**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM 10-K**

 

**FOR ANNUAL AND TRANSITION REPORTS**

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

**SECURITIES EXCHANGE ACT OF 1934**

** **
| **(Mark One)**                                                                                                                                                                                                                                                           |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                     |
| ý                                                                                                                                                                                                                                                                   | **ANNUAL REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                     |
| **For the fiscal year ended December 31, 2005**                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                     |
| o                                                                                                                                                                                                                                                                        | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934 (NO FEE REQUIRED)** |
|                                                                                                                                                                                                                                                                     |
| **For the transition period from                   to                   ** |

 

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

 

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**WII COMPONENTS, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

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

(Address of principal executive offices) (Zip Code)

 

**(320) 252-1503**

(Registrant’s telephone number, Including area code)

 

Securities registered pursuant to Section12(b) of the Act: **None**

Securities registered pursuant to Section12(g) of the Act: **None**

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days. Yes ý  No o

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act. Yes o  No ý

 

Indicate by check mark if the registrant is not required to filereports pursuant to Section 13 or Section 15(d) of the Act. Yes  ý  No  o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer:Large Accelerated filer  o        Acceleratedfiler  o        Non-Acceleratedfiler  ý

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. ý

 

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

 

Theaggregate market value of the voting stock held by nonaffiliates of theregistrant as of June 30, 2005: not applicable.

 

As of March 14, 2006, 21,751,331 shares of voting common stock, $.01par value per share, were outstanding and 854,261 shares of non-voting commonstock, $.01 par value per share, were outstanding (all of which are privatelyowned and not traded on a public market).

 

**DOCUMENTSINCORPORATED BY REFERENCE:   None.**

 

 

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**WIICOMPONENTS, INC.**

 

**FORM 10-K**

**Year Ended December 31, 2005**

 

**INDEX**

 
| **PART I**                                                                                                                 | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                       |       |
| Item 1.  Business                                                                                                          | 1          |
| Item  1A. Risk Factors                                                                                                     | 3          |
| Item  2. Properties                                                                                                        | 6          |
| Item  3. Legal Proceedings                                                                                                 | 7          |
| Item 4. Submission of Matters to Vote of Security Holders                                                                  | 7          |
|                                                                                                                       |       |
| **PART II**                                                                                                                | ** ** |
|                                                                                                                       |       |
| Item 5. Market For Registrant’s Common Equity, Related Stockholder  Matters and Issuer Purchases of Equity Securities | 7          |
| Item 6. Selected Financial Data                                                                                            | 7          |
| Item 7. Management’s Discussion and Analysis of Financial Condition  and Results of Operations                        | 9          |
| Item 7A. Quantitative and Qualitative Disclosures about Market Risk                                                        | 17         |
| Item 8. Financial Statements and Supplementary Data                                                                        | 18         |
| Item 9. Changes in and Disagreements With  Accountants on Accounting Financial Disclosure                                  | 35         |
| Item 9A. Controls and Procedures                                                                                           | 35         |
| Item 9B. Other Information                                                                                                 | 35         |
|                                                                                                                       |       |
| **PART  III**                                                                                                              | ** ** |
|                                                                                                                       |       |
| Item 10. Directors and Executive Officers  of the Registrant                                                               | 35         |
| Item 11 Executive Compensation                                                                                             | 36         |
| Item 12. Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters                   | 38         |
| Item 13.  Certain Relationships and Related Transactions                                                                   | 39         |
| Item 14. Principal Accountant Fees and  Services                                                                           | 40         |
|                                                                                                                       |       |
| **PART  IV**                                                                                                               | ** ** |
|                                                                                                                       |       |
| Item 15.  Exhibits, Financial Statement Schedules                                                                          | 41         |
| Item 16. Signatures                                                                                                        | 45         |

 

ACCESS TO REPORTS

 

Investors may obtain access free of charge to the WII Components, Inc.annual report on From 10-K, quarterly reports on Form 10-Q, current reports onForm 8-K and other reports by visiting the WII Components web site atwww.wiicomponents.com. These reports will be available as soon as reasonablypracticable following electronic filing with, or furnishing to, the Securitiesand Exchange Commission.

 

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*In this report, the terms “WII Components,” “we,”“our” or “us” refer to WII Components, Inc. and its subsidiaries on aconsolidated basis, unless otherwise indicated or the context otherwiserequires. In April 2003, WII Components, Inc. was formed by a groupof investors led by Behrman Capital III L.P. to acquire Woodcraft Industries, Inc.,or Woodcraft, and its subsidiaries, PrimeWood, Inc., or PrimeWood, andBrentwood Acquisition Corp., or Brentwood. WII Components conducts all of itsoperations through its direct subsidiary, Woodcraft, and its indirectsubsidiaries, PrimeWood, Brentwood, and Grand Valley Acquisition, Inc., orGrand Valley. For periods prior to April 2003, the terms “we,” “our” or “us”refer to Woodcraft, as our predecessor, and its subsidiaries on a consolidatedbasis, unless otherwise indicated or the context otherwise requires.*

 

**PART I**

 

# **Item 1. Business**

#  

**Our Company**

 

We are one of the leading manufacturers of hardwood cabinet doors,hardwood components and engineered wood products in the United States. Wegenerate approximately 95% of our sales from the kitchen and bath cabinetmanufacturing industry. Our reputation for high quality and reliableperformance has enabled us to establish strong, long-standing relationshipswith our customers, which include most of the top cabinet manufacturers in theUnited States. Our customers, in turn, distribute their products throughvarious sales channels, including specialty kitchen and bath cabinet dealers,home center retailers and homebuilders. We generated net sales of approximately$67.4 million for the three months ended December 31, 2005 andapproximately $259.6 million for the year ended December 31, 2005.

 

We believe that we have one of the broadest product offerings of doorsand related components for the kitchen and bath cabinet manufacturing industry.Our products include: (1) hardwood cabinet door components, face framesand drawer fronts, (2) fully assembled hardwood cabinet doors,(3) rigid thermofoil, or RTF, cabinet doors and components,(4) veneer raised panels, or VRPs, and (5) a variety of laminated andprofile-wrapped components. We produce over 100,000 SKUs for our customers,representing a wide array of styles, sizes, designs and wood species. Inaddition, we offer a variety of value-added services for our customers, such asnew product design and development and kitchen-at-a-time, or KAT, manufacturinga small batch production process that enables us to deliver semi-custom doorsand components on a quick-turnaround basis.

 

We operate ten manufacturing facilities located in Minnesota, NorthDakota, Ohio, Oregon, Pennsylvania, Kansas and Kentucky that allow us todistribute our products nationwide. In 2005, we acquired substantially all ofthe assets of Dimension Moldings, Inc., and as a result of the acquisition we commencedoperations at a second Ohio facility located in Middlefield, Ohio. In 2005, we alsoacquired a rough mill facility in Greenville, Pennsylvania and commencedoperations at a manufacturing facility in Lansing, Kansas. We have madesubstantial capital investments to broaden the scope of our manufacturing operationsfrom rough milling through final production, which maximizes our yield from rawmaterials and allows us to meet the short lead time requirements of ourcustomers. Our technical knowledge and expertise with respect to the entireproduction process enable us to meet the specifications and delivery timedemands of our customers for almost any style of cabinet doors or componentswith high quality standards at a competitive cost. We believe we offercustomers among the shortest lead times in the industry, an important criterionin our customers’ procurement decisions.

 

Our senior management team has an average of 13 years of industryexperience and 11 years with our Company. Our President and ChiefExecutive Officer, John Fitzpatrick, has over 25 years of experience inmanaging manufacturing-based companies and has led our senior management teamsince July 2000.

 

**Our History**

 

Our subsidiary, Woodcraft Industries, Inc., was founded in 1945 inSt. Cloud, Minnesota, and began as a manufacturer of millwork products,including store fixtures and shipping pallets. In 1968, through an acquisitionand by utilizing our millwork expertise, we began manufacturing kitchen cabinetcomponents. In 1989, we entered the door assembly business. Over the past 35 years,through strategic acquisitions and expansion of our manufacturing capabilities,we have become a leading U.S. hardwood cabinet door and hardwood componentmanufacturer focused primarily on the kitchen and bath cabinet industry. Weacquired our PrimeWood subsidiary in 1998, our Brentwood subsidiary in 2002,our Grand Valley subsidiary in 2004, and substantially all of the assets ofDimension Moldings, Inc. in 2005. WII Components, Inc. was incorporated inDelaware in April 2003, in connection with the acquisition of Woodcraft and itssubsidiaries by Behrman Capital III, L.P.

 

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**Customers**

 

We have been servicing our top ten customers for an average ofapproximately 16 years, with a minimum of five years. In 2005, sales to MascoCorporation, Elkay, and MasterBrand Cabinet, Inc. accounted for 27%, 17%,and 7%, respectively, of our net sales. We have experienced significant volumegrowth in the past four years with most of our top ten customers due to bothmarket share gains and growth experienced by our customers.

 

**Sales and Marketing**

 

Substantially all of our sales are made directly to cabinetmanufacturers without the use of third party sales representatives ordistributors. Our sales and marketing group is organized primarily by productand geography. The group includes a sales director for all product lines, a marketingdirector for hardwood products, a marketing director for engineered woods, amarketing director for industrial markets, and four account managers. Over thepast few years, our sales and marketing efforts have been focused onstrengthening relationships with our most important customers and introducingnew products to targeted markets. Due to our long-standing relationships withour key customers, sales and marketing involves relationships at multiplelevels with our customers. Accordingly, our internal sales force works closelywith our manufacturing and marketing personnel to develop new opportunities inour core kitchen and bath market, which accounted for approximately 95% of oursales in 2005, as well as our other markets, including store fixtures. In 2005,approximately 99.9% of net revenues resulted from sales in the United States,while the balance of approximately 0.1% resulted from sales in Canada.

 

We do not rely on imported product components for any significantportion of our business. However, we do purchase imported components for use inour domestic manufacturing process and for direct sale to our customers. In2005, our sales of imported products accounted for less than 3% of our totalsales.

 

**Supply of Raw Materials**

 

The primary raw materials we purchase are green, kiln-dried, andsemi-processed hardwood lumber, MDF, hardwood veneer and PVC foil. Hardwoodlumber accounts for the largest portion of our material costs. We purchase ourlumber directly from hardwood mills, which allows us to both leverage our scaleand avoid the costs associated with intermediaries. We purchase from a networkof over 50 regional mills throughout the Northern and Appalachian hardwoodforest areas in close proximity to our manufacturing facilities. No singlesupplier accounted for more than 5% of our material purchases in 2005, and weare not dependent on any single supplier for any raw material product. Our topten suppliers accounted for approximately 26% of the key raw materials wepurchased in 2005.

 

We purchase a variety of species of hardwood lumber, with hard maple,red oak and cherry accounting for our largest volumes. The prices of thevarious species have fluctuated historically on independent supply and demandcurves and are not highly correlated to one another. Generally, with a lagtime, we have passed lumber price changes through to our customers by workingin a partnership with them.

 

**Competition**

 

We operate in the highly competitive kitchen and bath cabinet door andcomponent industry. Our competitors include other independent kitchen and bathcabinet door and component manufacturers and vertically integrated cabinetmanufacturers who produce their own doors and components. We estimate that thecabinet door and component market segment in which we compete representedapproximately $2.2 billion of the overall U.S. cabinet market in 2005. Webelieve that independent cabinet door and component manufacturers, like us,accounted for approximately $1.1 billion of this segment in 2005, whilevertically integrated cabinet manufacturers accounted for the remainder.

 

We are one of the three largest manufacturers in the independentcabinet component industry. We believe that in 2005 we accounted forapproximately 23% of total outsourced cabinet door and component market sales,and, based on publicly available information, together with Conestoga WoodProducts and Appalachian Wood Products, our principal competitors, we accountedfor approximately 50% of this market in 2005.

 

**Environmental Matters**

 

Our operations and properties are subject to extensive federal, state,local and foreign environmental laws relating to protection of the environmentand human health and safety. Environmental laws and regulations are subject tofrequent 

 

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amendment and have become more stringent over time. We could incur inthe future significant costs associated with compliance with, or liabilitiesunder, environmental laws and regulations, including equipment costs, disposalcosts, cleanup costs, civil and criminal penalties, injunctive relief anddenial or loss of, or imposition of significant restrictions on, environmentalpermits. In addition, we could in the future be subject to suit by privateparties in connection with alleged violations of or liabilities underenvironmental laws and regulations.

 

**Employees**

 

As of December 31, 2005, we had approximately 1,654 full-timeemployees, 44 part-time employees, and 121 independent contractors. Currently,none of our employees are covered by a collective bargaining agreement.

 

**Item1A. Risk Factors**

 

Our ability topredict results or the effect of certain events on our operating results isinherently uncertain. Therefore, we wish to caution each reader of this annualreport to carefully consider the following factors and certain other factorsdiscussed herein and in other past filings with the Securities and ExchangeCommission.

 

The risks described below are not the only ones that could impact ourcompany. Additional risks and uncertainties not currently known to us or thatwe currently deem to be immaterial may also materially and adversely affect ourbusiness, financial condition or results of operations.

 

***Downturns in the newhome construction industry, repair and remodeling activity or the economy couldnegatively affect our business.***

 

Sales to the kitchen and bath cabinet market accounted forapproximately 95% of our total sales for the year ended December 31, 2005.Sales in this market are driven by new home construction and home repair andremodeling activity. New home construction and repair and remodeling activitymay be significantly affected by changes in economic and other conditions, suchas gross domestic product levels, employment levels, demographic trends,availability of financing, interest rates and consumer confidence. Thesefactors can negatively affect the demand for our products. Any deterioration inthese factors could have a material adverse effect on our business, financialcondition and results of operations.

 

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

 

For the year ended December 31, 2005, our top ten customersaccounted for approximately 80% of our net sales. During this period, our twolargest customers accounted for approximately 44% of our net sales. Thepermanent loss of, or a significant decrease in the level of purchases by, oneor more of our major customers could have a material adverse effect on ourresults of operations. The ongoing trend toward 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 manufacturer customers have theresources to manufacture internally the cabinet doors and components that wesell to them. Despite these manufacturing capabilities, these customers havechosen to outsource door and component production to us in part due to thequality of our products and in order to reduce costs, eliminate productionrisks and maintain company focus. However, we cannot assure that thesecustomers will continue to outsource door and component production in thefuture. Increased levels of production insourcing could result from a number offactors, such as shifts in our customers’ business strategies, which couldresult from the acquisition of another door and component manufacturer, theinability of third party suppliers to meet product specifications and theemergence of low-cost production opportunities in foreign countries. Anysignificant reduction in the level of cabinet door and component productionoutsourcing from our cabinet manufacturing customers could significantly impactour sales and, accordingly, have a material adverse effect on our business,results of operations and financial condition.

 

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***Increased prices forraw materials used in our products could adversely affect our business.***

 

Our profitability is affected by the prices of our raw materials, whichmay fluctuate 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. The prices for thehardwood species we use in production of our hardwood doors and components aresubject to some volatility. In the past calendar year the price of hard maple,the primary hardwood specie we use, (accounting for approximately 50% of ourlumber purchases), increased by approximately 20%, while the price of cherry, (accountingfor approximately 20% of our lumber purchases) decreased by 6%. We have nolong-term supply contracts for the raw materials used in the manufacture of ourproducts. This means that we are subject to changes in the prices charged byour suppliers. Significant increases in the prices of raw materials couldmaterially adversely affect our business, financial condition and results ofoperations, especially if we are not able to recover these costs by increasingthe prices we charge our customers for our products. In 2005, the U.S. kitchenand bath cabinet industry relied heavily on domestic maple, which is of ahigher quality than imported maple. A shortage in the supply of domestic mapleor certain other species of lumber would restrict our ability to make sales toour customers, which could also have a material adverse effect on our business,financial condition and results of operations. We have attempted to passthrough cost increases to our customers, but there is no assurance that priceincreases will fully offset the effects of increasing raw material costs.

 

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

 

Our dependency upon regular deliveries from suppliers means thatinterruptions or stoppages in such deliveries could adversely affect ouroperations until arrangements with alternate suppliers could be made. If asubstantial number of our suppliers were unable to deliver materials to us foran extended period of time, as the result of financial difficulties,catastrophic events affecting their facilities or other factors beyond ourcontrol, or if we were unable to negotiate acceptable terms for the supply ofmaterials with these or alternative suppliers, our business, financialcondition and results of operations could suffer. We may not be able to findacceptable alternatives, and any such alternatives could result in increasedcosts to us. Even if acceptable alternatives are found, the process of locatingand securing such alternatives might be disruptive to our business. Extendedunavailability of a necessary raw material could cause us to ceasemanufacturing of one or more products for a period of time, which could have amaterial adverse effect on our business, financial condition and results ofoperations. In the second half of 2005, the offshore supplier of one of ourimport products failed to deliver the product supply it had committed to. Wewere forced to fulfill our customer commitment by supporting the requiredproduction within our current facilities.

 

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

 

Our facilities are subject to numerous federal, state and local lawsrelating to the protection of the environment. We believe we are in substantialcompliance with all applicable requirements. Our efforts to comply withenvironmental requirements do not remove the risk that we may be held liable,or incur fines or penalties, and that the amount of liability, fines orpenalties may be material, for, among other things, releases of hazardoussubstances from current properties or any associated offsite disposal location,or for contamination at our properties from activities conducted by previousoccupants. Changes in environmental laws and regulations or the discovery ofpreviously unknown contamination or other liabilities relating to ourproperties and operations could result in significant environmentalliabilities. In addition, we might incur significant capital and other costs tocomply with increasingly stringent environmental laws and enforcement policies,which would decrease our cash flow available to service our indebtedness.

 

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

 

We operate in the highly fragmented and very competitive cabinet doorand component industry. Our competitors include international, national andlocal cabinet and cabinet component manufacturers. These can be large consolidatedoperations with manufacturing facilities in large and efficient plants, as wellas relatively small, local cabinetmakers. Some of our competitors may achievegreater market penetration in certain of the markets in which we operate, havegreater financial and other resources available and be less leveraged, whichmay provide them with greater financial flexibility. Moreover, companies inother building products industries may choose to compete with us. To remaincompetitive, we will need to invest continuously in manufacturing, customerservice and product development. We may have to adjust the prices of some ofour products to stay competitive. We cannot assure you that we will havesufficient resources to continue to make such investments or that we willmaintain our competitive position within each of the markets we serve.

 

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

 

The number of foreign-made kitchen cabinets sold in the United Stateshas increased slightly in the last ten years. We believe that the number offoreign-made cabinet components sold in the United States has also increased,though we do not believe any detailed study of such a trend is currentlyavailable. This increase in sales of imported components is the result offoreign wood component manufacturers improving the quality of their productsand services and, in some cases, offering lower prices. While we currently believethat the impact of imported products in our target markets is limited by, amongother factors, the need for greater variety in terms of profiles, sizes andfinishes, demand for higher quality products and short lead times, there can beno assurance that demand for foreign-made products will not increase in suchmarkets. If domestic cabinet manufacturers continue to increasingly rely onforeign imports for their components, our business, financial condition andresults of operations could be materially and negatively affected.

 

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

 

We periodically make capital investments to, among other things,maintain and upgrade our facilities and enhance our production processes. As wegrow our businesses, we may have to incur significant capital expenditures. Wecannot assure that we will have, or be able to obtain, adequate funds to makeall necessary capital expenditures when required, or that the amount of futurecapital expenditures will not be materially in excess of our anticipated orcurrent expenditures. If we are unable to make necessary capital expenditures,our product offering may become dated, our productivity may be decreased andthe quality of our products may be adversely affected, which, in turn, couldnegatively impact our business, financial condition and results of operations.

 

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

 

Our business is labor intensive. As a result, our financial performanceis affected by the availability of qualified personnel and the cost of labor.Currently, none of our employees are represented by labor unions. However, wecannot assure you that strikes or other types of conflicts with personnel willnot arise or that we will not become a target for union organizing activity.Strikes, work stoppages or slowdowns could result in slowdowns or closures ofour or our suppliers’ facilities. In addition, organizations responsible forshipping our products may be impacted by strikes. Any interruption in theproduction or delivery of our products could reduce sales of our products andincrease our costs.

