our executive officerswith our stockholders’ long-term interests by providing them with equity-basedawards that vest over a period of time upon the occurrence of certain 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 2009.

 

***Other Programs.*** Our Named Executive Officers can participate in our Company sponsoredbenefit programs at the same level as offered to all other employees.  These benefits include life, health, dental,401(k) matching, short-term disability, typical holiday and vacationbenefits, etc.  Also offered to the NamedExecutive Officers is a long-term disability plan, which is also offered toother certain management members.

 

***Compensation Committee Report.*** The Board of Directors has reviewed and discussed with management theCompensation Discussion and Analysis provisions included in this Form 10-K.  Based on the reviews and discussions referredto above, the Board of Directors recommends that the Compensation Discussionand Analysis referred to above be included in the Form 10-K.

 

Board of Directors

John Fitzpatrick

Robert S. Morris

Louis J. Mischianti

L. David Cardenas

Keith Heffernan

 

***Summary Compensation Table.*** The following table sets forth information for 2009, 2008, and 2007concerning compensation for services rendered in all capacities awarded to andearned by our Chief Executive Officer, Chief Financial Officer, and our onlyother officer who was serving as an executive officer on December 31,2009.

 
| **Name and  Principal  Position**                          | ** ** | **Fiscal  Year** | ** ** | **Salary  ($)** | ** ** | **Bonus  ($)** | ** ** | **Stock  Awards  ($) (1)** | ** ** | **Option  Awards  ($) (2)** | ** ** | **Non-Equity  Incentive  Plan Compensation  ($) (3)** | ** ** | **Change in Pension  Value and  Nonqualified  Deferred  Compensation  Earnings  ($) (4)** | ** ** | **All  Other  Compensation  ($)** | ** ** | **Total  ($)** | ** ** |
|-----------------------------------------------------------------|------------|------------------|------------|-----------------|------------|----------------|------------|---------------------------------|------------|----------------------------------|------------|-----------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|----------------|------------|
| John  Fitzpatrick, President and Chief Executive Officer        |       | 2009             |       | 341,890         | (8)        | —         |       | 7,558                           |       | —                           |       | —                                                          |       | —                                                                                                        |       | 27,116                            | (5)        | 376,564        |       |
|                                                            | 2008       |             | 342,571    |            | —     |           | 7,558      |                            | —     |                             | —     |                                                            | —     |                                                                                                          | 580,071    | (6)                               | 930,200    |           |
|                                                            | 2007       |             | 350,000    |            | —     |           | 15,115     |                            | —     |                             | 658,800    |                                                            | —     |                                                                                                          | 2,471,858  | (7)                               | 3,495,773  |           |
| Dale  Herbst, Chief Financial Officer, Treasurer, and Secretary |       | 2009             |       | 154,904         | (8)        | —         |       | 5,039                           |       | —                           |       | —                                                          |       | —                                                                                                        |       | 8,218                             | (5)        | 168,161        |       |
|                                                            | 2008       |             | 149,717    |            | —     |           | 5,039      |                            | —     |                             | —     |                                                            | —     |                                                                                                          | 161,182    | (6)                               | 315,938    |           |
|                                                            | 2007       |             | 142,000    |            | —     |           | 10,077     |                            | —     |                             | 250,000    |                                                            | —     |                                                                                                          | 841,619    | (7)                               | 1,243,696  |           |
| Joel  Beyer, Vice President of Operations-PrimeWood             |       | 2009             |       | 148,914         | (8)        | —         |       | 3,023                           |       | —                           |       | —                                                          |       | —                                                                                                        |       | 6,423                             | (5)        | 158,360        |       |
|                                                            | 2008       |             | 141,960    |            | —     |           | 3,023      |                            | —     |                             | —     |                                                            | —     |                                                                                                          | 120,969    | (6)                               | 265,952    |           |
|                                                            | 2007       |             | 140,000    |            | —     |           | 6,046      |                            | —     |                             | 20,000     |                                                            | —     |                                                                                                          | 616,036    | (7)                               | 782,082    |           |

 

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(1)                                  Representsthe aggregate grant date fair value of restricted stock awards of Parent commonstock granted in 2009, 2008, and 2007 fiscal years, computed in accordance withFASB ASC Topic 718.  There were no 

 

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forfeitures of such shares in 2009, 2008 or 2007.  See Note 2 “Restricted Stock” to the Company’sconsolidated financial statements for further discussion of such restrictedstock grants.

