UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

¨	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file numbers: 333-119696 and 333-114924

Norcraft Holdings, L.P.

Norcraft Companies, L.P.

(Exact name of registrants as specified in their charters)


Delaware		75-3132727
Delaware		36-4231718
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3020 Denmark Avenue, Suite 100

Eagan, MN 55121

(Address of Principal Executive Offices)

(800) 297-0661

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) have been subject to such filing requirements for the past 90 days. Yes ¨ No x.

Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, or non-accelerated filers.


Large Accelerated Filer ¨		Accelerated Filer ¨		Non-Accelerated Filer x

Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.

This Form 10-Q is a combined quarterly report being filed separately by two registrants: Norcraft Holdings, L.P. and Norcraft Companies, L.P. Unless the context indicates otherwise, any reference in this report to “Holdings” refers to Norcraft Holdings, L.P. and any reference to “Norcraft” refers to Norcraft Companies, L.P., the wholly-owned operating subsidiary of Holdings. The “Company”, “we”, “us”, and “our” refer to Norcraft Holdings, L.P., together with Norcraft Companies, L.P.

Norcraft Holdings, L.P. Norcraft Companies, L.P.

Table of Contents


		Page
PART I	FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements
	Consolidated Balance Sheets at June 30, 2006 and December 31, 2005	3
	Consolidated Statements of Income for the three months ended June 30, 2006 and 2005; Six months ended June 30, 2006 and 2005	4
	Consolidated Statements of Changes in Members’ Equity and Comprehensive Income for the six months ended June 30, 2006	6
	Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures of Market Risk	23
Item 4.	Controls and Procedures	23

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 6.	Exhibits	25

SIGNATURES		26

This combined Form 10-Q is separately filed by Norcraft Holdings, L.P., and Norcraft Companies, L.P. Each Registrant hereto is filing on its own behalf all of the information contained in this quarterly report that relates to such Registrant. Each Registrant hereto is not filing any information that does not relate to such Registrant, and therefore makes no representation as to any such information.

PART I. FINANCIAL INFORMATION

Item 1.

Consolidated Balance Sheets

(dollar amounts in thousands)

(unaudited)


	Norcraft Holdings, L.P.				Norcraft Companies, L.P.
ASSETS	June 30, 2006		December 31, 2005		June 30, 2006		December 31, 2005
Current assets:
Cash	$	17,769	$	933	$	17,769	$	933
Trade accounts receivable, net		43,880		37,015		43,880		37,015
Inventories		25,485		24,197		25,485		24,197
Prepaid expenses and other		1,566		1,921		1,566		1,921

Total current assets		88,700		64,066		88,700		64,066

Property, plant and equipment, net		36,728		36,485		36,728		36,485

Other assets:
Goodwill		148,459		148,459		148,459		148,459
Customer relationships, net		54,965		57,197		54,965		57,197
Brand names		49,000		49,000		49,000		49,000
Deferred financing costs, net		8,370		8,396		5,508		5,344
Display cabinets, net		9,197		8,443		9,197		8,443
Deposits		96		111		96		111

Total other assets		270,087		271,606		267,225		268,554

Total assets	$	395,515	$	372,157	$	392,653	$	369,105

LIABILITIES AND MEMBERS’ EQUITY
Current liabilities:
Book overdrafts payable	$	—	$	1,666	$	—	$	1,666
Accounts payable		14,117		10,817		14,117		10,817
Accrued expenses		22,489		20,537		22,489		20,537
Members’ distribution payable		470		—		470		—

Total current liabilities		37,076		33,020		37,076		33,020

Long-term debt		246,031		241,567		150,000		150,000

Commitments and contingencies		—		—		—		—

Members’ equity subject to put request		55,574		46,094		—		—

Members’ equity		56,834		51,476		205,577		186,085

Total liabilities and members’ equity	$	395,515	$	372,157	$	392,653	$	369,105

See notes to consolidated financial statements.

Consolidated Statements of Income

(dollar amounts in thousands)

(unaudited)


	Norcraft Holdings, L.P.
	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Net sales	$	121,876	$	104,087	$	230,542	$	196,041

Cost of sales		82,459		72,840		159,009		135,942

Gross profit		39,417		31,247		71,533		60,099

Selling, general and administrative expenses		20,707		16,685		38,523		31,719

Income from operations		18,710		14,562		33,010		28,380

Other expense (income):
Interest expense		5,640		5,893		11,229		11,784
Amortization of deferred financing costs		374		673		758		1,361
Other, net		22		112		74		112

		6,036		6,678		12,061		13,257

Net income	$	12,674	$	7,884	$	20,949	$	15,123

See notes to consolidated financial statements.