 

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

 

Our continued success depends to a large extent upon the continuedservices of our senior management and certain key employees. The loss of theservices of any of these individuals could have a material adverse effect onour business, financial condition and results of operations.

 

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

 

We explore opportunities to acquire related businesses from time totime, some of which could be material to us. If we make acquisitions, ourability to continue to grow will depend upon effectively integrating theseacquired companies, achieving cost efficiencies and managing these businessesas part of our company.

 

We may not be able to effectively integrate the acquired companies orsuccessfully implement appropriate operational, financial and managementsystems and controls to achieve the benefits expected to result from these acquisitions.Our efforts to integrate these businesses could be affected by a number offactors beyond our control, including general economic conditions and increasedcompetition. In addition, the process of integrating these businesses couldcause the interruption of, or loss of momentum in, the activities of ourexisting business. The diversion of management’s attention and any delays ordifficulties encountered in connection with the integration of these businessescould negatively impact our business and results of operations. Further, thebenefits that we anticipate from these acquisitions may not materialize.

 

Additionally, we may be subject to unexpected claims and liabilitiesarising from these acquisitions. Such claims and liabilities could be costly todefend, 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.

 

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

 

As of December 31, 2005, Behrman Capital III L.P., or Behrman,owned 95.4% of our outstanding voting capital stock. Behrman and its affiliateshave the ability to control the election of our Board of Directors and theoutcome of other issues submitted to the stockholders for approval. See “SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.” We cannot assure you that the interests of Behrman and its affiliateswill not conflict with the interests of the holders of our senior notes andrelated stockholder matters. In particular, Behrman and its affiliates maycause a change of control at a time when we do not have sufficient funds torepurchase the notes, or to repay our credit facility.

 

**Item2. Properties**

 

Our headquarters are located in St. Cloud, Minnesota. We own eightand lease two manufacturing facilities. We believe that our facilities arecurrently operating at approximately 95% of overall plant capacity. We intendto maintain current levels of capacity utilization while handling an increasedvolume of sales through increases in operating efficiencies and growthinvestments at our hardwood component, door and engineered woods facilities. Weexpanded our Molalla, Oregon plant in 2004 to create additional capacity forcustomers located on the West Coast. We have also started the expansion of ourCabinet Door plant located in St. Cloud, Minnesota to create additionalcapacity, and in 2005 purchased land and an existing building for the creationof a lumber drying yard and roughmill in Greenville, Pennsylvania.

 

Our Woodcraft subsidiary operates three facilities in Minnesota, two ofwhich are located in St. Cloud and one of which is in Foreston. OurMinnesota facilities manufacture hardwood components, and one of ourSt. Cloud facilities also produces approximately 65% of our hardwooddoors. The hardwood door plant in St. Cloud includes high-volume hardwooddoor production together with flexible production cells required to respond tocustomer KAT orders. Our Woodcraft division also has a fourth facility locatedin Bowling Green, Kentucky where we manufacture hardwood components forshipment to our Minnesota facilities and to selected customers in the easternUnited States. Our Woodcraft subsidiary in 2005 also acquired a facilitylocated in Middlefield, Ohio, which manufactures hardwood component moldings,and also acquired a facility located in Greenville, Pennsylvania which willmanufacture hardwood components for shipment to our Minnesota, Bowling Green, andMiddlefield facilities.

 

In Wahpeton, North Dakota, our PrimeWood subsidiary manufactures RTFdoors and components, VRPs and wrapped profiles. We believe our Wahpetonfacility, which supplies cabinet manufacturers throughout North America, is oneof the largest independent producers of engineered woods in North America. Weacquired this facility in 1998 in connection with our acquisition ofPrimeWood, Inc. The PrimeWood subsidiary in 2005 also began operations ata manufacturing facility in Lansing, Kansas that manufactures RTF doors andcomponents. The Lansing facility is located in the Lansing CorrectionalInstitute and employs inmates in the production of RTF components.

 

Our Brentwood subsidiary operates a manufacturing facility in Molalla,Oregon where we produce hardwood and RTF doors, primarily for distribution toour customers located on the West Coast. Our Molalla facility focuses primarilyon KAT production of custom and semi-custom products. We acquired this facilityin 2002 in connection with our acquisition of Brentwood, Inc.

 

Our Grand Valley subsidiary operates a manufacturing facility inOrwell, Ohio where we produce hardwood doors through KAT production, primarilyfor semi-custom products. We acquired this facility in 2004 in connection withour acquisition of Grand Valley.

 

The following chart sets forth information regarding our headquartersand our ten 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                                                 |

 

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**Item3. Legal Proceedings**

 

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

 

**Item 4. Submission of Matters to Vote of Security Holders**

 

None.

 

**PART II**

 

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

 

There is no establishedpublic trading market for any class of common equity of WII Components, Inc. Asof March 14, 2006, there are 12 holders of record of WII Component’s votingstock and 1 holder of record of non-voting common stock.

 

On February 24, 2004, we used$39.0 million of the net proceeds from the offering of the senior notes to makepayments to our stockholders through a combination of dividends and redemptionsof common stock. Any payment of future dividends and the amounts thereof willbe dependent upon the Company’s earnings, fiscal requirements and other factorsdeemed relevant by the Company’s Board of Directors. Certain restrictivecovenants contained in the Company’s senior secured credit facility and theindenture governing the senior notes currently limit its ability to makedividend or other payments.

 

In April 2004, we issued2,142,857 shares of common stock at $3.85 per share in connection with ouracquisition of Grand Valley. On April 22, 2004 we granted 489,000 options tocertain of our employees to purchase our common stock at an excercise price of$3.85 per share. On December 31, 2004 we granted 50,000 options to certain ofour employees to purchase our common stock at an exercise price of $3.85 pershare.

 

On July 28, 2005, we issued 1,016,488shares of common stock at $4.67 per share to our existing stockholders inconnection with our acquisition of substantially all of the assets of DimensionMoldings, Inc. On August 15, 2005 we granted 255,000 options to certain of ouremployees to purchase our common stock at an exercise price of $4.67 per share.On October 26, 2005 we granted 40,000 options to certain of our employees topurchase our common stock at an exercise price of $4.67 per share.

 

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

######  

The following table sets forth certain of our historical consolidatedfinancial data. We refer to the Company prior to its acquisition by BehrmanCapital III L.P. on April 9, 2003 as the “Predecessor.” For accountingpurposes, this acquisition was recorded with an effective date of April 1,2003 and accounted for using the purchase method of accounting. Therefore, thefinancial information for periods after April 1, 2003 may not becomparable to financial information for periods prior to April 1, 2003. Werefer to the Company after its acquisition by Behrman Capital III L.P. on April9, 2003 as the “Successor”. The selected historical consolidated financial dataas of and for the years ended December 31, 2005, 2004, 2002, and 2001; asof and for the three months ended March 31, 2003; and as of and for thenine months ended December 31, 2003 have been derived from our auditedconsolidated financial statements. Historical results are not necessarilyindicative of the results to be expected in the future. You should read thefollowing data in conjunction with “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and our historical consolidatedfinancial statements and accompanying notes included elsewhere in this annualreport.

 

7

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| ** **                                | ** ** | **Successor**                              | ** ** | **Predecessor**       | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | ** **                                 | ** ** | ** **            | ** ** | **Nine Months** | ** ** | **Three Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | ** **                                 | ** ** | ** **            | ** ** | **Ended** | ** ** | **Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Year Ended December 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** | **Year Ended December 31,** | ** ** |
| ** **                                | ** ** | **2005 (1)**                          | ** ** | **2004 (2)**     | ** ** | **2003** | ** ** | **2003** | ** ** | **2002 (3)** | ** ** | **2001** | ** ** |
| ** **                                | ** ** | **(Dollars in thousands)**       | ** ** |
| **Statement of Operations Data:**         |       |                                       |       |                  |       |   |   |   |   |   |   |   |   |
| Net sales                                 |       | $                                          | 259,603    |                  | $          | 203,066 |   | $ | 132,647 |   | $ | 40,980 |   | $ | 143,832 |   | $ | 120,903 |   |
| Cost of sales                             |       | 217,127                                    |       | 167,042               |       | 107,478 |   | 32,071 |   | 115,827 |   | 103,910 |   |
| Gross profit                              |       | 42,476                                     |       | 36,024                |       | 25,169 |   | 8,909 |   | 28,005 |   | 16,993 |   |
| Total operating expenses (4)              |       | 15,303                                     |       | 12,880                |       | 8,490 |   | 4,188 |   | 11,298 |   | 9,700 |   |
| Operating income                          |       | 27,173                                     |       | 23,144                |       | 16,679 |   | 4,721 |   | 16,707 |   | 7,293 |   |
| Interest expense                          |       | 13,561                                     |       | 12,767                |       | 6,343 |   | 835 |   | 3,358 |   | 4,409 |   |
| Other loss (income), net (5)              |       | (50                                        | )          | 3,414                 |       | (68 | ) | (28 | ) | 748 |   | (18 | ) |
| Income tax expense                        |       | 5,487                                      |       | 2,684                 |       | 3,852 |   | 1,404 |   | 4,983 |   | 1,223 |   |
| Net income                                |       | $                                          | 8,175      |                  | $          | 4,279 |   | $ | 6,552 |   | $ | 2,510 |   | $ | 7,618 |   | $ | 1,679 |   |
| **Other Financial Data:**                 |       |                                       |       |                  |       |   |   |   |   |   |   |   |   |
| EBITDA (6)                                |       | $                                          | 33,983     |                  | $          | 25,801 |   | $ | 20,799 |   | $ | 6,032 |   | $ | 20,724 |   | $ | 12,625 |   |
| EBITDA margin (7)                         |       | 13.1                                       | %          | 12.7                  | %          | 15.7 | % | 14.7 | % | 14.4 | % | 10.4 | % |
| Depreciation and amortization (8)         |       | $                                          | 6,760      |                  | $          | 6,071 |   | $ | 4,052 |   | $ | 1,283 |   | $ | 4,765 |   | $ | 5,314 |   |
| Capital expenditures (9)                  |       | 11,787                                     |       | 5,733                 |       | 5,005 |   | 533 |   | 2,270 |   | 1,692 |   |
| Net cash provided by operating activities |       | 12,990                                     |       | 15,969                |       | 17,203 |   | 989 |   | 11,308 |   | 12,655 |   |
| **Balance Sheet (at end of period):**     |       |                                       |       |                  |       |   |   |   |   |   |   |   |   |
| Total assets                              |       | $                                          | 221,594    |                  | $          | 194,987 |   | $ | 173,925 |   | $ | 81,091 |   | $ | 76,879 |   | $ | 65,896 |   |
| Long-term debt, plus current maturities   |       | 127,500                                    |       | 120,000               |       | 94,948 |   | 32,273 |   | 32,634 |   | 32,381 |   |
| Capital lease obligations                 |       | 2,466                                      |       | 3,122                 |       | 4,488 |   | 4,166 |   | 4,342 |   | 4,242 |   |
| Accumulated preferred stock               |       | $                                          | —     |                  | $          | — |   | $ | — |   | $ | 28,245 |   | $ | 27,062 |   | $ | 20,529 |   |
|                                           |            |                                            |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) In July 2005, the Company acquired substantially all of the assets ofa moldings manufacturing company operating under the name Dimension Moldings,Inc. through an asset purchase. The results of operations for this acquiredbusiness have been included in our financial statements since the date ofacquisition. Our results of operations for periods since the acquisition maynot be comparable to our results of operations for the periods prior to theacquisition.

 

(2) In April 2004, the Company acquired Grand Valley, Inc. through anasset purchase. The results of operations for this acquired business have beenincluded in our financial statements since the date of acquisition. Our resultsof operations for periods since the acquisition may not be comparable to ourresults of operations for the periods prior to the acquisition.

 

(3) In July 2002, the Predecessor acquired Brentwood, Inc.through an asset purchase. The results of operations for this acquired businesshave been included in our financial statements since the date of acquisition.Our results of operations for periods since the acquisition may not be comparableto our results of operations for the periods prior to the acquisition.

 

(4) Total operating expenses include $1.0 million of stockcompensation expense in 2002 related to stock option variable accounting andthe issuance of common stock, $1.8 million of payments to holders of ourcapital stock in the three months ended March 31, 2003 for certain taxliabilities incurred upon the sale of our predecessor’s capital stock inconnection with our acquisition by Behrman Capital III L.P, $0.8 million ofstock compensation expense in 2004 related to stock option variable accounting,and $1.8 million of stock compensation expense in 2005 related to stock optionvariable accounting.

 

(5) The Company incurred a $0.8 million expense in 2002 related tothe modification of credit facility debt in connection with the acquisition ofour Brentwood subsidiary. For the fiscal year ended December 31 2004, theCompany wrote off $3.5 million of financing fees related to the old creditfacility.

 

8

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(6) EBITDA as set forth in the table below represents net income beforeinterest, taxes, depreciation and amortization. We have presented EBITDAbecause we believe it is useful in evaluating our operating performancecompared to that of other companies in our industry, as the calculationeliminates the effects of long-term financing, income taxes and the accountingeffects of capital expenditures, which items may vary for companies for reasonsunrelated to overall operating performance. EBITDA is not a measurement offinancial performance or liquidity under GAAP and should not be considered asan alternative to net income or net cash flows provided by operating activitiesas determined in accordance with GAAP. Our calculation of EBITDA may not becomparable to the calculation of similarly titled measures reported by othercompanies.

 
| ** **                    | ** ** | **Successor**                              | ** ** | **Predecessor**       | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | ** **                                 | ** ** | ** **            | ** ** | **Nine Months** | ** ** | **Three Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | ** **                                 | ** ** | ** **            | ** ** | **Ended** | ** ** | **Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **Year Ended December 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** | **Years Ended December 31,** | ** ** |
| ** **                    | ** ** | **2005**                                   | ** ** | **2004**              | ** ** | **2003** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                    | ** ** | **(Dollars in thousands)**       | ** ** |
| Net income                    |       | $                                          | 8,175      |                  | $          | 4,279 |   | $ | 6,552 |   | $ | 2,510 |   | $ | 7,618 |   | $ | 1,679 |   |
| Interest expense              |       | 13,561                                     |       | 12,767                |       | 6,343 |   | 835 |   | 3,358 |   | 4,409 |   |
| Income tax expense            |       | 5,487                                      |       | 2,684                 |       | 3,852 |   | 1,404 |   | 4,983 |   | 1,223 |   |
| Depreciation and amortization |       | 6,760                                      |       | 6,071                 |       | 4,052 |   | 1,283 |   | 4,765 |   | 5,314 |   |
| EBITDA                        |       | $                                          | 33,983     |                  | $          | 25,801 |   | $ | 20,799 |   | $ | 6,032 |   | $ | 20,724 |   | $ | 12,625 |   |

 

(7) Represents EBITDA divided by net sales.

 

(8) Depreciation and amortization does not include amortization ofdeferred financing fees (which are included in interest expense) for the fiscalyears ended December 31, 2001, 2002, 2004 and 2005 of $0.3 million,$0.4 million, $1.0 million and $1.0 million, respectively; for the threemonths ended March 31, 2003 of $0.1 million; for the nine monthsended December 31, 2003 of $0.7 million.

 

(9) Includes capital expenditures in Accounts Payable at the end of theperiod, which has not been paid in cash. See “Consolidated Statements of CashFlows” included in the consolidated financial statements elsewhere in thisreport for more information.

 

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

#  

*You should read the following discussion inconjunction with our consolidated financial statements and related notesappearing elsewhere in this annual report. In addition to historicalinformation, this discussion contains forward-looking statements that involverisks, uncertainties and assumptions that could cause actual results to differmaterially from management’s expectations.*

 

**Overview**

 

We are one ofthe leading manufacturers of hardwood cabinet doors and components andengineered wood products in the United States. Our products include(1) hardwood cabinet door components, face frames and drawer fronts,(2) fully assembled hardwood cabinet doors, (3) rigid thermofoil, orRTF, cabinet doors and components, (4) veneer raised panels, or VRPs, and(5) a variety of laminated and profile-wrapped components. We generateapproximately 95% of our sales from the kitchen and bath cabinet manufacturingindustry. Our customers, in turn, distribute their products through varioussales channels, including specialty kitchen and bath cabinet dealers, homecenter retailers and homebuilders. We conduct all of our operations through ourWoodcraft, PrimeWood, Grand Valley and Brentwood subsidiaries and we operate tenmanufacturing facilities located in Minnesota, North Dakota, Oregon, Ohio,Kansas, Pennsylvania, and Kentucky that allow us to distribute our productsnationwide.

 

In the past eightyears, we have consummated four strategic acquisitions that have enhanced ourmarket position, product breadth and geographic reach. In June 1998, weacquired PrimeWood, a manufacturer of RTF, VRP and profile-wrapped engineeredwood products based in North Dakota. In July 2002, we acquired Brentwood,a manufacturer of solid wood and RTF cabinet doors located in Oregon. InApril 2004, we acquired Grand Valley, a manufacturer of solid wood cabinetdoors located in Ohio. In July 2005, we acquired substantially all of theassets of Dimension Moldings, Inc. (DMI), an Ohio corporation, which was in thebusiness of manufacturing hardwood component moldings at a 

 

9

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facility located in Middlefield, Ohio. Following the acquisition, ourWoodcraft subsidiary manufactures hardwood component moldings at theMiddlefield facility for sale to one of our major customers.

 

WII Components, Inc. (formerly known as WII Holdings, Inc.),a Delaware corporation, which we refer to as the Company, was formed to acquireWoodcraft Industries, Inc. and its subsidiaries, or the Predecessor,through a stock purchase on April 9, 2003, which we refer to as theAcquisition. For accounting purposes, the Acquisition was recorded with aneffective date of April 1, 2003. The Acquisition was accounted for usingthe purchase method of accounting. Accordingly, the assets acquired and theliabilities assumed by WII Components, Inc. were recorded at fair value asof April 1, 2003 and included $104.0 million for goodwill. Thefinancial information for periods after April 1, 2003 may not becomparable to financial information for periods prior to April 1, 2003.

 

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

 

InSeptember 2005, we amended and restated our existing senior secured revolvingcredit facility by expanding the revolving line of credit capacity to $40.0million, advancing a $7.5 million nonamortizing term loan, and allowing theflexibility to advance up to $7.5 million through June 30, 2006 on anonamortizing capital expenditure loan. We have the option, without penalty, toprepay the term loan and capital expenditure loan throughout the loancommitment period.

 

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

#####  

***Year EndedDecember 31, 2005 Compared to the Year Ended December 31, 2004***

 

The years ended December 31, 2005 and 2004 are shown in the tablebelow. The following table sets forth selected operating data derived from ourconsolidated statements of operations and presents this information as apercentage of net sales.

 
| ** **               | ** ** | **Year Ended  December 31, 2005** | ** ** | **Year Ended  December 31, 2004** | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
|                     |       | **(Dollars in thousands)**             |       |
| Net sales                |       | $                                                | 259,603    |                                             | $          | 203,066 |   |
| *% of net sales*         |       | 100.0                                            | %          | 100.0                                            | %          |
| Cost of sales            |       | 217,127                                          |       | 167,042                                          |       |
| *% of net sales*         |       | 83.6                                             | %          | 82.3                                             | %          |
| Gross profit             |       | 42,476                                           |       | 36,024                                           |       |
| *% of net sales*         |       | 16.4                                             | %          | 17.7                                             | %          |
| Operating expenses       |       | 15,303                                           |       | 12,880                                           |       |
| *% of net sales*         |       | 5.9                                              | %          | 6.3                                              | %          |
| Operating income         |       | 27,173                                           |       | 23,144                                           |       |
| *% of net sales*         |       | 10.5                                             | %          | 11.4                                             | %          |
| Other expenses:          |       |                                             |       |                                             |       |
| Interest expense         |       | 13,561                                           |       | 12,767                                           |       |
| *% of net sales*         |       | 5.2                                              | %          | 6.3                                              | %          |
| Other loss (income), net |       | (50                                              | )          | 3,414                                            |       |
| *% of net sales*         |       | 0.0                                              | %          | 1.7                                              | %          |
| Income taxes             |       | 5,487                                            |       | 2,684                                            |       |
| *% of net sales*         |       | 2.1                                              | %          | 1.3                                              | %          |
| Net income               |       | 8,175                                            |       | 4,279                                            |       |
| *% of net sales*         |       | 3.1                                              | %          | 2.1                                              | %          |
|                          |            |                                                  |            |                                                  |            |  |  |

 

*Net Sales.*Net salesincreased $56.5 million, or 27.8%, from $203.1 million for the yearended December 31, 2004 to $259.6 million for the year endedDecember 31, 2005. Our hardwood product line increased $50.7 millionattributable to (i) increases in volume due in part to overall industrygrowth and in part to market share gain, (ii) the acquisition of Grand Valleyin 2004 and the acquisition of the assets of Dimension Moldings, Inc. in July2005, and (iii) to a lesser extent, price adjustments due to increases in rawmaterial costs. The remaining$5.8 million increase in sales relates to 

 

10

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ourengineered wood products line and is attributable to increases in volume due tooverall industry growth and market share gain.