(2)                                  Represents the aggregate grant date fairvalue of option awards granted in the 2009, 2008, and 2007 fiscal years,computed in accordance with FASB ASC Topic 718. There were no option awards outstanding as of December 31, 2009.

(3)                                  Represents one-time transactionincentives paid in conjunction with the Transaction.

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

(5)                                  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 were $2,257, $1,425, and $1,365,respectively.  Compensation related tothe cancellation of stock options due to the Transaction for John Fitzpatrick,Dale Herbst, and Joel Beyer include $24,859, $6,793, and $5,058, respectively.

(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)                                  Includes base salary in EmploymentAgreements, subject to periodic adjustments. The amounts may not directly coincide with the base salary listed belowas of December 31, 2009 due to increases or decreases that occurredthroughout the year.

 

***RestrictedStock******.***  There were no Restricted Stock awards issued during2009.

 

***2009 Bonus Plan for Messrs. Fitzpatrick, Herbst, andBeyer. ***The 2009 bonus plan for Mr. Fitzpatrick,Mr. Herbst, and Mr. Beyer provided for a target cash bonus of$222,229, $69,707, and $59,566, respectively, based upon their respective basesalaries for 2009 of $341,890, $154,904, and $148,914, respectively.  In 2009, 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, 2009 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 2009.

 

**Grants of Plan-Based Awards**

 

The following table summarizes information regarding our 2009 bonusplans.  No equity-based incentive awardswere granted during 2009.

 
| ** **       | ** ** | ** **           | ** ** | **Estimated Future Payouts Under  Non-Equity Incentive Plan  (1)** | ** ** | **All Other  Stock  Awards:  Number of** | ** ** | **Exercise  or Base  Price of** | ** ** | **Grant Date  Fair Value**    | ** ** |
|------------------|------------|----------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| **Name**         | ** ** | **Grant Date**  | ** ** | **Threshold  ($)  (2)**                                            | ** ** | **Target  ($)  (3)**                               | ** ** | **Maximum  ($)  (4)**                     | ** ** | **Shares of  Stock  (#) (5)** | ** ** | **Stock  Awards  ($/Sh)** | ** ** | **of Stock  Awards  ($/Sh) (6)** | ** ** |
| John Fitzpatrick |       | January 1, 2009 |       | 14,815                                                             |       | 222,229                                            |       | 444,458                                   |       | —                                  |       | — |   | — |   |
| Dale Herbst      |       | January 1, 2009 |       | 4,647                                                              |       | 69,707                                             |       | 139,414                                   |       | —                                  |       | — |   | — |   |
| Joel Beyer       |       | January 1, 2009 |       | 3,971                                                              |       | 59,566                                             |       | 119,132                                   |       | —                                  |       | — |   | — |   |

 

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(1)   The threshold, target and maximum awardswere established under our annual cash bonus incentive.  See “Annual Cash Bonus Incentive” for furtherinformation regarding the criteria applied in determining the amount payableunder the awards.  The actual amountspaid with respect to these awards are included in the “Bonus” columns n theSummary Compensation Table.

(2)   Threshold amounts were determined basedon 85% of Target amounts.

(3)   Target amounts were determined based on2009 annual base salary for each named Executive Officer.

(4)   For each named Executive Officer, themaximum payment under our annual cash bonus incentive is 200% of the targetcash bonus.

(5)   Represents restricted securities issuedto the named Executive Officers pursuant to the Restricted Stock Agreements.

(6)   Represents the grant date fair value ofstock awards computed in accordance with FASB ASC Topic 718.