Consolidated Statements of Income

(dollar amounts in thousands)

(unaudited)


	Norcraft Companies, L.P.
	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Net sales	$	121,876	$	104,087	$	230,542	$	196,041

Cost of sales		82,459		72,840		159,009		135,942

Gross profit		39,417		31,247		71,533		60,099

Selling, general and administrative expenses		20,707		16,685		38,523		31,719

Income from operations		18,710		14,562		33,010		28,380

Other expense (income):
Interest expense		3,373		3,832		6,765		7,725
Amortization of deferred financing costs		278		585		568		1,187
Other, net		22		112		74		112

		3,673		4,529		7,407		9,024

Net income	$	15,037	$	10,033	$	25,603	$	19,356

See notes to consolidated financial statements.

Consolidated Statements of Changes in Members’ Equity and Comprehensive Income

(dollar amounts in thousands)

(unaudited)


	Norcraft Holdings, L.P.
	Members’ Equity			Accumulated other comprehensive income (loss)			Total comprehensive income (loss)
Balance, December 31, 2005	$	51,476		$	(130	)

Issuance of members’ interest		1,715

Stock compensation expense		421

Accretion on members’ interest subject to put request		(9,480	)

Repurchase of member’s interest		(315	)

Member tax distributions declared		(7,988	)

Cumulative translation adjustment		56			56			56

Net income		20,949						20,949

Total comprehensive income							$	21,005

Balance, June 30, 2006	$	56,834		$	(74	)

See notes to consolidated financial statements.

Consolidated Statements of Changes in Members’ Equity and Comprehensive Income

(dollar amounts in thousands)

(unaudited)


	Norcraft Companies, L.P.
	Members’ Equity			Accumulated other comprehensive income (loss)			Total comprehensive income (loss)
Balance, December 31, 2005	$	186,085		$	(130	)

Issuance of member’s interest		1,715

Stock compensation expense		421

Repurchase of member’s interest		(315	)

Member tax distributions declared		(7,988	)

Cumulative translation adjustment		56			56			56

Net income		25,603						25,603

Total comprehensive income							$	25,659

Balance, June 30, 2006	$	205,577		$	(74	)

See notes to consolidated financial statements.

Consolidated Statements of Cash Flows

(dollar amounts in thousands)

(unaudited)


	Norcraft Holdings, L.P.						Norcraft Companies, L.P.
	Six Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Cash flows from operating activities:
Net income	$	20,949		$	15,123		$	25,603		$	19,356
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, plant and equipment:		2,251			2,430			2,251			2,430
Amortization:
Customer relationships		2,232			2,233			2,232			2,233
Deferred financing costs		758			1,361			568			1,187
Display cabinets		2,696			1,945			2,696			1,945
Provision for uncollectible accounts receivable		562			298			562			298
Provision for obsolete and excess inventory		178			132			178			132
Provision for warranty claims		2,521			2,102			2,521			2,102
Accreted interest on senior notes		4,464			4,059			—			—
Stock compensation expense		421			127			421			127
(Gain) loss on sale of equipment		49			81			49			81
Change in operating assets and liabilities:
Accounts receivable		(7,454	)		(4,916	)		(7,454	)		(4,916	)
Inventories		(1,325	)		(2,455	)		(1,325	)		(2,455	)
Prepaid expenses and other		355			(9	)		355			(9	)
Other assets		17			1			17			1
Accounts payable and accrued liabilities		3,497			822			3,497			822

Net cash provided by operating activities		32,171			23,334			32,171			23,334

Cash flows from investing activities:
Proceeds from sale of property and equipment		54			16			54			16
Purchase of property, plant and equipment		(3,357	)		(3,330	)		(3,357	)		(3,330	)
Purchase of display cabinets		(3,450	)		(3,071	)		(3,450	)		(3,071	)

Net cash used in investing activities		(6,753	)		(6,385	)		(6,753	)		(6,385	)