 

*Cost of Sales.*Costof sales increased $50.1 million, or 30.0%, from $167.0 million for theyear ended December 31, 2004 to $217.1 million for the year endedDecember 31, 2005. This increase in cost of sales is primarily attributableto higher material, labor, and overhead costs as a result of higher volume ofsales, but other factors include; (i) increased material and labor costsrelated to operational inefficiencies at our Grand Valley facility, (ii)additional costs, such as overtime pay, as a result of us operating at nearfull capacity, (iii) inflation, primarily in respect of raw materialcosts, in each case related to both our hardwood and engineered wood productlines, (iv) start-up costs in our Pennsylvania facility, and (v) unfavorablemargins on an import program. These costs were partially offset by gains inoperational efficiencies in our other facilities and by spreading our fixedcosts over a larger sales base.

 

*Gross Profit.*Grossprofit increased $6.4 million, or 17.7%, from $36.1 million for theyear ended December 31, 2004 to $42.5 million for the same period in2005 as a result of the factors described above. As a percentage of net sales,our gross profit decreased 130 basis points from 17.7% for the year endedDecember 31, 2004 to 16.4% for the same period in 2005. This decrease ingross profit margins is attributable to (i) increased material and laborcosts related to operational inefficiencies at our Grand Valley facility, (ii)additional costs, such as overtime pay, as a result of us operating at nearfull capacity, (iii) inflation, primarily in respect of raw materialcosts, in each case related to both our hardwood and engineered wood productlines, (iv) start-up costs in our Pennsylvania facility, and (v) unfavorablemargins on an import program. These costs were partially offset by gains inoperational efficiencies in our other facilities and by spreading our fixedcosts over a larger sales base.

 

*Operating Expenses.*Operatingexpenses increased $2.4 million, or 18.6%, from $12.9 million for theyear ended December 31, 2004 to $15.3 million for the year endedDecember 31, 2005. The increaseconsists partially of (i) $0.9 million for additional stock compensationexpense in 2005, (ii) $1.0 million due to the inclusion of twelve fullmonths of operations of Grand Valley in 2005, which includes $0.3 million ofamortization for a Customer Relationship intangible asset, (iii) $0.5 milliondue to the inclusion of five full months of operations of our Middlefield facility,which includes $0.4 million of amortization for a Customer Relationshipintangible asset,  (iv) $0.1 million for twelvefull months of amortization on financing fees related to the 2004 creditfacility, (v) $0.2 million for additional telephone and information systemsexpenses, (vi) $0.1 million for additional bad debt expense, and (vii) $0.3million for additional professional fees. The increase in operating expensesfor the fiscal year ended December 31, 2005 is partially offset by certainexpenses incurred in the fiscal year ended December 31, 2004 which include (i)$0.8 million of additional incentive compensation paid to certain keyemployees in February 2004 in recognition of our improved financialperformance and the successful completion of the offering of the senior notes,and (ii) $0.3 million of consulting and noncompete expense in 2004 for theprevious owner of a subsidiary of Woodcraft Industries, Inc. As a percentage ofsales, operating expenses declined from 6.3% for the year ended December 31,2004 to 5.9% for the same period in 2005, reflecting the scale benefits of ahigher sales base in 2005 and the higher level of certain expenses incurred in2004, as described above.

 

*Operating Income.*Operatingincome increased by $4.0 million, or 17.2%, from $23.2 million forthe year ended December 31, 2004 to $27.2 million for the year endedDecember 31, 2005 as a result of the net effect of the factors describedabove.

 

*Interest Expense.*Interestexpense increased $0.8 million, or 6.3%, from $12.8 million for theyear ended December 31, 2004 to $13.6 million for the year endedDecember 31, 2005. This increaserelates to the increase in debt and the higher interest rate in connection withthe issuance of the $120.0 million senior notes in February 2004.

 

*Other loss (income).*Otherloss (income) changed from $3.4 million of other loss for the year endedDecember 31, 2004 to $0.1 million of other income for the year endedDecember 31, 2005 primarily reflecting the write-off of financing feesrelated to the senior credit facility, which was subsequently paid-off inFebruary 2004.

 

*Income tax expense.*Incometax expense increased $2.8 million, or 103.7% from $2.7 million for theyear ended December 31, 2004 to $5.5 million for the year endedDecember 31, 2005 as a result of increased earnings. The effective taxrate increased 170 basis points from 38.5% in 2004 to 40.2% in 2005. Thisincrease is a result of the increase in the tax rate due to additional statetaxes owed as a result of acquisitions.

 

*Net Income.*Netincome increased $3.9 million, or 90.7%, from $4.3 million for the yearended December 31, 2004 to $8.2 million for the year endedDecember 31, 2005 as a result of the factors described above.

 

11

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***Year EndedDecember 31, 2004 Compared to the Year Ended December 31, 2003***

 

For purposes of the discussion of the results of operations for thetwelve months ended December 31, 2004 and 2003 below, the results ofoperations for the company for the nine-month period ended December 31,2003 and the results of operations for the predecessor for the three-monthperiod ended March 31, 2003 have been combined in the table below. Theresults of operations for the company for the nine-month period ended December 31,2003 includes purchase accounting adjustments due to the Acquisition, whichwill be discussed throughout the “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” below. The following table setsforth selected operating data derived from our consolidated statements ofoperations and presents this information as a percentage of net sales.

 
| ** **               | ** ** | **WII Components, Inc.**               | ** ** | **Combined**                                     | ** ** | **Predecessor**                                            | ** ** | **WII Components, Inc.**                           | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **               | ** ** | **Year Ended  December 31, 2004** | ** ** | **Year Ended  December 31, 2003** | ** ** | **Three Months Ended  March 31, 2003** | ** ** | **Nine Months Ended  December 31, 2003** | ** ** |
| ** **               | ** ** | **(Dollars in thousands)**             | ** ** |
| Net sales                |       | $                                                | 203,066    |                                             | $          | 173,627                                                    |       | $                                                            | 40,980     |   | $ | 132,647 |   |
| *% of net sales*         |       | 100.0                                            | %          | 100.0                                            | %          | 100.0                                                      | %          | 100.0                                                        | %          |
| Cost of sales            |       | 167,042                                          |       | 139,549                                          |       | 32,071                                                     |       | 107,478                                                      |       |
| *% of net sales*         |       | 82.3                                             | %          | 80.4                                             | %          | 78.3                                                       | %          | 81.0                                                         | %          |
| Gross profit             |       | 36,024                                           |       | 34,078                                           |       | 8,909                                                      |       | 25,169                                                       |       |
| *% of net sales*         |       | 17.7                                             | %          | 19.6                                             | %          | 21.7                                                       | %          | 19.0                                                         | %          |
| Operating expenses       |       | 12,880                                           |       | 12,678                                           |       | 4,188                                                      |       | 8,490                                                        |       |
| *% of net sales*         |       | 6.3                                              | %          | 7.3                                              | %          | 10.2                                                       | %          | 6.4                                                          | %          |
| Operating income         |       | 23,144                                           |       | 21,400                                           |       | 4,721                                                      |       | 16,679                                                       |       |
| *% of net sales*         |       | 11.4                                             | %          | 12.3                                             | %          | 11.5                                                       | %          | 12.6                                                         | %          |
| Other expenses:          |       |                                             |       |                                             |       |                                                       |       |                                                         |       |
| Interest expense         |       | 12,767                                           |       | 7,178                                            |       | 835                                                        |       | 6,343                                                        |       |
| *% of net sales*         |       | 6.3                                              | %          | 4.1                                              | %          | 2.0                                                        | %          | 4.8                                                          | %          |
| Other loss (income), net |       | 3,414                                            |       | (96                                              | )          | (28                                                        | )          | (68                                                          | )          |
| *% of net sales*         |       | 1.7                                              | %          | -0.1                                             | %          | -0.1                                                       | %          | -0.1                                                         | %          |
| Income taxes             |       | 2,684                                            |       | 5,256                                            |       | 1,404                                                      |       | 3,852                                                        |       |
| *% of net sales*         |       | 1.3                                              | %          | 3.0                                              | %          | 3.4                                                        | %          | 2.9                                                          | %          |
| Net income               |       | 4,279                                            |       | 9,062                                            |       | 2,510                                                      |       | 6,552                                                        |       |
| *% of net sales*         |       | 2.1                                              | %          | 5.2                                              | %          | 6.1                                                        | %          | 4.9                                                          | %          |
|                          |            |                                                  |            |                                                  |            |                                                            |            |                                                              |            |  |  |  |  |

 

*Net Sales.*Net salesincreased $29.5 million, or 17.0%, from $173.6 million for the yearended December 31, 2003 to $203.1 million for the year endedDecember 31, 2004. Our hardwood product line increased $30.8 millionand is attributable to a combination of (i) increases in volume due inpart to overall industry growth and in part to market share gain, and(ii) price adjustments due to increases in raw material costs. Thisincrease is partially offset by a $1.3 million decrease in sales in ourengineered wood products line due to a partial loss of market share by some ofour customers and a softening in this market sector.

 

*Cost of Sales.*Costof sales increased $27.5 million, or 19.7%, from $139.5 million forthe year ended December 31, 2003 to $167.0 million for the year endedDecember 31, 2004. This increase in cost of sales is attributable to(i) increased material, labor and overhead costs related to volume growth,(ii) inflation, primarily in respect of raw material costs, in each caserelated to both our hardwood and engineered wood product lines, and(iii) operating inefficiencies experienced due to the expansion of ourBrentwood facility. These costs were partially offset by gains in operationalefficiency in our other facilities and by spreading our fixed costs over alarger sales base.

 

*Gross Profit.*Grossprofit increased $2.0 million, or 5.9%, from $34.1 million for theyear ended December 31, 2003 to $36.1 million for the same period in2004 as a result of the factors described above. As a percentage of net sales,our gross profit decreased 190 basis points from 19.6% for the year endedDecember 31, 2003 to 17.7% for the same period in 2004. This decreasereflects (i) increases in our raw material costs compared to the sameperiod in 2003 and (ii) inefficiencies in material and labor utilizationin our Brentwood facility, offset in part by (iii) the spreading of ourfixed costs over a larger sales base.

 

*Operating Expenses.*Operatingexpenses increased $0.2 million, or 1.6%, from $12.7 million for theyear ended December 31, 2003 to $12.9 million for the same period in2004. The increase consists of (i) $0.8 million of additional incentivecompensation paid to certain key employees in February 2004 in recognitionof our improved financial performance 

 

12

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and the successful completion of the offering of the senior notes, (ii)$1.2 million due to the inclusion of eight full months of operations ofGrand Valley in 2004, (iii) $0.5 million for bad debt expense due to a reversalof an allowance for doubtful account reserve in 2003, and (iv) $0.5 million forstock compensation expense. This increase was offset partially by(i) $1.5 million in cash payments to holders of the predecessor’scapital stock for certain tax liabilities incurred upon the sale of capitalstock in April 2003, (ii) $0.3 million for lower bonus expense based on2004 performance versus budget, (iii) $0.2 million write-down of animpaired asset in 2003, (iv) $0.1 million of periodic fees paid in2003 to the private equity firm which managed the equity fund that owned thepredecessor, (v) $0.2 million of lower depreciation expense, and (vi) $0.4million of consulting and noncompete expense in 2003 for the previous owner ofa subsidiary of Woodcraft Industries, Inc.

 

*Operating Income.*Operatingincome increased by $1.8 million, or 8.4%, from $21.4 million for theyear ended December 31, 2003 to $23.2 million for the year endedDecember 31, 2004 as a result of the net effect of the factors describedabove.

 

*Interest Expense.*Interestexpense increased $5.6 million, or 77.8%, from $7.2 million for theyear ended December 31, 2003 to $12.8 million for the year endedDecember 31, 2004. Amortization of deferred financing fees accounted for$0.2 million of the increase. The remaining increase related to theincrease in debt and the higher interest rate on the senior credit facilityestablished in connection with the Acquisition in April 2003, and theissuance of $120.0 million senior notes in February 2004.

 

*Other loss (income).*Otherloss (income) changed from $0.1 million of other income for the year endedDecember 31, 2003 to $3.4 million of other loss for the year endedDecember 31, 2004 resulting from the write-off of financing fees related to thesenior credit facility from April 2003 which was subsequently paid-off inFebruary 2004.

 

*Income tax expense.*Incometax expense decreased $2.6 million, or 49.1% from $5.3 million forthe year ended December 31, 2003 to $2.7 million for the year endedDecember 31, 2004 as a result of lower earnings. The effective tax rateincreased 180 basis points from 36.7% in 2003 to 38.5% in 2004. This increaseis a result of increases in permanent differences.

 

*Net Income.*Netincome decreased $4.7 million, or 52.2%, from $9.0 million for theyear ended December 31, 2003 to $4.3 million for the year endedDecember 31, 2004 as a result of the factors described above.

 

**Liquidity and Capital Resources**

 

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

 

*Refinancing*. On February 18, 2004, we issued $120.0 million of 10% seniornotes due in 2012, and paid the entire outstanding balance of our old seniorsecured credit facility and terminated the related credit agreement. Under thatcredit facility, we had three outstanding term loans and a $15.0 millionrevolving credit facility. Our existing $55.0 million credit facility, whichwas amended and restated in September 2005, provides for revolving credit of upto $40.0 million subject to a borrowing base, a $7.5 million nonamortizingterm loan, and a $7.5 million nonamortizing capital expenditure loan to bedrawn upon through June 30, 2006. The outstanding principal bears interest at afluctuating rate equal to either the base rate plus 23¤4% per annum or LIBOR plus 3.0% per annum. As of December 31, 2005 theborrowing base allowed for $36.1 million of the $40.0 million revolving credit.We had no amount outstanding under our revolving credit for either the yearended December 31, 2005 or the year ended December 31, 2004. As of December 31,2005 we had $7.5 million outstanding and no amount outstanding, under thenonamortizing term loan and nonamortizing capital expenditure loan,respectively. As of December 31, 2004 we had no amounts outstanding undereither the nonamortizing term loan or the nonamortizing capital expenditureloan. We must comply with certain financial covenants under our credit facilityincluding maintenance of a minimum fixed charge coverage ratio, a maximum totalleverage ratio and an EBITDA minimum. As of December 31, 2005 and December 31,2004 we were in compliance with these covenants. As of December 31, 2005 we had$2.5 million of capital lease obligations, of which $1.3 million was currentand as of December 31, 2004 we had $3.1 million of capital leaseobligations, of which $0.9 million was current.

 

The acquisition ofsubstantially all of the assets of Dimension Moldings, Inc, and associated feesand expenses at closing were funded one-half by the sale of shares of theCompany’s voting common stock to existing stockholders, and the remainder withoperating cash and a draw down on the Company’s senior secured credit facility.In the first quarter 2006, we paid an earn-out payment in the amount of $2.0million to the owners of DMI as a result of the operations of the DMI assetsmeeting agreed upon earnings targets.

 

Our existing senior securedrevolving credit facility and the indenture for the senior notes impose certainrestrictions on our ability to incur indebtedness, pay dividends, makeinvestments, grant liens, sell our assets and engage in certain other 

 

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activities.Indebtedness under our existing senior secured revolving credit facility issecured by substantially all of our assets, including our real and personalproperty, inventory, accounts receivable, intellectual property and otherintangibles.

 

*Cash flow from operating activities.*As of December 31, 2005, we had $4.0million of cash and cash equivalents available for working capital purposes. Asof December 31, 2004, we had approximately $2,000 of cash and cash equivalentsavailable for working capital purposes. Cash provided by operating activitiesfor the years ended December 31, 2005 and 2004 was $13.0 million and $16.0million, respectively. This decrease was mainly attributable to increases inaccounts receivable and inventories due to sales growth, and the additionalmanufacturing facilities in 2005. This decrease was partially offset withincreased net income in 2005 (as decribed earlier), net of the loss onmodification of debt from 2004.

 

*Cash flow from investing activities.*Net cash used in investing activities was $20.2 millionfor the year ended December 31, 2005 and $21.6 million for the year endedDecember 31, 2004. Capital expenditures in 2005 were $11.8 million, of which $11.1 millionwas paid in 2005 and $0.7 million was included in ending Accounts Payable as ofDecember 31, 2005 compared to $5.7 million for the year ended December 31,2004. The increase is primarily due to expenditures in 2005 for (i) theexpansion of our St. Cloud door plant and (ii) the purchase of land and an existingbuilding for the creation of a lumber drying yard and roughmill in Greenville,Pennsylvania. Net cash used in investing activities includes $9.3 million forthe year ended December 31, 2005 due to the acquisition of the assets ofDimension Moldings, Inc. The year ended December 31, 2004 included $15.9million related to the acquisition of Grand Valley.

 

*Cash flow from financing activities.*Net cash provided by financing activities forthe year ended December 31, 2005 was $11.2 million, primarily attributableto cash inflows from the new $7.5 million term loan funded under the newfinancing agreement and $4.7 million for stock issued for the DimensionMoldings, Inc. acquisition. Net cash provided by financing activities in the yearended December 31, 2004 totaled $5.6 million.

 

*Dividends.*In the three months endedMarch 31, 2003, the predecessor paid a dividend in the amount of$11.4 million to its preferred shareholders. We are limited by our current debt covenants regarding the payment ofdividends. On February 24, 2004, we used $39.0 million of the netproceeds from our February 2004 note offering to make payments to ourstockholders through a combination of dividends and redemptions of commonstock.

 

Weanticipate that the funds generated by operations and funds available under thesenior secured credit facility will be sufficient to meet working capitalrequirements and to finance capital expenditures over the next twelve months.We cannot provide assurances that our business will generate sufficient cashflow from operations, that anticipated net sales growth and operatingimprovements will be realized or that future borrowings will be available underour senior secured credit facility in an amount sufficient to enable us to serviceour indebtedness, including the notes, or to fund our other liquidity needs. Inaddition, we cannot provide assurances that we will be able to refinance any ofour indebtedness, including our senior secured revolving credit facility andthe notes, on commercially reasonable terms, if at all. We are currentlyapproaching our full manufacturing capacity. We intend to incur capitalexpenditures in order to continue to fulfill increased manufacturing demands,including without limitation, the expenditure of an aggregate amount between$16.0 to $18.0 million to acquire and expand a roughmill facility inPennsylvania and expand our St. Cloud door facility. As of December 31, 2005, wehave spent approximately $4.9 million of the expected expansion costs describedabove.  These expansion costs include theacquisition of the roughmill facility.

 

**Schedule of Certain Contractual Obligations**

 

The following table details our projected payments for our significantcontractual obligations as of December 31, 2005. The table is based uponavailable information and 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          |       | $                                         | —     |               | $          | — |   | $ | 127,500 |   | $ | — |   | $ | 127,500 |   |
| Interest expense on fixed rate debt |       | 12,094                                    |       | 36,060             |       | 25,500 |   | — |   | 73,654 |   |
| Capital lease obligations           |       | 1,262                                     |       | 1,204              |       | — |   | — |   | 2,466 |   |
| Operating lease obligations         |       | 446                                       |       | 868                |       | 247 |   | — |   | 1,561 |   |
| Total contractual cash obligations  |       | $                                         | 13,802     |               | $          | 38,132 |   | $ | 153,247 |   | $ | — |   | $ | 205,181 |   |

 

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In February 2004, the Company completedthe offering of $120 million of 10% senior notes due 2012. The 10% intereston the $120 million of senior notes is paid every six months.