 

***Restricted Stock Plan.**** *In 2007,Parent issued restricted stock awards to certain Company management personnel,with such grants consisting of 55,218 shares of Parent’s restricted commonstock in the aggregate.  The shares ofrestricted stock vest 25% per year for the fiscal years ending 2007 through2010, if (i) Parent’s EBITDA meets the applicable target EBITDA for suchperiod and (ii) the applicable participant holding such restricted stock awardis still an employee of Parent or one of its subsidiaries.  If, with respect to any particular fiscalyear, the applicable EBITDA target for such year is not achieved, half of theapplicable amount will vest in that year. In addition, if applicable EBITDA target is not achieved in a givenfiscal year, a “catch up” provision allows the portion of such restricted stockwhich would otherwise remain unvested due to the failure to achieve such EBITDAtarget to become vested in subsequent fiscal years, if subsequent performancetargets are achieved.  All of the sharesof restricted stock become fully vested upon the occurrence of any of thefollowing events: (i) after seven years, provided that the applicableparticipant is still an employee of Parent or one its subsidiaries; and (ii) upona sale event involving a change of control of Parent or all or substantiallyall of Parent’s assets on a consolidated basis, if certain targeted rates ofreturn on Olympus Growth Fund IV, L.P.’s investment are achieved or of theboard of directors of Parent so elects. The shares of restricted stock are voting shares of common stock ofParent.  We did not issue any plan-basedequity awards in 2009.

 

In addition to certain other restrictions on suchshares, the shares of restricted stock are subject to certain repurchase rightsin favor of Parent and Olympus Growth Fund IV, L.P. (as Parent’s majority shareholder)in the event that the holder of such shares ceases to be employed by Parent andits subsidiaries for any reason.  Therepurchase price for unvested shares of restricted stock is the lesser of theholder’s original cost to purchase such shares and fair market value, whereasthe repurchase price for vested shares of restricted stock is the fair 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.  In 2009,there were 1,121 shares of restricted stock repurchased due to the terminationof a member of management.

 

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

 

The following table summarizesinformation regarding our Named Executive Officer’s outstanding equity awards at asof December 31, 2009.  There were nooption awards outstanding as of December 31, 2009.

 
| ** **       | ** ** | **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 |       | 4,205                                                              | (2)        | — |   |
| Dale Herbst      |       | 2,803                                                              | (2)        | — |   |
| Joel Beyer       |       | 1,682                                                              | (2)        | — |   |

 

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(1)          Represents the number of restricted stockshares that have not vested, multiplied by the fair market value per share as ofDecember 31, 2009.  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, includingdividends accrued 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

 

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fiscal year, theapplicable EBITDA target for such year is not achieved, half of the applicableamount will vest in that year.  Inaddition, if applicable EBITDA target is not achieved in a given fiscal year, a“catch up” provision allows the portion of such restricted stock which wouldotherwise remain unvested due to the failure to achieve such EBITDA target tobecome vested in subsequent fiscal years, if subsequent performance targets areachieved.  All of the shares ofrestricted stock become fully vested upon the occurrence of any of thefollowing events: (i) after seven years, provided that the applicableparticipant is still an employee of Parent or one its subsidiaries; and (ii) upona sale event involving a change of control of Parent or all or substantiallyall of Parent’s assets on a consolidated basis, if certain targeted rates ofreturn on Olympus Growth Fund IV, L.P.’s investment are achieved or if the boardof directors of Parent so elects.  Theshares of restricted stock are voting shares of common stock of Parent.  Stock awards include the vested portionduring the twelve months ended December 31, 2009 for the Restricted Stockissued on August 31, 2007.

 

###### **Option Exercises and Restricted Stock Vested**

 

The followingtable summarizes information regarding the vesting of restricted stock held byout Named Executive Officer’s during 2009.  No stockoptions were exercised in 2009.

 
| ** **       | ** ** | **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 stock sharesvested during 2009.

(2)          Represents the number of restricted stock sharesvested during 2009, multiplied by the fair market value per share as of December 31,2009.  It was determined that the valueper share was nominal since the fair market value of the Company was less thanthe total debt and preferred stock, including dividends accrued at the Parentcompany.

 

**Pension Benefits**

 

The Company has no pension benefit plan.

 

**Non-Qualified Deferred Compensation**

 

The Company has no non-qualified deferred compensationplan.

 

**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 (PrimeWooddivision).  Pursuant to each EmploymentAgreement, upon consummation of the Transaction, the Employment Agreements of Messrs. Fitzpatrick,Herbst and Beyer superseded and preempted their respective 2003Agreements.  On January 9, 2007, byoperation of law upon consummation of the Transaction, each EmploymentAgreement was assigned by MergerCo to the Company.