 

In September 2005, the Company entered intoan Amended and Restated Credit Facility that includes a $40.0 million revolvingline of credit, a $7.5 million nonamortizing term loan, and a $7.5 millionnonamortizing capital expenditure loan to be drawn upon through June 30, 2006. Theoutstanding principal bears interest at a fluctuating rate equal to either thebase rate plus 23¤4% per annum or LIBOR plus 3.0% per annum. As of December 31, 2005 theCompany had $7.5 million outstanding under our credit facility. We must complywith certain financial covenants under the credit facility includingmaintenance of a minimum fixed charge coverage ratio, a maximum total leverageratio and an EBITDA minimum. As of December 31, 2005 the Company was incompliance with these covenants.

 

The Company leases certain equipment undercapital lease agreements with interest rates of 3.65% to 7.92%. The agreementsexpire at various dates through 2008.

 

Fromtime to time, we acquire the use of certain assets, such as warehouses,forklifts, trailers, and office equipment through operating leases. Many ofthese operating leases have termination penalties. However, because the assetsare used in the conduct of our business operations, it is unlikely that anysignificant portion of these operating leases would be terminated prior to thenormal expiration of their lease terms. Therefore, we consider the risk relatedto termination penalties to be minimal.

 

**Inflation**

 

Our cost of sales is subject to inflationary pressures on labor costs,prices of the raw materials we use and various overhead costs. We generallyhave been able over time to offset the effects of inflation and pricefluctuations through a combination of sales price increases and operationalefficiencies. We currently believe that raw material cost pressure ismoderating. We continue to attempt to pass along these costs, but such effortstypically lag behind in material costs and we can not guarantee a full offset.

 

**Seasonality**

 

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

 

**Critical Accounting Policies**

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America (GAAP) requiresmanagement to make estimates, assumptions and judgments that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Because of theuncertainty inherent in these matters, actual results could differ from thoseestimates. We believe that the estimates, assumptions and judgments involved inthe accounting policies below have the greatest potential impact on ourfinancial statements.

 

*Revenue Recognition.*Werecognize revenues and related cost of sales when title passes, which isusually upon shipment of product under FOB shipping point terms. Returns areestimated and provided for at the time of sale based on historical experienceand current trends.

 

*Allowance for Doubtful Accounts.*Wemake estimates of potentially uncollectible accounts receivable. Our reservesare based on an analysis of customers’ accounts and historical write-offexperience. Our analysis includes the age of the receivable, customercreditworthiness and general economic conditions. We believe the results couldbe materially different if historical trends do not reflect actual results orif economic conditions worsened.

 

*Goodwill.*We adoptedStatement of Financial Accounting Standards, (SFAS) No. 142, Goodwill andOther Intangible Assets, and accordingly have discontinued the amortization ofgoodwill. We evaluate goodwill for impairment annually or whenever an indicatorof impairment occurs. If events or circumstances change, including reductionsin anticipated cash flows generated by operations, goodwill could becomeimpaired and result in a charge to earnings.

 

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*Impairment of Long-Lived Assets.*Weevaluate the carrying value of long-lived assets, such as property, plant andequipment, for impairment when events or changes in circumstances indicate thatthe carrying amount of an asset or group of assets may not be recoverable.Assets are grouped and evaluated for impairment at the lowest level for whichthere is identifiable cash flows. If impairment indicators are present and theestimated future undiscounted cash flows are less than the carrying value ofthe asset or group of assets, the carrying value is reduced to its estimatedfair value. Fair value is estimated based on the best information available,including prices for similar assets or results of valuation techniques such asdiscounting estimated future cash flows.

 

*Insurance Benefit Accruals.*Eachaccounting period, we estimate an amount to accrue for medical costs incurredbut not yet reported under our self-funded employee medical and workerscompensation insurance plans. We base our determination on an evaluation ofpast rates of claim payouts and trends in the amount of payouts. Thisdetermination requires significant judgment and assumes past patterns arerepresentative of future payment patterns. A significant shift in usage andpayment patterns within these plans could necessitate significant adjustmentsto these accruals in future accounting periods.

 

*Purchase Accounting.*Weaccounted for our acquisitions under the purchase method of accounting and,accordingly, the acquired assets and liabilities assumed are recorded at theirrespective fair values. The recorded values of assets and liabilities are basedon third-party estimates and valuations when available. The remaining valuesare based on management’s judgments and estimates. Our financial position andresults from operations may be affected by changes in estimates and judgments.

 

*Income Taxes.*TheCompany accounts for income taxes in accordance with the liability method ofaccounting, which requires recognition of deferred tax assets and liabilitiesfor the expected future tax consequences of events that were included in theconsolidated financial statements and tax returns. Under this method, deferredtax assets and liabilities are determined based on the difference between thefinancial statement and tax bases of assets and liabilities using enacted taxrates expected to be in effect for the year in which the differences areexpected to reverse. The Company records a valuation allowance when it is morelikely than not that the net deferred tax assets will not be realized.

 

The Company issubject to audits in the tax jurisdictions in which it operates. Upon audit,these taxing jurisdictions could retroactively disagree with our tax treatmentof certain items. Consequently, the actual liabilities with respect to any yearmay be determined long after financial statements have been issued. The Companyestablishes tax reserves for estimated tax exposures. These potential exposuresresult from varying applications of statutes, rules, regulations, case law andinterpretations. The settlement of these exposures primarily occurs uponfinalization of tax audits. However, the amount of the exposures can also beimpacted by changes in tax laws and other factors. The Company believes that ithas established the appropriate reserves for these estimated exposures. However,actual results may differ from these estimates. The resolution of these taxmatters will not have a material effect on the consolidated financial conditionof the Company, although a resolution could have a material impact on theCompany’s consolidated statement of operations for a particular future periodand on the Company’s effective tax rate.

 

**New Accounting Standards**

 

In December2004, the Financial Accounting Standards Board (FASB) revised SFAS No. 123 andissued SFAS No. 123(R). This Statement supersedes APB No. 25, which resulted inno stock-based employee compensation cost related to stock options if theoptions granted had an exercise price equal to the market value of theunderlying common stock on the date of grant. SFAS No. 123R requiresrecognition of an expense for employee services provided in exchange for ashare-based payment based on the grant date fair market value. The Company isrequired to adopt SFAS No. 123R as of January 1, 2006. As of the effectivedate, this Statement applies to all new awards issued as well as awardsmodified, repurchased, or cancelled.

 

In November 2004, the FASB issued SFAS No. 151, *Inventory Costs*. This Statement requiresthat abnormal amounts of idle facility expense, freight, handling costs, andspoilage be recognized as current period charges. The Statement also requiresthat fixed production overhead be allocated to conversion costs based on thenormal capacity of the production facilities. SFAS No. 151 is effective forinventory costs incurred by the Company beginning January 1, 2006. The adoptionof this Statement will not have a material impact on the Company’s consolidatedfinancial position, results of operations, or cash flows.

 

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

 

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

 

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

 

*Interest Rate Risk.*Weare exposed to market risk relating to changes in interest rates in respect ofa portion of our long-term debt and a portion of our capital leases. As ofDecember 31, 2005, we had $7.5 million outstanding under the nonamortizing termloan issued under our senior secured credit facility, all of which bearinterest at variable rates. In addition, as of that date, we had approximately$0.9 million of capital leases that bear interest at variable rates. Webelieve that a one percent (1%) increase in the interest rates currently ineffect would not have a material adverse effect on our financial condition, resultsof operations, or cash flows.

 

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

#  

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

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

 

We have audited the accompanying consolidated balance sheets of WII Components, Inc. and Subsidiaries(the “Successor”) as of December 31, 2005 and 2004, and the relatedconsolidated statements of income, stockholders’ equity, and cash flows for theyears ended December 31, 2005 and 2004 and for the period from inception (April1, 2003) to December 31, 2003. We have also audited the accompanyingconsolidated statement of operations, stockholders’ equity, and cash flows ofWoodcraft Industries Inc. and Subsidiaries (the “Predecessor” along with theSuccessor, herein referred to as the “Company”) for the three-month period endedMarch 31, 2003. Our audits also included the financial statement schedulelisted in the Index at Item 15.  These financial statements and financialstatement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements andfinancial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  TheCompany is not required to have, nor were we engaged to perform, an audit ofits internal control over financial reporting.  Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting.  Accordingly, we express nosuch opinion.  An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the Successor consolidated financial statements referredto above present fairly, in all material respects, the financial position ofthe Company**as of December 31,2005 and 2004, and the results of their operations and their cash flows for theyears ended December 31, 2005 and 2004 and for the period from inception (April1, 2003) to December 31, 2003, in conformity with accounting principlesgenerally accepted in the United States of America.  Further, in ouropinion, the Predecessor’s consolidated financial statements referred to abovepresent fairly, in all material respects, the results of their operations andtheir cash flows for the three-month period ended March 31, 2003, in conformitywith accounting principles generally accepted in the United States of America. Also,in our opinion, such financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentsfairly in all material respects the information set forth therein.

 

Minneapolis,MinnesotaMarch 22, 2006

 

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

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2005 AND 2004**

**(In thousands, except share and per shareamounts)**

 
| ** **                                                                                                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **ASSETS**                                                                                                                   |       |     |       |     |       |
| CURRENT ASSETS:                                                                                                              |       |     |       |     |       |
| Cash                                                                                                                         |       | $        | 3,981      |     | $          | 2 |   |
| Accounts receivable—net of allowance for  doubtful accounts of $118 and $209, respectively                              |       | 14,682   |       | 9,564    |       |
| Inventories                                                                                                                  |       | 20,770   |       | 16,742   |       |
| Deferred income taxes                                                                                                        |       | 1,163    |       | 1,437    |       |
| Income tax receivable                                                                                                        |       | —   |       | 768      |       |
| Other current assets                                                                                                         |       | 1,329    |       | 1,176    |       |
| Total current assets                                                                                                         |       | 41,925   |       | 29,689   |       |
| PROPERTY, PLANT, AND EQUIPMENT:                                                                                              |       |     |       |     |       |
| Land                                                                                                                         |       | 4,218    |       | 3,175    |       |
| Buildings and yards                                                                                                          |       | 21,896   |       | 20,197   |       |
| Equipment                                                                                                                    |       | 37,552   |       | 27,480   |       |
| Less accumulated depreciation                                                                                                |       | (13,745  | )          | (8,600   | )          |
| Property, plant, and equipment—net                                                                                      |       | 49,921   |       | 42,252   |       |
| GOODWILL AND OTHER ASSETS:                                                                                                   |       |     |       |     |       |
| Goodwill                                                                                                                     |       | 107,748  |       | 107,601  |       |
| Customer relationship                                                                                                        |       | 14,896   |       | 7,347    |       |
| Noncompete agreements                                                                                                        |       | 849      |       | 1,201    |       |
| Other assets                                                                                                                 |       | 6,255    |       | 6,897    |       |
| Total goodwill and other assets                                                                                              |       | 129,748  |       | 123,046  |       |
| TOTAL                                                                                                                        |       | $        | 221,594    |     | $          | 194,987 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                |       |     |       |     |       |
| CURRENT LIABILITIES:                                                                                                         |       |     |       |     |       |
| Current maturities of capital lease  obligations                                                                             |       | $        | 1,262      |     | $          | 928 |   |
| Accounts payable                                                                                                             |       | 6,993    |       | 5,808    |       |
| Accrued payroll                                                                                                              |       | 3,674    |       | 3,207    |       |
| Other current liabilities                                                                                                    |       | 13,027   |       | 9,107    |       |
| Total current liabilities                                                                                                    |       | 24,956   |       | 19,050   |       |
| LONG-TERM DEBT—Net of current maturities                                                                                |       | 127,500  |       | 120,000  |       |
| CAPITAL LEASE OBLIGATIONS—Net of current  maturities                                                                    |       | 1,204    |       | 2,194    |       |
| DEFERRED INCOME TAXES                                                                                                        |       | 4,015    |       | 4,526    |       |
| COMMITMENTS AND CONTINGENCIES (Note 7)                                                                                       |       |     |       |     |       |
| STOCKHOLDERS’ EQUITY:                                                                                                   |       |     |       |     |       |
| Common stock:                                                                                                                |       |     |       |     |       |
| Voting, $0.01 par—28,000,000 shares  authorized; 21,751,331 and 20,734,843 shares issued and outstanding,  respectively |       | 217      |       | 207      |       |
| Nonvoting, $0.01 par—1,000,000 shares  authorized; 854,261 and 854,261 issued and outstanding, respectively             |       | 9        |       | 9        |       |
| Additional paid-in capital                                                                                                   |       | 51,927   |       | 45,410   |       |
| Retained earnings                                                                                                            |       | 11,766   |       | 3,591    |       |
| Total stockholders’ equity                                                                                              |       | 63,919   |       | 49,217   |       |
| TOTAL                                                                                                                        |       | $        | 221,594    |     | $          | 194,987 |   |

 

See notes to consolidated financial statements.

 

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**WII COMPONENTS, INC. AND SUBSIDIARIES(SUCCESSOR), AND**

**WOODCRAFT INDUSTRIES, INC. ANDSUBSIDIARIES (PREDECESSOR)**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(In thousands)**

 
| ** **                               | ** ** | **Successor**                              | ** ** | **Predecessor**       | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | ** **                                 | ** ** | ** **            | ** ** | **Nine Months** | ** ** | **Three Months** | ** ** |
| ** **                               | ** ** | ** **                                 | ** ** | ** **            | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **                               | ** ** | **Year Ended December 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
| ** **                               | ** ** | **2005**                                   | ** ** | **2004**              | ** ** | **2003** | ** ** | **2003** | ** ** |
| NET SALES                                |       | $                                          | 259,603    |                  | $          | 203,066 |   | $ | 132,647 |   | $ | 40,980 |   |
| COST OF SALES                            |       | 217,127                                    |       | 167,042               |       | 107,478 |   | 32,071 |   |
| Gross profit                             |       | 42,476                                     |       | 36,024                |       | 25,169 |   | 8,909 |   |
| OPERATING EXPENSES:                      |       |                                       |       |                  |       |   |   |   |   |
| General and administrative               |       | 10,299                                     |       | 9,124                 |       | 6,278 |   | 1,396 |   |
| Selling and marketing                    |       | 3,222                                      |       | 2,949                 |       | 2,219 |   | 733 |   |
| Stock compensation expense               |       | 1,780                                      |       | 844                   |       | — |   | 1,841 |   |
| Loss (gain) on sale of assets            |       | 2                                          |       | (37                   | )          | (7 | ) | 218 |   |
| Total operating expenses                 |       | 15,303                                     |       | 12,880                |       | 8,490 |   | 4,188 |   |
| OPERATING INCOME                         |       | 27,173                                     |       | 23,144                |       | 16,679 |   | 4,721 |   |
| OTHER INCOME (EXPENSE):                  |       |                                       |       |                  |       |   |   |   |   |
| Interest income                          |       | 45                                         |       | 28                    |       | 59 |   | 22 |   |
| Interest expense                         |       | (13,561                                    | )          | (12,767               | )          | (6,343 | ) | (835 | ) |
| Loss on modification of debt             |       | —                                     |       | (3,454                | )          | — |   | — |   |
| Other income                             |       | 5                                          |       | 12                    |       | 9 |   | 6 |   |
| Total other expense                      |       | (13,511                                    | )          | (16,181               | )          | (6,275 | ) | (807 | ) |
| INCOME BEFORE PROVISION FOR INCOME TAXES |       | 13,662                                     |       | 6,963                 |       | 10,404 |   | 3,914 |   |
| PROVISION FOR INCOME TAXES               |       | 5,487                                      |       | 2,684                 |       | 3,852 |   | 1,404 |   |
| NET INCOME                               |       | $                                          | 8,175      |                  | $          | 4,279 |   | $ | 6,552 |   | $ | 2,510 |   |

 

See notes to consolidated financial statements.

 

20

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**WII COMPONENTS, INC. AND SUBSIDIARIES (SUCCESSOR), AND**

**WOODCRAFT INDUSTRIES, INC. ANDSUBSIDIARIES (PREDECESSOR)**

** **

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**

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

 
| ** **                                                                        | ** ** | ** **            | ** ** | ** **     | ** ** | ** **   | ** ** | ** **       | ** ** | ** **        | ** ** | **Retained** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|--------------|------------|------------------|------------|-------------------|------------|--------------|------------|-----------------|------------|------------|------------|
| ** **                                                                        | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | **Earnings** | ** ** | **Other**        | ** ** | ** **        | ** ** |
| ** **                                                                        | ** ** | **Voting**            | ** ** | **Nonvoting**  | ** ** | **Paid-in**  | ** ** | **(Accumulated** | ** ** | **Comprehensive** | ** ** | ** **   | ** ** |
| ** **                                                                        | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Shares**   | ** ** | **Amount**       | ** ** | **Capital**       | ** ** | **Deficit)** | ** ** | **Income**      | ** ** | **Total**  | ** ** |
| **PREDECESSOR**                                                                   |       |                  |       |           |       |         |       |             |       |              |       |         |       |            |       |       |       |
| BALANCE—December  31, 2002                                                   |       | 979,500               |       | $              | 10         |         | 85,348     |             | $          | 1                 |       | $            | 2,240      |            | $          | (5,354     | )          |   |   | $ | (3,103 | ) |
| Series A, Series  B, and Series C redeemable preferred stock cumulative dividends |       |                  |       |           |       |         |       |             |       |              |       | (1,183       | )          |            |       | (1,183     | )          |
| Stock option  modification                                                        |       |                  |       |           |       |         |       |             |       | 334               |       |         |       |            |       | 334        |       |
| Net income                                                                        |       |                  |       |           |       |         |       |             |       |              |       | 2,510        |       |            |       | 2,510      |       |
| BALANCE—March 31,  2003                                                      |       | 979,500               |       | $              | 10         |         | 85,348     |             | $          | 1                 |       | $            | 2,574      |            | $          | (4,027     | )          | $ | — |   | $ | (1,442 | ) |
| **SUCCESSOR**                                                                     |       |                  |       |           |       |         |       |             |       |              |       |         |       |            |       |       |       |
| INITIAL  CAPITALIZATION—April 1, 2003                                        |       | 14,813,827            |       | $              | 148        |         | 1,000,000  |             | $          | 10                |       | $            | 47,283     |            | $          | —     |       | $ | — |   | $ | 47,441 |   |
| Derivative  instrument                                                            |       |                  |       |           |       |         |       |             |       |              |       |         |       | 141             |       | 141        |       |
| Net income                                                                        |       |                  |       |           |       |         |       |             |       |              |       | 6,552        |       |            |       | 6,552      |       |
| Total  comprehensive income                                                       |       |                  |       |           |       |         |       |             |       |              |       |         |       |            |       | 6,693      |       |
| BALANCE—December  31, 2003                                                   |       | 14,813,827            |       | $              | 148        |         | 1,000,000  |             | $          | 10                |       | $            | 47,283     |            | $          | 6,552      |       | $ | 141 |   | $ | 54,134 |   |
| Conversion of  convertible note                                                   |       | 6,950,000             |       | 70             |       |         |       |             |       | 20,780            |       |         |       |            |       | 20,850     |       |
| Repurchase of  common stock                                                       |       | (3,171,841            | )          | (32            | )          | (145,739     | )          | (1               | )          | (17,517           | )          |         |       |            |       | (17,550    | )          |
| Dividend  distribution                                                            |       |                  |       |           |       |         |       |             |       | (14,209           | )          | (7,240       | )          |            |       | (21,449    | )          |
| Stock  compensation expense                                                       |       |                  |       |           |       |         |       |             |       | 844               |       |         |       |            |       | 844        |       |
| Stock issued to  fund acquisition                                                 |       | 2,142,857             |       | 21             |       |         |       |             |       | 8,229             |       |         |       |            |       | 8,250      |       |
| Net income                                                                        |       |                  |       |           |       |         |       |             |       |              |       | 4,279        |       |            |       | 4,279      |       |
| Derivative  instrument                                                            |       |                  |       |           |       |         |       |             |       |              |       |         |       | (141            | )          | (141       | )          |
| Total  comprehensive income                                                       |       |                  |       |           |       |         |       |             |       |              |       |         |       |            |       | 4,138      |       |
| BALANCE—December  31, 2004                                                   |       | 20,734,843            |       | $              | 207        |         | 854,261    |             | $          | 9                 |       | $            | 45,410     |            | $          | 3,591      |       | $ | — |   | $ | 49,217 |   |
| Stock  compensation expense                                                       |       |                  |       |           |       |         |       |             |       | 1,780             |       |         |       |            |       | 1,780      |       |
| Stock issued to  fund acquisition                                                 |       | 1,016,488             |       | 10             |       |         |       |             |       | 4,737             |       |         |       |            |       | 4,747      |       |
| Net income                                                                        |       |                  |       |           |       |         |       |             |       |              |       | 8,175        |       |            |       | 8,175      |       |
| BALANCE—December  31, 2005                                                   |       | 21,751,331            |       | $              | 217        |         | 854,261    |             | $          | 9                 |       | $            | 51,927     |            | $          | 11,766     |       | $ | — |   | $ | 63,919 |   |

 

See notes to consolidated financial statements.

 

21

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**WII COMPONENTS, INC. AND SUBSIDIARIES(SUCCESSOR), AND**

**WOODCRAFT INDUSTRIES, INC. ANDSUBSIDIARIES (PREDECESSOR)**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands)**

 
| ** **                                                                         | ** ** | **Successor**                              | ** ** | **Predecessor**       | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | ** **                                 | ** ** | ** **            | ** ** | **Nine Months** | ** ** | **Three Months** | ** ** |
| ** **                                                                         | ** ** | ** **                                 | ** ** | ** **            | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
| ** **                                                                         | ** ** | **2005**                                   | ** ** | **2004**              | ** ** | **2003** | ** ** | **2003** | ** ** |
| OPERATING ACTIVITIES:                                                              |       |                                       |       |                  |       |   |   |   |   |
| Net income                                                                         |       | $                                          | 8,175      |                  | $          | 4,279 |   | $ | 6,552 |   | $ | 2,510 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                       |       |                  |       |   |   |   |   |
| Loss on modification of debt                                                       |       | —                                     |       | 3,454                 |       | — |   | — |   |
| Depreciation and amortization                                                      |       | 6,760                                      |       | 6,071                 |       | 4,052 |   | 1,282 |   |
| Amortization of debt issue costs                                                   |       | 1,054                                      |       | 1,011                 |       | 712 |   | 87 |   |
| Deferred income taxes                                                              |       | (234                                       | )          | 145                   |       | 87 |   | 175 |   |
| Loss (gain) on sale of assets                                                      |       | 2                                          |       | (37                   | )          | (7 | ) | 218 |   |
| Stock compensation expense                                                         |       | 1,780                                      |       | 844                   |       | — |   | 334 |   |
| Change in operating assets and liabilities:                                        |       |                                       |       |                  |       |   |   |   |   |
| Accounts receivable                                                                |       | (4,750                                     | )          | (190                  | )          | 1,959 |   | (4,393 | ) |
| Inventories                                                                        |       | (2,929                                     | )          | (3,263                | )          | (533 | ) | (1,593 | ) |
| Other current assets                                                               |       | 649                                        |       | 1,481                 |       | 3,763 |   | 37 |   |
| Accounts payable                                                                   |       | 149                                        |       | (811                  | )          | 481 |   | 686 |   |
| Accrued payroll and other current  liabilities                                     |       | 2,334                                      |       | 2,985                 |       | 137 |   | 1,646 |   |
| Total adjustments                                                                  |       | 4,815                                      |       | 11,690                |       | 10,651 |   | (1,521 | ) |
| Net cash provided by operating activities                                          |       | 12,990                                     |       | 15,969                |       | 17,203 |   | 989 |   |
| INVESTING ACTIVITIES:                                                              |       |                                       |       |                  |       |   |   |   |   |
| Purchases of property, plant, and equipment                                        |       | (11,136                                    | )          | (5,733                | )          | (5,005 | ) | (533 | ) |
| Middlefield acquisition                                                            |       | (9,289                                     | )          | —                |       | — |   | — |   |
| Grand Valley acquisition                                                           |       | —                                     |       | (15,937               | )          | — |   | — |   |
| Proceeds from sale of assets                                                       |       | 234                                        |       | 2                     |       | 7 |   | 11 |   |
| Change in other assets                                                             |       | (17                                        | )          | 59                    |       | (163 | ) | 79 |   |
| Net cash used in investing activities                                              |       | (20,208                                    | )          | (21,609               | )          | (5,161 | ) | (443 | ) |
| FINANCING ACTIVITIES:                                                              |       |                                       |       |                  |       |   |   |   |   |
| Principal payments under long-term  financing agreements                           |       | (16,655                                    | )          | (92,097               | )          | (17,278 | ) | (6,737 | ) |
| Borrowings of long-term debt                                                       |       | 23,500                                     |       | 135,782               |       | 3,387 |   | 6,200 |   |
| Dividend distribution .                                                            |       | —                                     |       | (21,449               | )          | — |   | — |   |
| Issuance of common stock                                                           |       | 4,747                                      |       | 8,250                 |       | — |   | — |   |
| Repurchase of common stock                                                         |       | —                                     |       | (17,550               | )          | — |   | — |   |
| Debt issuance costs                                                                |       | (395                                       | )          | (7,385                | )          | — |   | — |   |
| Termination of interest rate collar                                                |       | —                                     |       | 52                    |       | — |   | — |   |
| Net cash provided by (used in) financing  activities                               |       | 11,197                                     |       | 5,603                 |       | (13,891 | ) | (537 | ) |
| NET (DECREASE) INCREASE IN CASH                                                    |       | 3,979                                      |       | (37                   | )          | (1,849 | ) | 9 |   |
| CASH—Beginning of period                                                      |       | 2                                          |       | 39                    |       | 1,888 |   | 2 |   |
| CASH—End of period                                                            |       | $                                          | 3,981      |                  | $          | 2 |   | $ | 39 |   | $ | 11 |   |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                                |       |                                       |       |                  |       |   |   |   |   |
| Cash paid for interest                                                             |       | $                                          | 12,498     |                  | $          | 9,050 |   | $ | 3,124 |   | $ | 681 |   |
| Cash paid for income taxes—net                                                |       | $                                          | 3,682      |                  | $          | 664 |   | $ | 7,574 |   | $ | 411 |   |
| NONCASH ACTIVITY:                                                                  |       |                                       |       |                  |       |   |   |   |   |
| Capital Expenditures in Accounts Payable                                           |       | $                                          | 651        |                  | $          | — |   | $ | — |   | $ | — |   |
| Accrued redeemable preferred stock  cumulative dividends for Series A, B, and C    |       | $                                          | —     |                  | $          | — |   | $ | — |   | $ | 1,184 |   |
| Conversion of subordinated convertible note  and accrued interest to common stock  |       | $                                          | —     |                  | $          | 20,850 |   | $ | — |   | $ | — |   |

 

See notes to consolidated financial statements.

 

22

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** **

**WII COMPONENTS, INC. AND SUBSIDIARIES(SUCCESSOR),**

**AND WOODCRAFT INDUSTRIES, INC. ANDSUBSIDIARIES (PREDECESSOR)**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

###### **DECEMBER 31, 2005 AND 2004**

######  

**1. NATURE OF BUSINESS**

 

***Company Background***  WII Components, Inc. (formerly WIIHoldings, Inc. and referred to herein as the “Successor” or the “Company”),a Delaware corporation, was formed to acquire 100% of the common stock ofWoodcraft Industries, Inc. and Subsidiaries (the “Predecessor” or “Company”)in a buyout (the “Acquisition”) from the former owners. On April 9, 2003,pursuant to a sale agreement between WII Components, Inc. and the formerowners, WII Components, Inc. acquired the common stock of WoodcraftIndustries, Inc. for a total of approximately $145 million. Foraccounting purposes, the acquisition date is considered to be April 1,2003. WII Components, Inc. has no independent assets or operationsseparate from its consolidated subsidiaries.

 

The Acquisition was accounted for using the purchase method of accounting.Accordingly, the assets acquired and the liabilities assumed by WII Components, Inc.were recorded at fair value as of the date of the Acquisition. The excess ofthe purchase price over the fair value of the assets acquired and liabilitiesassumed totaling approximately $104.0 million was recorded as goodwill.

 

In February 2004, the Successor completed an equity restructuringusing the proceeds from its $120 million 10% senior notes offering(Note 6) to pay off the outstanding term loans and revolving line ofcredit, to pay a dividend of approximately $21.5 million, to repurchaseapproximately $17.5 million of the Successor’s outstanding common stock,and to pay financing costs of approximately $7.4 million.

 

The Company acquired a cabinet door manufacturer operating under thename Grand Valley Door Co. (“Grand Valley”) on April 30, 2004(Note 5).

 

The Company acquired substantially all of the assets of a moldingmanufacturer operating under the name Dimension Moldings, Inc. on July 28,2005 (Note 5). Those assets are being operated as a division of WoodcraftIndustries, Inc, which is referred to as Woodcraft Middlefield.

 

***Description ofBusiness*** The Company is a leading manufacturer of wood cabinet doors, hardwoodcomponents, and engineered wood products in the United States. Its products aresold principally to leading national and regional kitchen and bathroom cabinetmanufacturers. Its reputation for high quality and reliable performance hasenabled the Company to establish strong, long-standing relationships with itscustomers. Its customers, in turn, distribute products through various saleschannels, including specialty kitchen and bathroom cabinetry dealers, homecenter retailers, and homebuilders.

 

***Principles ofConsolidation*** The consolidated financial statements include the accounts of theCompany and its wholly owned subsidiaries. On April 9, 2003, the Companycompleted the acquisition of Woodcraft Industries, Inc. and its whollyowned subsidiaries, PrimeWood, Inc. (“PrimeWood”) and Brentwood Acquisition,Corp. (“Brentwood”). On April 30, 2004 the Company completed theacquisition of Grand Valley, and on July 28, 2005 the Company completedthe acquisition of substantially all of the assets of Dimension Moldings, Inc.(Note 5). All intercompany accounts and transactions have been eliminated inthe preparation of the consolidated financial statements.

 

**2. SIGNIFICANT ACCOUNTING POLICIES**

 

***Cash Equivalents***  All highly liquid investments with a maturityof three months or less at the date of purchase are considered to be cashequivalents.

 

***Revenue Recognition***  The Company recognizes revenues and therelated cost of sales when title passes, which is usually upon shipment ofproduct under FOB shipping point terms. Freight billed to customers is includedin sales. Shipping costs are included in cost of sales. Returns are estimatedand provided for at the time of sale based on historical experience and currenttrends.

 

23

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***Concentration ofCredit Risk*** Accounts receivable comprises primarily trade receivables related to thesale of the Company’s products to its customers, primarily in the UnitedStates. The Company’s customers representing 10% or more of consolidated salesare as follows:

 
| ** ** | ** ** | **Successor**                    | ** ** | **Predecessor**       | ** ** |
|------------|------------|----------------------------------|------------|-----------------------|------------|
| ** ** | ** ** | ** **                       | ** ** | ** **            | ** ** | **Nine Months** | ** ** | **Three Months** | ** ** |
| ** ** | ** ** | ** **                       | ** ** | ** **            | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** ** | ** ** | **Year Ended December 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
| ** ** | ** ** | **2005**                         | ** ** | **2004**              | ** ** | **2003** | ** ** | **2003** | ** ** |
| A          |       | 27.4                             | %          | 16.9                  | %          | 11.1 | % | 10.0 | % |
| B          |       | *                                |       | *                     |       | 12.8 |   | 13.4 |   |
| C          |       | 17.1                             |       | 20.1                  |       | 17.3 |   | 19.5 |   |
| D          |       | *                                |       | *                     |       | 10.0 |   | 11.7 |   |

 

----

* Less than 10% of consolidated sales.

 

The Company’s customers that represent 10% or more of consolidatedaccounts receivable as of December 31 are as follows:

 
| ** ** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------|------------|----------|------------|----------|------------|
| A          |       | 33.7     | %          | 29.1     | %          |
| C          |       | 10.7     |       | 12.0     |       |

 

***Inventories ***Inventories asof December 31 consisted of the following (in thousands):

 
| ** **      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Raw materials   |       | $        | 11,369     |     | $          | 9,995 |   |
| Work in process |       | 5,954    |       | 4,796    |       |
| Finished goods  |       | 4,360    |       | 2,901    |       |
| LIFO adjustment |       | (913     | )          | (950     | )          |
|            |       | $        | 20,770     |     | $          | 16,742 |   |
|                 |            |          |            |          |            |  |  |  |

 

The majority of inventory is valued at the lower of last-in, first-out(“LIFO”) cost or market. The remainder of the inventory is valued under thefirst-in, first-out method (“FIFO”). As of December 31, 2005, and 2004,inventory on the LIFO method represented 59% and 60% of the inventory balance,respectively.

 

***Property, Plant, andEquipment*** Improvements are capitalized and expenditures for maintenance andrepairs are charged to operations as incurred. Depreciation is computed usingthe straight-line method (for financial reporting purposes) and the acceleratedmethod (for income tax reporting purposes). Estimated useful lives forfinancial reporting purposes are as follows:

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

 

Equipment includes assets under capital leases of $5.0 million and $5.0million and accumulated depreciation and amortization related to such assets of$2.3 million and $1.8 million at December 31, 2005 and 2004, respectively.

 

Depreciation for the year ended December 31, 2005, the year ended December 31,2004, the nine-month period ended December 31, 2003, and the three-monthperiod ended March 31, 2003 was $5,152,000, $5,030,000, $3,604,000, and$1,134,000, respectively.

 

***Goodwill***  The Company accounts for goodwill inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,*Goodwill and Other Intangible Assets*.In part, SFAS No. 142 states that companies must evaluate goodwill forimpairment at least annually. The Company has elected to perform itsannual tests for goodwill impairment as of December 31 of each year. Fairvalue is measured using a market multiple valuation method.

 

24

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***CustomerRelationship ***Customerrelationship relates to an intangible asset recorded through the purchase priceallocation of the Grand Valley acquisition and the acquisition of the assets ofDimension Moldings, Inc. for relationships with a significant customer. Theoriginal cost of these customer relationships is $16.6 million, and the relatedaccumulated amortization as of December 31, 2005 is $1.5 million. Theintangible assets are being amortized over the estimated life of 10 years.Amortization for the year ended December 31, 2005 was $1,154,000. Expectedamortization is as follows for the years ended December 31 (in thousands):

 
| 2006      |   | $     | 1,657  |   |
|-----------|--------|-------|--------|--------|
| 2007      |   | 1,657 |   |
| 2008      |   | 1,657 |   |
| 2009      |   | 1,657 |   |
| 2010      |   | 1,657 |   |
| 2011-2015 |   | 6,611 |   |

 

***Noncompete Agreement***  Noncompete agreements primarily relate toagreements with the former owners of Brentwood, Grand Valley, and DimensionMoldings, Inc. The original cost of these noncompete agreements is $2.3million, and the related accumulated amortization as of December 31, 2005is $1.5 million. Noncompete rights are being amortized over the applicableterms of the agreements (5 years, 7 years, and 5 years, respectively),and are expected to be fully amortized by July 2007, April 2011, and July 2010,respectively. Amortization for the year ended December 31, 2005, the yearended December 31, 2004, the nine-month period ended December 31,2003, and the three-month period ended March 31, 2003 was $453,000, $516,000,$448,000, and $149,000, respectively. As of December 31, 2005 the netnoncompete intangible asset was $0.8 million. Expected amortization is asfollows for the years ended December 31 (in thousands):

 
| 2006 |   | $   | 465    |   |
|------|--------|-----|--------|--------|
| 2007 |   | 285 |   |
| 2008 |   | 34  |   |
| 2009 |   | 34  |   |
| 2010 |   | 26  |   |
| 2011 |   | 5   |   |

 

***Other Assets***  Other assets primarily represent financingfees and are amortized straight-line over the term of the related financingagreement. During 2004 the company terminated its credit agreement and recordeda loss of $3.5 million.

 

***Impairment ofLong-Lived Assets*** The Company evaluates the carrying value of long-lived assets forimpairment when events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. If impairment indicators arepresent and the estimated future undiscounted cash flows are less than thecarrying value of the assets, the carrying value is reduced to the estimatedfair value as measured by the associated discounted cash flows. There was noimpairment write-downs during any of the periods presented.

 

***Other CurrentLiabilities ***Othercurrent liabilities consisted of the following (in thousands):

 
| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                                     |       |                  |       |   |   |
| Self-insurance reserve                   |       | $                     | 1,789      |   | $ | 1,801 |   |
| Accrued interest expense                 |       | 4,617                 |       | 4,693 |   |
| Income tax payable                       |       | 1,270                 |       | — |   |
| Contingent consideration of acquisitions |       | 2,000                 |       | — |   |
| Other                                    |       | 3,351                 |       | 2,613 |   |
|                                     |       | $                     | 13,027     |   | $ | 9,107 |   |

 

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

 

***Income Taxes***  The Company accounts for income taxes inaccordance with the liability method of accounting, which requires recognitionof deferred tax assets and liabilities for the expected future tax consequencesof events that were included in the consolidated financial statements and taxreturns. Under this method, deferred tax assets and liabilities are determinedbased

 

25

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on the difference between the financial statement and tax bases ofassets and liabilities using enacted tax rates expected to be in effect for theyear in which the differences are expected to reverse. The Company records avaluation allowance when it is more likely than not that the net deferred taxassets will not be realized.

 

***Stock Options* **ThePredecessor had a stock option plan that provided for the granting of up to150,881 nonqualified stock options on the Predecessor’s common stock. Certainofficers, directors, and key employees were granted options to purchase commonstock of the Predecessor under these plans. Options become exercisable over athree-year period. At the end of each year, one-third of the total options toan individual become vested. The Predecessor purchased the remaining 14,250options prior to its acquisition. (Note 5)

 

There were 29,501 options that were canceled and reissued during 2001,resulting in the need to adopt variable accounting over the remaining vestingperiod of the repriced options. As of December 31, 2002, of the remaining options6,250 shares were vested. The Predecessor recorded compensation expense relatedto options of $334,000 for the three-month period ended March 31, 2003.

 

Information regarding stock options under all plans is summarized asfollows:

 
| ** **                                      | ** ** | **Successor**                             | ** ** | **Predecessor**                           | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **Year Ended  December 31,****2005** | ** ** | **Year Ended  December 31,****2004** | ** ** | **Nine Months Ended****December 31,********2003** | ** ** | **Three Months Ended****March 31,********2003** | ** ** |
| ** **                                      | ** ** | **Options**                               | ** ** | **Weighted  Average  Exercise  Price**    | ** ** | **Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding, beginning of period                |       | 2,056,000                                 |       | $                                         | 2.32       |   | 1,617,000 |   | $ | 3.00 |   |   |   | $ | — |   | 14,250 |   | $ | 2.40 |   |
| Granted                                         |       | 295,000                                   |       | 4.67                                      |       | 539,000 |   | 3.85 |   | 1,617,000 |   | 3.00 |   |   |   |   |   |
| Exercised                                       |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Canceled                                        |       |                                      |       |                                      |       | 100,000 |   | 1.78 |   |   |   |   |   |   |   |   |   |
| Outstanding, end of period                      |       | 2,351,000                                 |       | $                                         | 2.62       |   | 2,056,000 |   | $ | 2.32 |   | 1,617,000 |   | $ | 3.00 |   | 14,250 |   | $ | 2.40 |   |
| Exercisable, end of period                      |       | 893,250                                   |       | $                                         | 2.09       |   | 379,250 |   | $ | 1.78 |   |   |   | $ | 3.00 |   | 14,250 |   | $ | 2.40 |   |
| Weighted average fair value of options  granted |       | $                                         | 1.03       |                                      |       |   | $ | .80 |   |   |   | $ | .49 |   |   |   | $ | — |   |   |   |
|                                                 |            |                                           |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In April 2003, the 2003 Stock Option and Grant Plan (“2003 Plan”)was approved by the stockholders of the Successor. The 2003 Plan allows thegranting of both incentive stock options and nonqualified stock options. The2003 Plan serves as the successor to the plans implemented by the Predecessor.Under the terms of the 2003 Plan, a maximum of 2,500,000 shares of stock,subject to adjustment, were made available for awards to officers, employees,directors, consultants, and other key persons of the Company. Awards may include,but are not limited to, stock options, restricted stock, unrestricted stockawards, and substitute performance awards.