 

Thetable below summarizes certain severance provisions in the EmploymentAgreements of our Named Executive Officers. The Named Executive Officers will receive no cash severance payments fortermination with cause, voluntary termination without good reason, disability, orany transaction involving a change in control of Parent or the Company.

 

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| **Name**         | ** ** | **Benefit**                                | ** ** | **Termination without Cause, for Good Reason or due to  Disability**                                             |
|------------------|------------|--------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|
| John Fitzpatrick |       | Cash severance and  continued benefits (1) |       | $716,000  (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) |

 

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(1)          Executives are entitledto continued salary payments and benefits through their applicable severanceperiod (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 areentitled to a pro rata portion (based on the number of calendar days ofemployment during such fiscal year) of any annual bonus that would have payableto the executive during the year in which the executive is terminated withoutcause or resigns for good reason or due to a disability; provided that suchbonus amounts are only payable if the executive is employed by the Company forsix months 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.

 

***John Fitzpatrick.***** **Mr. Fitzpatrick’s Employment Agreement, subjectto subsequent annual adjustments, provides for a base salary of $358,000 and anannual performance-based bonus of up to one-hundred thirty percent (130%) ofhis base salary as of December 31, 2009. 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’sEmployment Agreement provides that Mr. Fitzpatrick, subject to hiseligibility, be included in all employee benefit plans established by theCompany.  Mr. Fitzpatrick’sEmployment Agreement may be terminated at any time, with or without cause, byeither party.  Mr. Fitzpatrick’sEmployment Agreement also contains non-disclosure provisions and prohibits Mr. Fitzpatrickfrom competing with the Company during the term of his employment and for aperiod of two years thereafter.  Mr. Fitzpatrickholds shares of restricted stock that are subject to certain repurchaserights in favor of Parent and Olympus Growth Fund IV, L.P. (as Parent’smajority shareholder) in the event that the holder of such shares ceases to beemployed by Parent and its subsidiaries for any reason.  The repurchase price for unvested shares ofrestricted stock is the lesser of the holder’s original cost to purchase suchshares and fair market value, whereas the repurchase price for vested shares ofrestricted stock is the fair market value of the shares unless the holder isterminated for cause, in which case the repurchase price for vested shares isthe lesser of the holder’s original cost and fair market value.

 

***DaleHerbst.***** **Mr. Herbst’s Employment Agreement, subject tosubsequent annual adjustments, provides for a base salary of $150,000 and anannual performance-based bonus of up to ninety percent (90%) of his base salaryas of December 31, 2009.  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’s Employment Agreementprovides that Mr. Herbst, subject to his eligibility, be included in allemployee benefit plans established by the Company.  Mr. Herbst’s Employment Agreement may beterminated at any time, with or without cause, by either party.  Mr. Herbst’s Employment Agreement alsocontains non-disclosure provisions and prohibits Mr. Herbst from competingwith the Company during the term of his employment and for a period of one yearthereafter.  Mr. Herbst holds shares ofrestricted stock that are subject to certain repurchase rights in favor ofParent and Olympus Growth Fund IV, L.P. (as Parent’s majority shareholder) inthe event that the holder of such shares ceases to be employed by Parent andits subsidiaries for any reason.  Therepurchase price for unvested shares of restricted stock is the lesser of theholder’s original cost to purchase such shares and fair market value, whereasthe repurchase price for vested shares of restricted stock is the fair 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.

 

***JoelBeyer.***** **Mr. Beyer’s Employment Agreement, subject tosubsequent annual adjustments, provides for a base salary of $144,200 and anannual performance-based bonus of up to eighty percent (80%) of his base salaryas of December 31, 2009.  Mr. Beyer’sEmployment Agreement provides for annual reviews of Mr. Beyer’s basesalary to determine whether an adjustment to his annual base salary is appropriate.  Mr. Beyer’s Employment Agreementprovides that Mr. Beyer, subject to his eligibility, be included in allemployee benefit plans established by the Company.  Mr. Beyer’s Employment Agreement may beterminated at any time, with or without cause, by either party.  Mr. Beyer’s Employment Agreement alsocontains non-

 