 

In May 2003, 1,617,000 options were granted with terms of10 years from the date of grant, and at an exercise price of $3.00 pershare under the 2003 Plan. Issued options vest in equal annual installmentsover four years. The fair value of options granted during the nine months endedDecember 31, 2003 was estimated on the date of the grant using theBlack-Scholes option-pricing model with the following assumptions: a risk-freeinterest rate of 3.0%, an expected life of six years, and no volatility. During2004, 100,000 options were cancelled. As a part of the February 2004equity restructuring (Note 6), the Successor repriced the outstandingstock options. The Successor has adopted variable plan accounting for theseoptions from the date of the repricing. Based on the fair value of the optionsas of December 31, 2005, the Successor expects to record approximately $1.9 millionof compensation expense over the remaining vesting period of approximately oneand one-half years. The Company recorded $1,780,000 and $844,000 of noncashcompensation expense during the years ended December 31, 2005 and 2004,respectively. 

 

In April and November 2004, the Company granted 489,000 and50,000 options, respectively under the 2003 Plan. The fair value of theseoptions was estimated on the date of the grant using the Black-Scholesoption-pricing model with the following assumptions: a risk-free interest ratein April and November of 3.9% and 4.2%, respectively, an expectedlife of six

 

26

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years, and no volatility.

 

InAugust and October 2005, the Company granted 255,000 and 40,000 options,respectively, under its 2003 Plan. The fair value of these options wasestimated on the date of the grant using the Black-Scholes option-pricing modelwith the following assumptions: a risk-free interest rate in August and October of4.2% and 4.4%, respectively, an expected life of six years, and no volatility.

 

As of December 31, 2005 the range inexercise price for the outstanding stock options is $1.78 to $4.67 per share,and these options have a weighted average remaining contractual life of seven yearsand ten months.

 

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

 
| ** **                                                                                                            | ** ** | **Successor**                    | ** ** | **Predecessor**       | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|
| ** **                                                                                                            | ** ** | ** **                       | ** ** | ** **            | ** ** | **Nine Months** | ** ** | **Three Months** | ** ** |
| ** **                                                                                                            | ** ** | ** **                       | ** ** | ** **            | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **                                                                                                            | ** ** | **Year Ended December 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
| ** **                                                                                                            | ** ** | **2005**                         | ** ** | **2004**              | ** ** | **2003** | ** ** | **2003** | ** ** |
| Net income                                                                                                            |       |                             |       |                  |       |   |   |   |   |
| As reported                                                                                                           |       | $                                | 8,175      |                  | $          | 4,279 |   | $ | 6,552 |   | $ | 2,510 |   |
| Total stock-based employee compensation  expense determined under fair value based method, net of related tax effects |       | (134                             | )          | (67                   | )          | (132 | ) | — |   |
| Pro forma                                                                                                             |       | 8,041                            |       | 4,212                 |       | 6,420 |   | 2,510 |   |
|                                                                                                                       |            |                                  |            |                       |            |  |  |  |  |  |  |  |  |

 

***Derivative Instrumentsand Hedging Activities***  All derivatives, whether designated inhedging relationships or not, are recorded on the balance sheet at fair value.If the derivative is designated in a cash flow hedge, changes in the fair valueof the derivative are recorded in other comprehensive income and recognized inthe statement of operations when the hedged item affects earnings. SFAS No. 133,*Accounting for Derivative Instruments andHedging Activities*, as amended, defines the requirements fordesignation and documentation of hedging relationships as well as ongoingeffectiveness assessments in order to use hedge accounting. For a derivativethat is not designated as or does not qualify as a hedge, changes in fair valueare recognized in earnings. Management has determined that the Company has nofreestanding or embedded derivatives as of December 31, 2005. (Note6)  The Company’s policy is to not usefreestanding derivatives for speculative purposes.

 

***Use of Estimates***  The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

 

***New AccountingPronouncements*** In December 2004, the Financial Accounting Standards Board (FASB)revised SFAS No. 123 and issued SFAS No. 123(R). This Statementsupersedes APB No. 25, which resulted in no stock-based employeecompensation cost related to stock options if the options granted had anexercise price equal to the fair market value of the underlying common stock onthe date of grant. SFAS No. 123R requires recognition of an expense for employeeservices provided in exchange for a share-based payment based on the grant datefair market value. The Company is required to adopt SFAS No. 123R as of January 1,2006. As of the effective date, this Statement applies to all new awards issuedas well as awards modified, repurchased, or cancelled. (see “Stock Options”above for SFAS No. 123 required disclosures).

 

In November 2004, the FASB issued SFAS No. 151, *Inventory Costs*. This Statement requiresthat abnormal amounts of idle facility expense, freight, handling costs, andspoilage be recognized as current period charges. The Statement also requiresthat fixed production overhead be allocated to conversion costs based on thenormal capacity of the production facilities. SFAS No. 151 is effectivefor inventory costs incurred by the Company beginning January 1, 2006. Theadoption of this Statement will not have a material impact on the Company’sconsolidated financial position, results of operations, or cash flows.

 

27

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**3. BUSINESS SEGMENTS**

 

The Company conducts its business within one reportable segment: thewood 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 woodproducts includes rigid thermofoil doors and components, veneer raised panels,and wrapped profiles.

 

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

 
| ** **               | ** ** | **Successor**                    | ** ** | **Predecessor**       | ** ** |
|--------------------------|------------|----------------------------------|------------|-----------------------|------------|
| ** **               | ** ** | ** **                       | ** ** | ** **            | ** ** | **Nine Months** | ** ** | **Three Months** | ** ** |
| ** **               | ** ** | ** **                       | ** ** | ** **            | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **               | ** ** | **Year Ended December 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
| ** **               | ** ** | **2005**                         | ** ** | **2004**              | ** ** | **2003** | ** ** | **2003** | ** ** |
| Hardwood products        |       | $                                | 201,402    |                  | $          | 150,713 |   | $ | 91,241 |   | $ | 28,665 |   |
| Engineered wood products |       | 58,201                           |       | 52,353                |       | 41,406 |   | 12,315 |   |
| Total                    |       | $                                | 259,603    |                  | $          | 203,066 |   | $ | 132,647 |   | $ | 40,980 |   |

 

Substantially all sales are made within North America.

 

**4. GOODWILL**

 

The Company has elected to perform its annual tests for goodwillimpairment as of December 31 of each year. Based on the impairment test performed on December 31, 2005, theCompany’s fair value exceeds the carrying value, resulting in no goodwillimpairment.

 

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

 
| ** **                       | ** ** | **Successor**                    | ** ** | **Predecessor**       | ** ** |
|----------------------------------|------------|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | ** **                       | ** ** | ** **            | ** ** | **Nine Months** | ** ** | **Three Months** | ** ** |
| ** **                       | ** ** | ** **                       | ** ** | ** **            | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **                       | ** ** | **Year Ended December 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
| ** **                       | ** ** | **2005**                         | ** ** | **2004**              | ** ** | **2003** | ** ** | **2003** | ** ** |
| Balance—Beginning of period |       | $                                | 107,601    |                  | $          | 104,041 |   | $ | 104,041 |   | $ | 24,513 |   |
| Goodwill acquired                |       | —                           |       | 3,770                 |       | — |   | — |   |
| Purchase accounting adjustment   |       | 147                              |       | (210                  | )          | — |   | (93 | ) |
| Balance—End of period       |       | $                                | 107,748    |                  | $          | 107,601 |   | $ | 104,041 |   | $ | 24,420 |   |

 

**5. ACQUISITIONS**

 

As stated in Note 1, the Successor was formed to acquire 100% ofthe common stock of the Predecessor in a buyout from the former owners. On April 9,2003, pursuant to a sale agreement between the Successor and the former owners,the Successor acquired the common stock of the Predecessor for a total ofapproximately $145 million. For accounting purposes, the acquisition dateis considered to be April 1, 2003. The Successor has no independent assetsor operations separate from its consolidated subsidiaries.

 

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

 

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The components of the purchase price allocation are as follows (inthousands):

 
| Current assets                 |   | $       | 34,531 |   |
|--------------------------------|--------|---------|--------|--------|
| Property, plant, and equipment |   | 35,622  |   |
| Other assets                   |   | 4,280   |   |
| Noncompete agreements          |   | 2,065   |   |
| Goodwill                       |   | 104,041 |   |
| Assets acquired                |   | 180,539 |   |
| Liabilities assumed            |   | 133,098 |   |
| Net assets acquired            |   | $       | 47,441 |   |

 

The Company obtained various forms of debt totaling approximately $97.6million at the date of acquisition to fund the acquisitions and futureoperations.

 

Pro forma operating results of the Predecessor, assuming theacquisition of Woodcraft occurred on January 1, 2003, are as follows (inthousands):

 
| ** **                                 | ** ** | **Three Months Ended  March 31, 2003** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|
| Sales from continuing operations net sales |       | $                                           | 40,980     |   |
| Net income                                 |       | 1,660                                       |       |
|                                            |            |                                             |            |  |

 

Pro forma financial information is provided for informational purposesonly and is not necessarily indicative of the Company’s operating results thatwould have occurred had the acquisition been consummated on the dates for whichthe consummation of the acquisitions are being given effect, nor is itnecessarily indicative of the Company’s future operating results. The pro formaamounts do not reflect any operating efficiencies and cost savings that theCompany believes are achievable.

 

On April 30, 2004, the Company acquired a cabinet doormanufacturer operating under the name of Grand Valley Door Co. The acquisitionwas accomplished through the acquisition of substantially all of the assets ofOhio Door Company and certain land and improvements from Grand ValleyInvestment LLC. The Company paid a cash purchase price at closing of$16 million, and if the business acquired achieves certain sales andprofit margin targets, an additional $1 million will be payable prior to June 30,2006. Approximately half of the purchase price was funded with borrowings underthe senior secured revolving credit facility and the remainder was funded fromthe proceeds of an equity contribution from existing stockholders. The acquiredcompany is a 100% owned subsidiary of the Successor and, on June 25, 2004,agreed to fully and unconditionally guarantee the senior notes on a joint andseveral basis with the Successor’s existing subsidiary guarantors.

 

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

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

 

On July 28, 2005,the Company acquired substantially all of the assets of a moldings manufacturingcompany operating under the name of Dimension Moldings, Inc. The Companypaid a cash purchase price at closing of $9.3 million and will be requiredto pay up to an aggregate of $7.0 million if certain earnings targets are metat the end of each calendar

 

29

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year from 2005 to 2010. Slightly less than half of thepurchase price paid at closing was funded with borrowings under the seniorsecured revolving credit facility and the remainder was funded from theproceeds of an equity contribution from existing stockholders. The acquiredassets of Dimension Moldings, Inc are now operated and owned by WoodcraftIndustries, Inc., the Company’s subsidiary.

 

Theacquisition of the assets of Dimension Moldings, Inc. was accounted forusing the purchase method of accounting. Accordingly, the assets acquired andthe liabilities assumed by the Company were recorded at fair value as of thedate of the acquisition, including assigning value to certain intangible assetsacquired (a customer relationship for $8.7 million and a noncompete for $0.1million). This purchase price allocation is preliminary and the Company expectsto complete their review by the second quarter 2006. Based on this preliminarypurchase price allocation, the Company determined the fair value of the net assetsacquired exceeded the $9.3 million closing purchase price by approximately $2.0million. As a result, the Company recorded a current liability of $2.0 million,which was paid in the first quarter of 2006. Any contingent consideration paidin excess of the original purchase price allocation will be recorded asgoodwill; $147,000 was recorded during the fourth quarter of 2005. The proforma effects of this transaction are not material to the Company’s results ofoperations. The components of the purchase price allocation are as follows (inthousands):

 
| Current assets                 |   | $      | 1,504  |   |
|--------------------------------|--------|--------|--------|--------|
| Property, plant, and equipment |   | 1,271  |   |
| Goodwill                       |   | 147    |   |
| Customer Relationship          |   | 8,704  |   |
| Noncompete agreement           |   | 100    |   |
| Assets acquired                |   | 11,726 |   |
| Liabilities assumed            |   | (437   | )      |
| Net assets acquired            |   | 11,289 |   |
| Contingent consideration       |   | (2,000 | )      |
| Closing purchase price         |   | $      | 9,289  |   |

 

**6. FINANCING ARRANGEMENTS**

 

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

 
| ** **                                            | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Senior notes (10%) due 2012                           |       | $                           | 120,000    |                        | $          | 120,000 |   |
| Term loan, (7.33% at December 31, 2005) due 2010 |       | 7,500                       |       | —                      |       |
| Total debt                                            |       | 127,500                     |       | 120,000                     |       |
| Less current maturities                               |       | —                      |       | —                      |       |
|                                                  |       | $                           | 127,500    |                        | $          | 120,000 |   |

 

***Senior Notes ***On February 18,2004, the Company completed the offering of $120 million of 10% seniornotes due 2012. The net proceeds of the offering of the senior notes were usedto pay off the outstanding term loans and revolving line of credit, to pay adividend of approximately $21.5 million, to repurchase approximately$17.5 million of the Company’s outstanding common stock, and to payfinancing costs of $7.4 million. Additionally in February 2004, theCompany entered into a new $25 million revolving line of credit.

 

***Credit Facility***** On September 23,2005, the Company entered into an Amended and Restated Credit Facility amendingits prior $25.0 million revolving line of credit. The new credit facilityincludes a $40.0 million revolving line of credit, a $7.5 million nonamortizingterm loan, and a $7.5 million nonamortizing capital expenditure loan to bedrawn upon through June 30, 2006. The outstanding principal bears interestat a fluctuating rate equal to the base rate plus 2.75% per annum or LIBOR plus3.0% per annum. It is optional for the Company, without penalty, to prepay theterm loan and capital expenditure loan throughout the loan commitment period.

 

The Company’s senior secured credit facility and the indenture for thenotes impose certain restrictions on our ability to incur indebtedness, paydividends, make investments, grant liens, sell our assets and engage in certainother activities. The Company must comply with certain financial covenantsunder the credit facility including maintenance of a minimum fixed chargecoverage ratio, a maximum total leverage ratio and an EBITDA minimum. As of December 31,2005 the Company was in compliance with these covenants. Indebtedness under theexisting senior secured revolving credit facility is secured by substantiallyall of the assets, including real and personal property, inventory, accountsreceivable, intellectual property and other intangibles.

 

30

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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 independent assetsor operations. As a result, the Company has not presented separate financialstatements of the subsidiary guarantors.

 

***SubordinatedConvertible Debt ***TheCompany issued approximately $20 million of 5% Convertible SubordinatedNotes due April 9, 2004 in April 2003. These notes were convertibleat any time prior to maturity, unless previously redeemed, at the option of theholders into shares of the Company’s common stock at a conversion price of$3.00 per share, subject to certain adjustments. The notes were subordinated tothe Company’s senior indebtedness. The notes were not subordinated to theCompany’s trade payables or other general creditors of the Company. On February 9,2004, these notes, along with approximately $0.9 million of relatedaccrued interest, were converted into approximately 7.0 million shares ofthe Company’s $0.01 par value common stock.

 

***Credit Agreement andTerm Loans*** In April 2003 the Company entered into a $90,500,000 creditfacility that provides for $75,500,000 in term loans and a revolving line ofcredit of $15,000,000. In July 2003, the Company entered into a three-yearinterest rate collar transaction with a notional amount of $55,550,000 to limitthe interest rate (LIBOR rate) on a portion of this variable rate debt betweena floor of 1.2% and a cap of 6.0%. The Company discontinued this interest ratehedge in connection with the repayment of its old credit facility as describedabove, resulting in the receipt of approximately $52,000 upon settlement in2004.

 

***Maturities of Long-TermDebt***  The Companyhas no long-term debt maturing until after December 31, 2009. The Company’s$120 million of 10% senior notes are set to mature in February 2012.

 

***Capital Leases***  The Company leases certain equipment undercapital lease agreements with interest rates of 3.65% to 7.92%. The agreementsexpire at various dates through 2008. Future minimum lease payments requiredunder these capital leases at December 31, 2005 are as follows (inthousands):

 
| **Year Ending December 31**                         | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|------------|------------|
| 2006                                                     |       | $          | 1,356      |   |
| 2007                                                     |       | 719        |       |
| 2008                                                     |       | 545        |       |
| Total capital lease obligations                          |       | 2,620      |       |
| Less amount representing interest                        |       | 154        |       |
| Present value of capital lease obligations               |       | 2,466      |       |
| Less current maturities                                  |       | 1,262      |       |
| Capital lease obligations—net of current maturities |       | $          | 1,204      |   |

 

**7. COMMITMENTS AND CONTINGENCIES**

 

***Operating Leases***  The Company is obligated under variousoperating leases for warehouse space and plant equipment. Rental expense underthese agreements was approximately $289,000 for the year ended December 31,2005, $290,000 for the year ended December 31, 2004, $199,000 for thenine-month period ended December 31, 2003, and $66,000 for the three-monthperiod ended March 31, 2003, respectively. Future minimum lease paymentsare as follows (in thousands) as of December 31, 2005:

 
| **Year Ending December 31** | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|
| 2006                             |       | $          | 446        |   |
| 2007                             |       | 328        |       |
| 2008                             |       | 279        |       |
| 2009                             |       | 261        |       |
| 2010                             |       | 247        |       |
|                             |       | $          | 1,561      |   |

 

***Woodcraft Industries, Inc.Retirement Assurance Plan***  The Company sponsors a 401(k) and profitsharing plan which covers certain full-time employees who meet eligibilityrequirements as to age and length of service. Employees are allowed to makepretax contributions up to the maximum amount permitted by law. Employercontributions to the plan are made at the discretion of the Board of Directors.The Company’s contribution was approximately $596,000, $488,000, $381,000, and

 

31

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$201,000 during the years ended December 31, 2005 and 2004, the nine-monthperiod ended December 31, 2003, and the three-month period ended March 31,2003, respectively.

 

***Litigation***  In the normal course of business, the Companyis subject to various instances of litigation. In the opinion of the Company’smanagement and legal counsel, the ultimate settlement of such matters will nothave a material adverse effect on the Company’s financial position, results ofoperations, or cash flows.