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disclosure provisions and prohibits Mr. Beyerfrom competing with the Company during the term of his employment and for aperiod of one year thereafter.  Mr. Beyerholds shares of restricted stock that are subject to certain repurchaserights in favor of Parent and Olympus Growth Fund IV, L.P. (as Parent’smajority shareholder) in the event that the holder of such shares ceases to beemployed by Parent and its subsidiaries for any reason.  The repurchase price for unvested shares ofrestricted stock is the lesser of the holder’s original cost to purchase suchshares and fair market value, whereas the repurchase price for vested shares ofrestricted stock is the fair market value of the shares unless the holder isterminated for cause, in which case the repurchase price for vested shares isthe lesser of the holder’s original cost and fair market value.

 

# **Directors Compensation**

 

Our directors do notreceive compensation for attending board meetings, other than reimbursement ofreasonable out-of-pocket expenses incurred in connection with attending anyboard meeting or any committee meetings.

 

**Item 12.Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters**

 

As of March 17,2010, all of the Company’s capital stock is owned by Parent.  As of March 17, 2010, the followingtable sets forth certain information regarding the beneficial ownership ofParent’s Series APreferred Stock, par value $0.01 per share (“Parent Preferred”),and Common Stock, par value $0.01 per share (“Parent Common”),by (i) each person known to us to beneficially own more than 5% of theoutstanding shares of either Parent Preferred and Parent Common; (ii) eachof our directors; (iii) each named executive officer and (iv) all ofour executive officers and directors as a group.  Beneficial ownership is determined inaccordance with the rules of the SEC. These rules generally attribute beneficial ownership of shares topersons who possess sole or shared voting and/or investment power with respectto the shares shown as beneficially owned. Unless otherwise indicated in the footnotes to this table, the addressof all listed stockholders is c/o WII Components, Inc., 525 LincolnAvenue, SE, St. Cloud, Minnesota 56304.

 
| ** **                                                   | ** ** | **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 | % |

 

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*                                         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 shares beneficially owned by OlympusGrowth Fund IV, L.P. are beneficially owned indirectly by OGP IV, LLC, thegeneral partner of Olympus Growth Fund IV, L.P., and by Mr. Morris, themanaging member of OGP IV, LLC.  Theshares beneficially owned by Olympus Executive Fund, L.P. are beneficiallyowned indirectly 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 memberof Parent’s boardof directors, is the managing partner of Olympus Partners and is the managingmember of OGP IV, LLC and is the president (and sole stockholder) of themanaging general partner of OEF, L.P., and, in such capacities, has voting andinvestment power with respect to all shares held by the Olympus Funds and has apecuniary interest in certain of those shares. 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. Cardenas and Heffernan, alsomembers of Parent’s board of directors, are partners of Olympus Partners andare members of OGP IV, L.L.C. and, in such capacities, have a pecuniaryinterest in certain of the shares held by the Olympus Funds.  Each of Messrs. Morris, Mischianti, Cardenasand Heffernan disclaims beneficial ownership of the shares owned by theseentities, except to the extent of their proportionate 

 

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pecuniary interesttherein.  The address for OlympusPartners, the Olympus Funds and Messrs. Morris, Mischianti, Cardenas andHeffernan is c/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 a trustee of the JohnP Fitzpatrick Revocable Trust U/A 12/31/01 and Mr. Fitzpatrick and membersof his family are the primary beneficiaries. Mr. Fitzpatrick’s shares include Parent Common shares of 7,605 andParent 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.

# ** **

# **Item 13. Certain Relationships and Related PartyTransactions, and Director Independence**

 

**StockholdersAgreement**

 

On January 9, 2007,Parent and each of Parent’s stockholders entered into a Stockholders Agreement(the “Parent Stockholders Agreement”). Under the provisions of the Parent Stockholders Agreement, theauthorized number of directors on Parent’s board of directors is established atfive directors (or such higher number as determined by Olympus Growth Fund IV,L.P.) and all of the parties agree to elect as members of our board ofdirectors each representative designated from time to time by Olympus GrowthFund IV, L.P., as a nominee.  Pursuant tothe 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 theholders of a majority of Parent’s capital stock) and board of directors ofParent have the right to force all of the other stockholders to participate ina sale event involving a change of control of Parent or all or substantiallyall of Parent’s assets on a consolidated basis.  In addition, subject to certain exceptions,all stockholders of Parent have pre-emptive rights on future sales of equitysecurities of Parent.  Finally, pursuantto the Parent Stockholders Agreement, Parent granted certain customary registrationrights, including demand, piggyback and resale shelf registration rights.  Demand registration rights were granted onlyto the holders of a majority of Parent’s capital stock.