 

**8. INCOME TAXES**

 

The provision for income taxes consisted of the following (inthousands):

 
| ** **                     | ** ** | **Successor**                    | ** ** | **Predecessor**       | ** ** |
|--------------------------------|------------|----------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | ** **                       | ** ** | ** **            | ** ** | **Nine Months** | ** ** | **Three Months** | ** ** |
| ** **                     | ** ** | ** **                       | ** ** | ** **            | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **                     | ** ** | **Year Ended December 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
| ** **                     | ** ** | **2005**                         | ** ** | **2004**              | ** ** | **2003** | ** ** | **2003** | ** ** |
| Current provision:             |       |                             |       |                  |       |   |   |   |   |
| Federal                        |       | $                                | 4,465      |                  | $          | 2,210 |   | $ | 3,153 |   | $ | 1,091 |   |
| State                          |       | 1,259                            |       | 329                   |       | 612 |   | 138 |   |
|                           |       | 5,724                            |       | 2,539                 |       | 3,765 |   | 1,229 |   |
| Deferred tax expense (benefit) |       | (237                             | )          | 145                   |       | 87 |   | 175 |   |
| Provision for income taxes     |       | $                                | 5,487      |                  | $          | 2,684 |   | $ | 3,852 |   | $ | 1,404 |   |

 

The provision for income taxes differs from the amount of income taxdetermined by applying the U.S. federal tax rate to pretax income due to thefollowing:

 
| ** **                                           | ** ** | **Successor**                    | ** ** | **Predecessor**       | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | ** **                       | ** ** | ** **            | ** ** | **Nine Months** | ** ** | **Three Months** | ** ** |
| ** **                                           | ** ** | ** **                       | ** ** | ** **            | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **                                           | ** ** | **Year Ended December 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
| ** **                                           | ** ** | **2005**                         | ** ** | **2004**              | ** ** | **2003** | ** ** | **2003** | ** ** |
| Tax provision at federal rate                        |       | $                                | 4,782      |                  | $          | 2,367 |   | $ | 3,537 |   | $ | 1,331 |   |
| Increase (decrease) in income taxes  resulting from: |       |                             |       |                  |       |   |   |   |   |
| Nondeductible interest                               |       | —                           |       | —                |       | — |   | 18 |   |
| Nondeductible expenses                               |       | 29                               |       | 121                   |       | 26 |   | 3 |   |
| Federal tax credits                                  |       | (125                             | )          | (125                  | )          | (94 | ) | (31 | ) |
| Section 199                                     |       | (158                             | )          | —                |       | — |   | — |   |
| State income taxes—net of federal benefit       |       | 865                              |       | 321                   |       | 383 |   | 183 |   |
| Other                                                |       | 94                               |       | —                |       | — |   | (100 | ) |
| Provision for income taxes                           |       | $                                | 5,487      |                  | $          | 2,684 |   | $ | 3,852 |   | $ | 1,404 |   |

 

Net deferred tax assets (liabilities) consist of the followingcomponents as of December 31:

 

| ** **                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Depreciation                          |       | $        | (5,893     | )        | $          | (5,878 | ) |
| Noncompete agreements                 |       | 1,286    |       | 1,259    |       |
| Goodwill and other amortizable assets |       | (283     | )          | (252     | )          |
| Accruals                              |       | 1,136    |       | 568      |       |
| Inventory                             |       | (857     | )          | (769     | )          |
| Capital leases                        |       | 768      |       | 916      |       |
| Bad debt expense                      |       | 47       |       | 80       |       |
| Accrued payroll and health insurance  |       | 944      |       | 987      |       |
| Net deferred tax liabilities          |       | $        | (2,852     | )        | $          | (3,089 | ) |
| Whereof:                              |       |     |       |     |       |
| Current                               |       | $        | 1,163      |     | $          | 1,437 |   |
| Noncurrent                            |       | (4,015   | )          | (4,526   | )          |
|                                  |       | $        | (2,852     | )        | $          | (3,089 | ) |

 

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The Company is subject to audits in the tax jurisdictions in which itoperates. Upon audit, these taxing jurisdictions could retroactively disagreewith our tax treatment of certain items. Consequently, the actual liabilitieswith respect to any year may be determined long after financial statementshave been issued. The Company establishes tax reserves for estimated taxexposures. These potential exposures result from varying applications ofstatutes, rules, regulations, case law and interpretations. The settlement ofthese exposures primarily occurs upon finalization of tax audits. However, theamount of the exposures can also be impacted by changes in tax laws and otherfactors. The Company believes that it has established the appropriate reservesfor these estimated exposures. However, actual results may differ fromthese estimates. The resolution of these tax matters will not have a materialeffect on the consolidated financial condition of the Company, although aresolution could have a material impact on the Company’s consolidated statementof operations for a particular future period and on the Company’s effective taxrate.

 

**9. REDEEMABLE PREFERRED STOCK (PREDECESSOR)**

 

***Series ARedeemable Preferred Stock***  The Predecessor issued 750,000 shares of Series Ain 1998 for consideration of $6,000,000. All Series A Redeemable PreferredStock was purchased in connection with the Acquisition.

 

***Series B and Series CRedeemable Preferred Stock***  The Predecessor issued 803,125 shares of Series Bin 1998 for consideration of $6,425,000 and 112,500 shares of Series C in2001 for consideration of $900,000. In 2002, the Predecessor issued 437,500shares of Series C for consideration of $3,500,000. All Series B and Series CRedeemable Preferred Stock were purchased in connection with the Acquisition.

 

***AccumulatedDividends*** In April 2003, all dividends ($11,420,000) were paid in connectionwith the Acquisition.

 

***Warrants***  In connection with the issuance of Series Aand Series B preferred stock, the Company issued warrants for the purchaseof up to 1,178,125 shares of nonvoting common stock and 13,125 shares of votingcommon stock to stockholders at an exercise price of $8.00 per share. In 2001,13,125 shares of the voting common stock were subsequently exercised and redeemedby the Company. In connection with the issuance of the Senior Notes, theCompany issued a total of 182,890 warrants to purchase nonvoting common stockof the Company. All warrants were bought out in connection with theAcquisition.

 

**10. STOCKHOLDERS’ EQUITY (PREDECESSOR)**

 

***Authorized Shares***  The Predecessor’s Restated Articles ofIncorporation authorize the aggregate issuance of 14,986,875 shares of stockdivided into five classes consisting of: 750,000 shares of Series Aredeemable preferred stock (“Series A”), $.01 par value; 803,125 shares ofSeries B redeemable preferred stock (“Series B”), $.01 par value;1,000,000 shares of Series C redeemable preferred stock (“Series C”),$.01 par value; 5,000,000 shares of voting common stock, $.01 par value;600,000 shares of nonvoting common stock, $.01 par value; and 6,833,750undesignated shares, $.01 par value. The undesignated shares shall be divisibleinto such classes or series and have such voting rights, other rights, andpreferences, as determined by the Predecessor’s Board of Directors.

 

**11. STOCKHOLDERS’ EQUITY (SUCCESSOR)**

 

The Successor’s Amended and Restated Certificate of Incorporationauthorized the aggregate issuance of 30,000,000 shares of stock divided intothree classes: 28,000,000 shares of voting common stock, $0.01 par value;1,000,000 shares of nonvoting common stock, $0.01 par value; and 1,000,000undesignated preferred stock, par value $0.01.

 

In February 2004, the Company completed an equity restructuringusing a portion of the proceeds from its $120 million 10% senior notes offering(Note 6) to pay a dividend of approximately $21.5 million and to repurchase3,317,580 shares of common stock for approximately $17.5 million. Inconjunction with this equity restructuring, the Company’s convertible noteswere converted into 6,950,000 shares of common stock.

 

In April 2004, the Company issued 2,142,857 shares of common stockfor approximately $8.3 million in connection with the Grand Valley acquisition(Note 5).

 

In July 2005, the Company issued 1,016,488 shares of common stockfor approximately $4.7 million in connection with the Dimension Moldings, Inc.acquisition (Note 5).

 

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**12. RELATED-PARTY TRANSACTIONS**

 

The Companyhas a management services agreement with an affiliate of the primary investorwhereby the Company pays a transaction fee to the affiliate for servicesprovided for each financing, refinancing, acquisition, or similar nonrecurringtransaction. The Company paid approximately $1.7 million to this affiliate forservices related to the Acquisition which is recorded as goodwill andapproximately $1.2 million for financing services which was recorded in otherassets as deferred financing costs. The deferred financing costs were subsequentlywritten off in conjunction with the February 2004 financing transactiondiscussed in Note 6. In addition, the Company paid approximately $2.4 millionto this affiliate related to the February financing transaction, which isrecorded in other assets as deferred financing costs. The Company paidapproximately $320,000 to this affiliate for services related to theacquisition of Grand Valley, approximately $224,000 of which is recorded asgoodwill and approximately $96,000 of which is recorded in other assets asfinancing costs. The Company received services from this affiliate related tothe acquisition of the assets of Dimension Moldings, Inc. totaling$313,000, which was included in the purchase price allocation.

 

The Predecessor had a management services agreement with an affiliateof its former primary investor, whereby the Predecessor paid an annual base feeof $300,000 plus a percentage fee based on annual net operating cash flow. Thetotal fee was approximately $81,000 for the three-month period ended March 31,2003.

 

The Predecessor entered into a noncompete agreement on July 31,2002 with the former majority stockholder of Brentwood (Note 2).

 

ThePredecessor entered into a consulting and noncompete agreement on June 16,1998 with the former majority stockholder of PrimeWood. The agreement requiredaggregate payments of approximately $4,600,000 in equal annual installmentsover a six-year period. The expense under these agreements was approximately$0, $351,000, $575,000, and $192,000 for the years ended December 31, 2005and 2004, the nine-months ended December 31, 2003, and the three-monthsended March 31, 2003, respectively (Note 2).

 

The Company entered into a noncompete agreement on April 30, 2004with the former owners of Grand Valley, and on July 28, 2005 with theowners of Dimension Moldings, Inc. (Notes 2 and 5).

 

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

 

The following is a condensed summary of actual quarterly results ofoperations for 2005 and 2004 (in thousands):

 
| ** **        | ** ** | **First**  | ** ** | **Second** | ** ** | **Third**  | ** ** | **Fourth** | ** ** | **Year**   | ** ** |
|-------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **2005:**         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales         |       | $          | 57,808     |       | $          | 66,306     |       | $          | 68,067     |       | $          | 67,422 |   | $ | 259,603 |   |
| Gross profit      |       | 9,214      |       | 11,149     |       | 10,758     |       | 11,355     |       | 42,476     |       |
| Operating income  |       | 5,772      |       | 7,149      |       | 7,047      |       | 7,205      |       | 27,173     |       |
| Net income        |       | 1,601      |       | 2,383      |       | 2,200      |       | 1,991      |       | 8,175      |       |
|              |       |       |       |       |       |       |       |       |       |       |       |
| **2004:**         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales         |       | $          | 47,718     |       | $          | 51,217     |       | $          | 52,274     |       | $          | 51,857 |   | $ | 203,066 |   |
| Gross profit      |       | 8,366      |       | 8,840      |       | 9,293      |       | 9,525      |       | 36,024     |       |
| Operating income  |       | 4,622      |       | 5,880      |       | 5,829      |       | 6,813      |       | 23,144     |       |
| Net income (loss) |       | (816       | )          | 1,558      |       | 1,504      |       | 2,033      |       | 4,279      |       |

 

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**PART III**

 

**Item 9. Changes in and Disagreements With Accountants on Accounting andFinancial Disclosure**

 

There were no changes in or disagreements with the accountants onaccounting and financial disclosure.

 

**Item 9A. Controls and Procedures**

 

Disclosure Controls and Procedures. As required by Rule 13a-15under the Securities Exchange Act of 1934, we carried out an evaluation underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe design and operation of our disclosure controls and procedures as of theend of the period covered by this annual report. In designing and evaluatingour disclosure controls and procedures, we and our management recognize thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and our management necessarily was required to apply its judgment in evaluatingand implementing possible controls and procedures. Based upon that evaluation,our Chief Executive Officer and Chief Financial Officer have concluded thatthey believe that, as of the date of completion of the evaluation, ourdisclosure controls and procedures were reasonably effective to ensure thatinformation required to be disclosed by us in the reports we file or submitunder the Exchange Act is recorded, processed, summarized and reported, withinthe time periods specified in the Securities and Exchange Commission’s rules andforms. We will continue to review and document our disclosure controls andprocedures on an ongoing basis, and may from time to time make changes aimedat enhancing their effectiveness and to ensure that our systems evolve with ourbusiness.

 

Changes in Internal Controls Over Financial Reporting. There were nochanges in our internal controls over financial reporting during our fourthfiscal quarter that have materially affected, or are reasonably likely tomaterially affect, our internal controls over financial reporting.

 

# **Item 9B. Other Information**

#  

Not applicable.

 

**Item 10. Directors and Executive Officers ofthe Registrant**

 

The following table sets forth the names and ages of our executiveofficers and directors as of December 31, 2005 and the positions that theyhold at WII Components, Inc. and, where applicable, at our subsidiarylevels. Directors of WII Components hold their positions until the annualmeeting of the stockholders at which their term expires or until theirrespective successors are elected and qualified. Executive officers of WIIComponents hold their positions until the annual meeting of the Board ofDirectors or until their respective successors are elected and qualified.

 
| **Name**         | ** ** | **Age** | ** ** | **Position**                                                                                                 |
|------------------|------------|---------|------------|--------------------------------------------------------------------------------------------------------------|
| John Fitzpatrick |       | 62      |       | Chief Executive Officer—WII Components; Director, President and Chief  Executive Officer—Woodcraft |
| Dale Herbst      |       | 37      |       | Vice President, Treasurer and Secretary—WII Components; Chief  Financial Officer—Woodcraft         |
| Joel Beyer       |       | 46      |       | Vice President of Operations—PrimeWood                                                                  |
| Tom Perlmutter   |       | 42      |       | Director and President —WII Components                                                                  |
| Rodney Cohen     |       | 44      |       | Director —WII Components                                                                                |

 

*Mr. Fitzpatrick*has served as Woodcraft’s President and Chief Executive Officer since 2000.Prior to joining us he was Chief Operating Officer at Nexcycle, Inc., aprivately held consolidator of specialty recycling businesses with over$120 million of sales in the United 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. Fitzpatrickreceived a BS in Mechanical Engineering from the University of Notre Dame andan MBA from the University of Pittsburgh.

 

*Mr. Herbst* hasserved as Woodcraft’s Chief Financial Officer since 2002. Since joining us in1992, he has served as a Controller, Accounting Manager and General Accountant.Mr. Herbst received a BS in Financial Management and Accounting from theUniversity of North Dakota.

 

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*Mr. Beyer* hasserved as Vice President of our PrimeWood subsidiary since 1998. He joinedPrimeWood in 1977. Mr. Beyer has served in many capacities during hiscareer with us, including Director of Operations, Director of Engineering,Project Engineer and Production Manager.

 

*Mr. Perlmutter*joined our board of directors in 2003 and became President of WII Components onJuly 6, 2005. Mr. Perlmutter joined Behrman Capital in May 2002with 13 years of private equity investing experience. Most recently, hespent seven years as a vice president at Desai Capital Management, a privateequity investment firm with over $1 billion of capital under management.During that time, he led several successful investments in the businessservices, information technology and communications sectors, including TeleCorpPCS and Triton PCS. He currently serves on the board of WIL Research Holdings, Inc.Mr. Perlmutter received an AB in Economics from Princeton University andan MBA from Harvard Business School.

 

*Mr. Cohen*joined our board of directors in 2005. Mr. Cohen joined Behrman Capital asa partner in April, 2005. Mr. Cohen was previously a partner at Lindsay,Goldberg, and Bessemer and Bessemer Holdings where he spent over 12 yearsinvesting in a wide range of industries. Mr. Cohen received anundergraduate degree in Business and a postgraduate degree in FinancialAccounting from the University of Witwatersrand. He also received his MBA fromThe Wharton School of the University of Pennsylvania.

 

**Board of Directors**

 

We currently have a two-member board of directors consisting of Messrs. Perlmutterand Cohen. Our bylaws permit the directors to increase the size of the board ofdirectors by resolution. All of our stockholders are party to a stockholdersagreement whereby they agree to take all appropriate action to fix the size ofthe board of directors at two and to vote the shares over which they exercisevoting power in favor of the election of Messrs. Perlmutter and Cohen.

 

**Item 11. Executive Compensation**

 

***Summary Compensation.***The following summary compensation table setsforth information concerning compensation for services rendered in allcapacities awarded to, earned by or paid to our Chief Executive Officer and ourtwo other most highly compensated executive officers who were serving asexecutive officers on December 31, 2005 and whose total compensationexceeded $100,000 for the fiscal year ended December 31, 2005.

 
| ** **                                                                                                   | ** ** | ** **              | ** ** | **Long-Term  Compensation** | ** **                  | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|-----------------------------|------------|------------|
| ** **                                                                                                   | ** ** | ** **              | ** ** | ** **                  | ** **                  | ** ** | ** ** | **Number of  Securities  Underlying  Options  Granted** | ** ** | ** ** | ** ** |
| ** **                                                                                                   | ** ** | ** **              | ** ** | ** **                  | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                   | ** ** | ** **              | ** ** | ** **                  | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                   | ** ** | **Annual Compensation** | ** ** | ** **                  | **All Other  Compensation** | ** ** |
| **Name and Position**                                                                                        | ** ** | **Year**                | ** ** | **Salary**                  | ** **                  | **Bonus**  | ** ** | ** ** | ** ** |
| John Fitzpatrick                                                                                             |       | 2005                    |       | $                           | 300,000                     |       | $          | 135,886 |   | 620,000 |   | $ | 4,258 | (1) |
| Chief Executive Officer—WII Components;  Director, President and Chief Executive Officer—Woodcraft |       |                    |       |                        |                        |       |       |   |   |   |   |
| Dale Herbst                                                                                                  |       | 2005                    |       | $                           | 117,731                     |       | $          | 35,728 |   | 235,000 |   | $ | 3,206 | (2) |
| Vice President, Treasurer, Secretary—WII  Components; Chief Financial Officer—Woodcraft            |       |                    |       |                        |                        |       |       |   |   |   |   |
| Joel Beyer                                                                                                   |       | 2005                    |       | $                           | 135,000                     |       | $          | 45,604 |   | 175,000 |   | $ | 3,215 | (3) |
| Vice President of Operations—PrimeWood                                                                  |       |                    |       |                        |                        |       |       |   |   |   |   |

 

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(1)                                  Includes$3,856 in contributions by us to his 401(k) account, and $402 in taxablemileage reimbursement according to our company policy.

 

(2)                                  Consistsof contributions by us to his 401(k) account.

 

(3)                                  Consistsof contributions by us to his 401(k) account

 

***Option Grants.***Thefollowing table sets forth information concerning the individual grants ofstock options to each of the executive officers listed below who receivedgrants in 2005. The exercise price per share of each option was equal to thefair market value of the voting common stock on the date of grant, asdetermined by the board of directors based on its good faith

 

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estimate of the fair market value. We have never granted any stockappreciation rights. The potential realizable value is calculated based onassumed rates of stock appreciation of 5% and 10% compounded annually from thedate the options were granted until their expiration dates, assuming a fairmarket value equal to the fair market value at fiscal 2005 year end. Thesenumbers are calculated based on the requirements of the SEC and do not reflectour estimate of future stock price growth. Actual gains, if any, on stockoption exercises will depend on future performance of common stock and the dateon which the options are exercised.

 
| ** **       | ** ** | **Number of  Securities  Underlying  Options  Granted** | ** ** | **Percentage of  Options  Total  Granted to  Employees in  Fiscal Year** | ** ** | **Exercise  Price Per  Share** | ** ** | **Expiration  Date** | ** ** | **Potential Realizable Value at  Assumed Annual Rates of  Stock Price Appreciation for  Option Term** | ** ** |
|------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|--------------------------------|------------|----------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| **Name**         | ** ** | ** **                                              | ** ** | ** **                                                               | ** ** | **5%**                         | ** ** | **10%**              | ** ** |
| John Fitzpatrick |       | —                                                  |       | —                                                                   |       | —                         |       | —               |       | —                                                                                                |       | — |   |
| Dale Herbst      |       | 25,000                                                  |       | 8.47                                                                     | %          | $                              | 4.67       |                 | 8/15/15    |                                                                                                  | $          | 73,423 |   | $ | 186,069 |   |
| Joel Beyer       |       | 25,000                                                  |       | 8.47                                                                     | %          | $                              | 4.67       |                 | 8/15/15    |                                                                                                  | $          | 73,423 |   | $ | 186,069 |   |

 

***Option Exercises and Year-endValues*.**The following table sets forth informationconcerning exercises of stock options during 2005 by each of the executiveofficers listed below and the year-end value of unexercised options, providedon an aggregated basis:

 
| **Name**         | ** ** | **Shares Acquired  on Exercise (#)** | ** ** | **Value Realized  ($)(1)** | ** ** | **Number of Securities Underlying  Unexercised Options at FY-End  (#)  Exercisable/unexercisable** | ** ** | **Value of Unexercised In-the-  Money Options at FY-End ($)  Exercisable/unexercisable(2)** | ** ** |
|------------------|------------|--------------------------------------|------------|----------------------------|------------|----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| John Fitzpatrick |       | —                               |       | —                     |       | 280,000 / 340,000                                                                                  |       | 766,700 /820,100                                                                            |       |
| Dale Herbst      |       | —                               |       | —                     |       | 95,500 / 139,500                                                                                   |       | 263,015 / 281,675                                                                           |       |
| Joel Beyer       |       | —                               |       | —                     |       | 68,750 / 106,250                                                                                   |       | 190,563 / 203,438                                                                           |       |

 

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(1)                                  Determinedby multiplying the number of shares acquired on exercise by the differencebetween the estimated fair market value at exercise and the per share optionexercise price.