 

**AdvisoryServices Agreement**

 

The Parent has anAdvisory Services Agreement, dated as of January 9, 2007, with anaffiliate of Olympus Growth Fund IV, L.P., Parent’s largest stockholder. Under this agreement, the affiliate 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 consummate a capital transaction (such as anacquisition of another company, a sale of Parent or any of its subsidiaries, orsignificant events relating to changes in the capital structure of Parent andits subsidiaries), Parent is required to pay the affiliate a fee for its roleas Parent’s advisor.   Under the terms ofthis agreement, Parent is obligated to pay a quarterly advisory fee of$150,000, unless lowered by the affiliate.  In 2008, the quarterly feepayable by Parent was lowered for the third and fourth quarters to $135,000.  In 2008, the Company paid a total of $570,000on account of Parent pursuant to this agreement.  In 2009, the quarterly advisory fee was notpaid but continued to be accrued at the reduced amount of $135,000 per quarter.  In connection with the March 30, 2009 amendmentsto the Note Purchase Agreements related to the Parent Notes, the quarterly feepayment was deferred by the affiliate for 2009 and will be payable in 2010 orthereafter.  Currently, the Company iscontinuing to accrue but not pay the quarterly advisory fee.  Although neither the Company nor any of itssubsidiaries is party to this Agreement, the Company has recorded this expensein its statement of operations because most of the services relate to itsoperations.  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 intoindemnification agreements with our executive officers, John Fitzpatrick andDale 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 ofincorporation, as amended, contains a provision permitted by Delaware law thatgenerally eliminates the personal liability of directors for monetary damagesfor breaches of their fiduciary duty, including breaches involving negligenceor gross negligence in business combinations, unless the director has breachedhis or her duty of loyalty, failed to act

 

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in good faith, engaged in intentional misconduct or aknowing violation of law, paid a dividend or approved a stock repurchase orredemption in violation of the Delaware General Corporation Law or obtained animproper 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 that directors shall be,and in the discretion of the board of directors, our officers and non-officeremployees may be, indemnified to the fullest extent authorized by Delaware law,as it now exists or may in the future be amended, against all expenses andliabilities reasonably incurred in connection with service for or on behalf ofthe company.  Our bylaws also provide thatthe right of our directors and officers to indemnification shall be a contractright and shall not be exclusive of any other right now possessed or hereafteracquired under any statute, bylaw, agreement, vote of stockholders, directorsor otherwise.

 

Insofar as indemnification for liabilities arisingunder the Securities Act may be permitted to our directors, officers andpersons controlling us as described above, we have been advised that in theopinion of the SEC such indemnification is against public policy as expressedin the Securities Act and is therefore unenforceable.  At present, there is no pending materiallitigation or proceeding involving any of our directors, officers, employees oragents in which indemnification will be required or permitted.

 

**Policiesand Procedures for Related Party Transactions**

 

As aprivate company, 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.

 

**Director Independence**

 

The boards of Parent and theCompany are currently composed of five directors, none of whom would qualify asan independent director based on the definition of independent director setforth in Rule 4200(a) (15) of the NASDAQ Marketplace rules.  Because affiliates of Olympus Funds ownapproximately 87% of the voting stock of Parent, and we do not otherwise haveany securities listed on any securities exchange, we are not subject tocorporate governance rules that require that a board of directors becomposed of a majority of independent directors.

 

**Item 14.Principal Accountant Fees and Services**

 

Aggregate fees billed bythe Company’sprincipal accounting firm, Grant Thornton LLP, for the fiscal years ended December 31,2009, and 2008, respectively:

 
| ** **                          | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Audit Fees (a)                      |       | $                                | 143,000    |   | $ | 140,000 |   |
| Audit-Related  Fees (b)             |       | 43,000                           |       | — |   |
| Total audit and  audit-related fees |       | 186,000                          |       | 140,000 |   |
| Tax Fees                            |       | —                           |       | — |   |
| Total Fees                          |       | $                                | 186,000    |   | $ | 140,000 |   |

 

----

(a) Fees for audit services:

·                  Billed in 2009 for the audit of the Company’s annual financial statements and reviewsof the Company’s quarterly financial statements.