 

(2)                                  Determinedby multiplying the number of shares underlying the unexercised in-the-moneyoptions beneficially held at December 31, 2005 by the difference betweenthe estimated fair market value as of December 31, 2005 and the per shareoption exercise price.

 

**2003 Stock Option and Grant Plan**

 

Under our 2003 Stock Option and Grant Plan, our board of directors may awardup to an aggregate of 2,500,000 shares of our voting common stock to directors,officers, consultants and other key persons of WII Components, Inc. andour subsidiaries in the form of incentive stock options (which may beawarded to employees only), nonqualified stock options, restricted stockawards, unrestricted stock awards and any combination of the foregoing. Theexercise price per share for an incentive stock option may not be lessthan 100% of the fair market value of the underlying shares on the grant date.The exercise price per share for an incentive stock option granted to a personowning stock possessing more than 10% of the total combined voting power of allclasses of our stock may not be less than 110% of the fair market value ofthe underlying shares on the grant date, and may not be exercisable afterthe expiration of five years from the date of grant. Otherwise, options may notbe exercisable after the expiration of ten years from the date of grant. Ourboard of directors has full discretion to administer and interpret the 2003Stock Option and Grant Plan, to adopt such rules, regulations and procedures asit deems necessary or advisable, and to determine the persons eligible toreceive awards, the time or times at which the awards may be exercised andwhether and under what circumstances an award may be exercised.

 

**Employment Agreements**

 

On April 9, 2003, we entered into employment agreements with Messrs. Fitzpatrick,Herbst, and Beyer. Other than Mr. Fitzpatrick’s agreement, which has aterm of two years, each of the agreements has a term of one year. All of theagreements

 

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are automatically renewed upon the completion of the initial term forsuccessive one-year periods until either we or the executive give 60 daysprior written notice of intent not to extend. Each agreement provides for thepayment of base salary, incentive compensation and the provision of certainfringe benefits to the executive. The agreements require the officers torefrain from competing with us and from hiring our employees for a period oftime following the termination of their employment agreements. Under hisagreement, Mr. Fitzpatrick is prohibited from competing with us for aperiod of twelve months from the termination of his employment and prohibitedfrom hiring our employees for a period of 24 months from the terminationof his employment. Generally, the other officers are prohibited from competingwith us for a period ranging from six months to one year following thetermination of their employment and are prohibited from hiring our employeesfor a period of 24 months from the termination of their employment. Eachagreement also provides for certain payments and benefits for each officer inthe event his employment with us is terminated as a result of his death or disability.In general, in the case of a termination by an officer for good reason, or byus without cause, the officer will receive the greater of either the basesalary due to him for the remainder of the term or six months salary (except inthe case of Mr. Fitzpatrick who shall receive two years base salary) andif the officer has remained employed with us for at least six months of thefiscal year in which his employment terminated, he will receive a proratedportion of the annual incentive bonus that would have been payable to him hadhe remained employed with us at the end of the fiscal year.

 

# **Directors Compensation**

#  

Our directors do not receive compensation for attending board meetings.

 

**Item 12. Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**

 

The following table sets forth certain information regarding thebeneficial ownership of our voting common stock and non-voting common stock asof March 14, 2006 by (i) each person known to us to beneficially ownmore than 5% of the outstanding shares of either voting common stock ornon-voting common stock; (ii) each of our directors; (iii) each namedexecutive officer and (iv) all of our officers and directors as a group.Beneficial ownership is determined in accordance with the rules of theSEC. 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 and include shares of common stockissuable upon the exercise of stock options that are immediately exercisable orexercisable within 60 days. Unless otherwise indicated in the footnotes tothis table, the address of all listed stockholders is c/o WII Components, Inc.,525 Lincoln Avenue, SE, St. Cloud, Minnesota 56304.

 
| ** **                                         | ** ** | **Voting Common Stock**         | ** ** | **Non-Voting  Common Stock**        | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| **Name  of Beneficial Owner**                      | ** ** | **Shares  Beneficially  Owned** | ** ** | **Percentage  Beneficially  Owned** | ** ** | **Shares  Beneficially  Owned** | ** ** | **Percentage  Beneficially  Owned** | ** ** |
| Behrman Capital III L.P.(1)                        |       | 20,742,235                      |       | 89.6                                | %          | — |   | — |   |
| Tom Perlmutter(2)                                  |       | 20,742,235                      |       | 89.6                                | %          | — |   | — |   |
| Rodney Cohen(2)                                    |       | 20,742,235                      |       | 89.6                                | %          | — |   | — |   |
| John Fitzpatrick(3)                                |       | 748,165                         |       | 3.2                                 | %          | — |   | — |   |
| Dale Herbst(4)                                     |       | 197,113                         |       | *                                   |       | — |   | — |   |
| Joel Beyer(5)                                      |       | 158,335                         |       | *                                   |       | — |   | — |   |
| Indosuez Capital Partners 2003, LLC(6)             |       | —                          |       | —                              |       | 854,261 |   | 100 | % |
| All directors and officers as a group (7 persons)  |       | 21,845,848                      |       | 94.4                                | %          | — |   | — |   |
| Total shares outstanding, including vested options |       | 23,146,081                      |       | 100                                 | %          | 854,261 |   | 100 | % |

 

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*                                         Representsless than 1% of the outstanding shares of voting common stock.

 

(1)                                  BehrmanBrothers III L.L.C. is the general partner of Behrman Capital III L.P. Messrs. Perlmutterand Cohen, members of our board of directors, are non-managing members ofBehrman Brothers III L.L.C. Messrs. Perlmutter and Cohen disclaim anybeneficial ownership of the shares held by Behrman Capital III L.P., except tothe extent of their respective pecuniary interests therein. The address ofBehrman Capital III L.P. and Messrs. Perlmutter and Cohen is c/o BehrmanCapital, 126 East 56th Street, 27th Floor, New York, New York 10022.

 

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(2)                                  Consistssolely of the shares held by Behrman Capital III L.P., of which Messrs. Perlmutterand Cohen may each be considered the beneficial owner. Messrs. Perlmutterand Cohen disclaim beneficial ownership of such shares, except to the extent oftheir respective pecuniary interests therein.

 

(3)                                  Includes435,000 option shares that may be acquired within 60 days of March 14,2006.

 

(4)                                  Includes148,000 option shares that may be acquired within 60 days of March 14,2006.

 

(5)                                  Includes106,250 option shares that may be acquired within 60 days of March 14,2006.

 

(6)                                  Theaddress of Indosuez Capital Partners 2003, LLC is 666 Third Avenue, New York,New York 10017.

 

# **Item 13. Certain Relationships and RelatedParty Transactions**

#  

**Stockholders Agreement**

 

Pursuant to our Stockholders Agreement, dated as of April 9, 2003,entered into with Behrman Capital III L.P., one of Behrman Capital III’saffiliates, certain members of our management (including the named executiveofficers) and certain other stockholders, each of the current stockholders,other than Behrman Capital III L.P. and its affiliate are subject to certaintransfer restrictions, including rights of first refusal and co-sale, and isentitled to co-sale rights on certain transfers by Behrman Capital III L.P. andits affiliate. Behrman Capital III L.P. has the right to force all of the otherstockholders to participate in a sale event in which it elects to participate.Subject to certain standard exceptions, all stockholders have pre-emptiverights on future sales of securities. Under the provisions of the StockholdersAgreement, all of the parties agree to elect as members of our board of directorstwo Behrman Capital III L.P. nominees, currently Messrs. Perlmutter and Cohen.Finally, each member of our management who is a party to the StockholdersAgreement has the right under certain circumstances to require us to repurchasehis or her shares of our stock at the then fair market value in the event ofthe termination of his or her employment.

 

**Equity Registration Rights Agreement**

 

We entered into a Registration Rights Agreement, dated as of April 9,2003, with Behrman Capital III L.P. and one of its affiliates, certain membersof our management (including the named executive officers) and certain otherstockholders. Pursuant to this agreement, we granted certain customaryregistration rights, including demand, piggy back and resale shelf registrationrights. Demand registration rights were granted only to Behrman Capital IIIL.P. and one of its affiliates.

 

**Financial Advisor Agreement**

 

We entered into a Financial Advisor Agreement dated as of April 9,2003, with Behrman Brothers Management Corp., or Behrman Brothers, an affiliateof our largest stockholder, Behrman Capital III L.P. Under this agreement,Behrman Brothers provides us with advice regarding our financial management,potential acquisitions, dispositions, financial transactions and other issues.In the event that we consummate a transaction (such as a merger with, oracquisition of, another company, a sale of our company or significant eventsrelating to changes in our equity structure), we are required to pay BehrmanBrothers a fee for its role as our advisor and reimburse any expenses incurredby Behrman Brothers in providing such advice. This agreement remains in effectuntil there is a change in the control of our company or we sell all orsubstantially all of our assets.

 

**Indemnification Agreements**

 

We have entered into indemnification agreements with our directors, RodneyCohen and Tom Perlmutter. The form of indemnification agreement providesthat the directors will be indemnified for expenses incurred because of theirstatus as a director to the fullest extent permitted by Delaware law and ourcertificate of incorporation and bylaws.

 

Our certificate of incorporation, as amended, contains a provisionpermitted by Delaware law that generally eliminates the personal liability ofdirectors for monetary damages for breaches of their fiduciary duty, includingbreaches involving negligence or gross negligence in business combinations,unless the director has breached his or her duty of loyalty, failed to act ingood faith, engaged in intentional misconduct or a knowing violation of law,paid a dividend or approved a stock repurchase or redemption in violation ofthe Delaware General Corporation Law or obtained an improper personal benefit.This provision does not alter a director’s liability under the federalsecurities laws and does not affect the availability of equitable remedies,such as an injunction or rescission, for breach of fiduciary duty. Our bylawsprovide that directors shall be, and in the discretion of the board

 

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of directors, our officers and non-officer employees may be,indemnified to the fullest extent authorized by Delaware law, as it now existsor may in the future be amended, against all expenses and liabilitiesreasonably incurred in connection with service for or on behalf of the company.Our bylaws also provide that the right of our directors and officers toindemnification shall be a contract right and shall not be exclusive of anyother right now possessed or hereafter acquired under any statute, bylaw,agreement, vote of stockholders, directors or otherwise.

 

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

 

**Item 14. Principal Accountants and Services**

 

Aggregate fees billed to the company for the fiscal years ended December 31,2005, and 2004 by the Company’s principal accounting firm, Deloitte &Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respectiveaffiliates:

 
| ** **                         | ** ** | **Fiscal year ended** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                               |       |                  |       |   |   |
| Audit Fees (a)                     |       | $                     | 157,367    |   | $ | 396,647 |   |
| Audit-Related Fees (b)             |       | —                |       | 10,693 |   |
|                               |       |                  |       |   |   |
| Total audit and audit-related fees |       | 157,367               |       | 407,340 |   |
| Tax Fees (c)                       |       | 39,736                |       | 85,400 |   |
|                               |       |                  |       |   |   |
| Total Fees                         |       | $                     | 197,103    |   | $ | 492,740 |   |

 

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(a) Fees for audit services billed in 2005 consist of:

•                  Auditof the Company’s annual financial statements

•                  Reviewsof the Company’s quarterly financial statements

 

       Feesfor the audit services billed in 2004 consist of:

•                  Auditof the Company’s annual financial statements

•                  Reviewsof the Company’s quarterly financial statements

•                  Comfortletters, S-4 filing, and issuance of consents related to Securities andExchange Commission (“SEC”) matters

 

(b) Fees for audit-related services billed in 2004 consist of:

•                  Duediligence services related to Grand Valley acquisition

 

(c) Fees for tax services billed in 2005 consist of:

•                  Preparationof December 31, 2004 tax return

•                  Researchand assistance with earnings and profit, state matters, and other miscellaneousprojects

 

       Fees for tax services billed in 2004 consist of:

•                  Preparationof March 31, 2003 and December 31, 2003 tax returns

•                  Preparationof 2000-2002 amended returns due to IRS audit adjustments

•                  Preparationof Form 3115’s related to tax accounting changes

•                  Researchand assistance with the IRS audit

•                  Researchand assistance with stock options, dividend and earnings and profit

 

40

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**PART IV**

 

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

 

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

 

(1)          *Financial Statements*. Consolidated FinancialStatements of WII Components, Inc. and Subsidiaries as of December 31,2005 and 2004 and for the years ended December 31, 2005 and 2004 and theperiod from inception (April 1, 2003) to December 31, 2003, andConsolidated Financial Statements of Woodcraft Industries, Inc. andSubsidiaries (Predecessor to WII Components, Inc.) for the three monthsended March 31, 2003

 
| Report of Independent Registered Public Accounting  Firm        |   |
|-----------------------------------------------------------------|--------|
| Consolidated  Balance Sheets                                    |   |
| Consolidated  Statements of Operations                          |   |
| Consolidated  Statements of Stockholders’ Equity (Deficit) |   |
| Consolidated  Statements of Cash Flows                          |   |
| Notes  to Consolidated Financial Statements                     |   |

 

(2)          *Financial StatementSchedules*. Allschedules for which provision is made in the applicable accounting regulationsof the SEC have been omitted as not required or not applicable, or theinformation required has been included elsewhere by reference in the financialstatements and related notes, except for Schedule II.

 

(3) Exhibits:

 
| **Exhibit No.** | ** ** | **Exhibit Description**                                                                                                                                                                                                                        |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                          |
| 3.1                  |       | Second  Amended and Restated Certificate of Incorporation of WII Components, Inc.  (incorporated herein by reference to Exhibit 3.1 to the Company’s  Registration Statement on Form S-4, as amended, File No. 333-115490) |
|                 |       |                                                                                                                                                                                                                                                |
| 3.2                  |       | Amended and  Restated By-laws of WII Components, Inc. (incorporated herein by  reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-4,  as amended, 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 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)                                                  |

 

41

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| **Exhibit No.** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                                    |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.9                  |       | Certificate of Incorporation of Grand Valley Acquisition, Inc.  (incorporated herein by reference to Exhibit 3.9 to the Company’s  Amendment No. 1 to the Registration Statement on Form S-4, as  amended, File No. 333-115490)                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.10                 |       | Bylaws of Grand Valley Acquisition, Inc. (incorporated herein by  reference to Exhibit 3.10 to the Company’s Amendment No. 1 to the  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                 |       | Employment Agreement dated April 9, 2003 between Woodcraft  Industries, Inc. and John Fitzpatrick (incorporated herein by reference  to Exhibit 10.3 to the Company’s Registration Statement on Form S-4,  as amended, File No. 333-115490)                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.4                 |       | Employment Agreement dated April 9, 2003 between Woodcraft  Industries, Inc. and Dale Herbst (incorporated herein by reference to Exhibit 10.4  to the Company’s Registration Statement on Form S-4, as amended, File No. 333-115490)                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.5                 |       | Employment Agreement dated April 9, 2003 between Woodcraft  Industries, Inc. and Joel Beyer (incorporated herein by reference to Exhibit 10.7  to the Company’s Registration Statement on Form S-4, as amended, File No. 333-115490)                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.6                 |       | Credit Agreement, dated as of February 18, 2004, by and among  WII Components, Inc. as Borrower and Antares Capital Corporation, for  itself and as Agent for all Lenders, and the Financial Institutions Party  thereto (incorporated herein by reference to Exhibit 10.8 to the Company’s  Registration Statement on Form S-4, as amended, File No. 333-115490) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.7                 |       | Form of Revolving Note (incorporated herein by reference to Exhibit 10.9  to the Company’s Registration Statement on Form S-4, as amended, File No. 333-115490)                                                                                                                                                                                                        |

 

42

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| **Exhibit No.** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                           |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                   |
| 10.8                 |       | Stockholders Agreement dated April 9, 2003 by and among WII  Holdings, Inc. and the Stockholders as defined therein (incorporated  herein by reference to Exhibit 4.1 to the Company’s Registration  Statement on Form S-4, as amended, File No. 333-115490)                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                   |
| 10.9                 |       | Registration Rights Agreement dated April 9, 2003 by and among  WII Holdings, Inc. and the Stockholders as defined therein (incorporated  herein by reference to Exhibit 4.2 to the Company’s Registration  Statement on Form S-4, as amended, File No. 333-115490)                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                   |
| 10.10                |       | Purchase Agreement dated as of February 18, 2004, by and among  WII Components Inc. and the Purchasers as defined therein (incorporated  herein by reference to Exhibit 4.4 to the Company’s Registration  Statement on Form S-4, as amended, File No. 333-115490)                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                                   |
| 10.11                |       | 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)                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                   |
| 10.12                |       | Agreement and Plan of Merger dated as of April 9, 2003 by and  among WII Holdings, Inc., Woodcraft Acquisition Subsidiary, Inc.,  and Woodcraft Industries, Inc. (incorporated herein by reference to Exhibit 2.3  to the Company’s Registration Statement on Form S-4, as amended, File No. 333-115490)       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                   |
| 10.13                |       | 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) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                   |
| *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)                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                   |
| *23.1                |       | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                   |
| *31.1                |       | Certification of Vice President, 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 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 Vice President, Treasurer, and Secretary of WII  Components, Inc., pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                   |
| *32.2                |       | Certification of Chief Executive Officer 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                                                                                                                                                            |

 

----

* Filed herewith.

 

43

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**SCHEDULE II. VALUATION ANDQUALIFYING ACCOUNTS**

 

**Allowance for Doubtful Accounts**

 

Thetransactions in the allowance for doubtful accounts for the years ended December 31,2005 and 2004, the nine-month period ended December 31, 2003, and thethree-month period ended March 31, 2003 were as follows (in thousands): 

 
| ** **                 | ** ** | **Successor**                    | ** ** | **Predecessor**       | ** ** |
|----------------------------|------------|----------------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | ** **                       | ** ** | ** **            | ** ** | **Nine Months** | ** ** | **Three Months** | ** ** |
| ** **                 | ** ** | ** **                       | ** ** | ** **            | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **                 | ** ** | **Year Ended December 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
| ** **                 | ** ** | **2005**                         | ** ** | **2004**              | ** ** | **2003** | ** ** | **2003** | ** ** |
| Balance, beginning of year |       | $                                | 209        |                  | $          | 237 |   | $ | 358 |   | $ | 996 |   |
| Provision                  |       | 61                               |       | 27                    |       | (72 | ) | (446 | ) |
| Write-offs                 |       | (152                             | )          | (55                   | )          | (49 | ) | (192 | ) |
| Balance, end of year       |       | $                                | 118        |                  | $          | 209 |   | $ | 237 |   | $ | 358 |   |

 

44

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**Item 16.Signatures**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this AnnualReport to be signed on its behalf by the undersigned thereunto duly authorized,this 23rd day of March 2006:

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

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this Annual Report has been signed below by the following persons on behalf ofthe registrant and in the capacities and on the dates indicated.

 
| **Signature**        | ** ** | **Title**                                                     | ** ** | **Date**            |
|----------------------|------------|---------------------------------------------------------------|------------|---------------------|
| ** **           | ** ** | ** **                                                    | ** ** | ** **          |
| /s/ John Fitzpatrick |       | Chief  Executive Officer (Principal Executive Officer)        |       | March 23, 2006 |
| John Fitzpatrick     |       |                                                          |       |                |
|                 |       |                                                          |       |                |
| /s/ Dale B. Herbst   |       | Vice  President, Treasurer and Secretary (Principal Financial |       | March 23, 2006 |
| Dale B. Herbst       |       | Officer  and Principal Accounting Officer)                    |       |                |
|                 |       |                                                          |       |                |
| /s/ Rodney Cohen     |       | Director                                                      |       | March 23, 2006 |
| Rodney Cohen         |       |                                                          |       |                |
|                 |       |                                                          |       |                |
| /s/ Tom Perlmutter   |       | Director                                                      |       | March 23, 2006 |
| Tom Perlmutter       |       |                                                          |       |                |

 

45

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