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

(b) Fees for audit related services:

·                  Billed in 2009 for services provided in connectionwith anticipated 404(b) compliance and SEC comment letter.

 

**Preapproval Policies**

 

The Company is not required to have a preapprovalpolicy for services performed by our independent registered pubic accountingfirm.

 

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**PART IV**

 

**Item 15. Exhibits, FinancialStatement Schedules**

 

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

 

(1)  *FinancialStatements*.  Consolidated Financial Statements of WIIComponents, Inc. and Subsidiaries as of December 31, 2009 and 2008and for the years ended December 31, 2009, 2008 and 2007.

 

Report of Independent Registered Public AccountingFirm

Consolidated BalanceSheets

Consolidated Statementsof Operations

Consolidated Statementsof Stockholders’ Equity

Consolidated Statementsof 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)                                                                                                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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                                                                                                                                                                                                                                                                                              |

 

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| **Exhibit No.** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                 |       | 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) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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) **                                                                                                                                                                       |

 

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| **Exhibit No.** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 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)                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 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)**                                                                                                                                                                                                                                                         |

 

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| **Exhibit No.** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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 (incorporated herein by  reference to Exhibit 10.18 to the Company’s Annual Report on  Form 10-K filed March 31, 2009, File No. 333-115490) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.19               |       | Amendment No. 5 To The Credit Agreement, dated  as of March 26, 2010, 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                                                                                                                                                                                                                                                                                                      |

 

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* 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, 2009,2008 and 2007 were as follows (in thousands):

 
| ** **                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Balance, beginning of year |       | $                                | 239        |   | $ | 131 |   | $ | 104 |   |
| Provision                  |       | 308                              |       | 139 |   | 50 |   |
| Write-offs                 |       | (222                             | )          | (31 | ) | (23 | ) |
| Balance, end of year       |       | $                                | 325        |   | $ | 239 |   | $ | 131 |   |

 

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**Item 16. Signatures**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Annual Report to be signed onits behalf by the undersigned, thereunto duly authorized.

 
| ** ** | **WII COMPONENTS, INC.** |
|------------|--------------------------|
| ** ** | ** **               |
|       | By:                      | /s/ John  Fitzpatrick |
|       |                     | John Fitzpatrick, President and Chief Executive  Officer |
|       |                     |   |
|       | Date:                    | March 31, 2010 |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this Annual Report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 

| **Signature**           | ** ** | **Title**                                                                                                        | ** ** | **Date**            |
|-------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|---------------------|
|                    |       |                                                                                                             |       |                |
| /s/ John Fitzpatrick    |       | President and Chief Executive Officer (Principal  Executive Officer)                                             |       | March 31, 2010 |
| John Fitzpatrick        |       |                                                                                                             |       |
|                    |       |                                                                                                             |       |                |
| /s/ Dale B. Herbst      |       | Chief Financial Officer, Treasurer and Secretary  (Principal Financial Officer and Principal Accounting Officer) |       | March 31, 2010 |
| Dale B. Herbst          |       |                                                                                                             |       |
|                    |       |                                                                                                             |       |                |
| /s/ Robert S. Morris    |       | Director                                                                                                         |       | March 31, 2010 |
| Robert S. Morris        |       |                                                                                                             |       |                |
|                    |       |                                                                                                             |       |                |
| /s/ Louis J. Mischianti |       | Director                                                                                                         |       | March 31, 2010 |
| Louis J. Mischianti     |       |                                                                                                             |       |                |
|                    |       |                                                                                                             |       |                |
| /s/ L. David Cardenas   |       | Director                                                                                                         |       | March 31, 2010 |
| L. David Cardenas       |       |                                                                                                             |       |                |
|                    |       |                                                                                                             |       |                |
| /s/ Keith Heffernan     |       | Director                                                                                                         |       | March 31, 2010 |
| Keith Heffernan         |       |                                                                                                             |       |                |

 

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