Cash flows from financing activities:
Increase in financing costs		(732	)		—			(732	)		—
Payments on term loan		—			(14,500	)		—			(14,500	)
Book overdrafts payable		(1,666	)		1,525			(1,666	)		1,525
Proceeds from issuance of member interests		1,715			35			1,715			35
Repurchase of members’ interests		(315	)		(290	)		(315	)		(290	)
Tax distributions to members		(7,518	)		(4,068	)		(7,518	)		(4,068	)

Net cash used in financing activities		(8,516	)		(17,298	)		(8,516	)		(17,298	)

Effect of exchange rates on cash		(66	)		(117	)		(66	)		(117	)

Net increase in cash		16,836			(466	)		16,836			(466	)

Cash, beginning of the period		933			823			933			823

Cash, end of period	$	17,769		$	357		$	17,769		$	357

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	6,765		$	7,675		$	6,765		$	7,675

Supplemental disclosure of non-cash transactions:
Tax distributions declared but not paid	$	470		$	330		$	470		$	330

Member interest repurchase declared but not paid	$	—		$	1,598		$	—		$	1,598

See notes to consolidated financial statements.

Norcraft Holdings, L.P. Norcraft Companies L.P.

Notes to Consolidated Financial Statements

(in thousands)

(unaudited)

1.	Basis of Presentation

Norcraft Holdings L.L.C. was formed on August 21, 2003, as a Delaware limited liability company to acquire all the outstanding membership units of Norcraft Companies LLC. On October 10, 2003, Norcraft Holdings L.L.C. converted to a Delaware Limited Partnership and is now Norcraft Holdings, L.P. (“Holdings”). Holdings had no activity prior to its acquisition of Norcraft Companies LLC on October 21, 2003 (“the Acquisition”). Concurrent with the Acquisition, Norcraft Companies LLC converted to a Delaware Limited Partnership and is now Norcraft Companies, L.P. (“Norcraft”); Norcraft a separate public reporting company, is a 100% owned indirect subsidiary of Holdings. Holdings and Norcraft are collectively referred to as the “Company”.

The consolidated financial statements of Holdings include the accounts of its 100% owned subsidiary, Norcraft Intermediate Holdings, L.P., whose sole assets are Norcraft and Norcraft Capital Corp. In August 2004, Holdings and Norcraft Capital Corp. issued $118.0 million of 9³/4% senior discount notes generating gross proceeds of $80.3 million. Holdings and Norcraft Capital Corp. are the sole obligors of these notes. The net proceeds of this offering were used to make a distribution to Holdings’ limited partners. Other than this debt obligation, related deferred issuance costs, and related interest and amortization expense, all other assets, liabilities, income, expenses and cash flows of the consolidated financial statements of Holdings presented for all periods represent those of its wholly-owned subsidiary Norcraft.

Unless separately stated, the notes herein relate to both Holdings and Norcraft.

The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the interim consolidated financial statements and accompanying notes included herein should be read in conjunction with the more detailed information contained in the Company’s annual report on form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission. The unaudited interim consolidated financial statements as of June 30, 2006 and 2005 and for the three and six months ended June 30, 2006 and 2005 include all normal recurring adjustments which management considers necessary for the fair presentation of financial position, results of operations and cash flows for the interim periods.

2.	Stock-Based Compensation

Prior to January 1, 2006, the Company accounted for stock-based compensation using the minimum value method prescribed in Statement of Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” On January 1, 2006, the Company adopted SFAS No. 123 (Revised 2004) Share-Based Payments (“SFAS No. 123R”), using the prospective transition method, which requires the application of the accounting standard on the first day of the Company’s fiscal year 2006 for grants issued or modified subsequent to the date of adoption.

Holdings has a Management Incentive Plan, (the “Plan”) which provides for the grants of incentive Class D limited partnership units (the “Class D Units”) in Holdings to selected employees of the Company. Under the terms of the Plan the Class D Units begin to vest on the December 31 following the date of grant with 50% of the Class D Units time-vesting over a 5 year period and 50% vesting over a 5 year period subject to the Company meeting certain performance based criteria in each of those years. Upon vesting, each Class D Unit entitles the unit holder the option to purchase one Class A limited partnership interest in Holdings. All Class D Units will be issued with an exercise price equal to the then fair value of Holdings’ Class A limited partnership units.

The fair value of the Class D Units granted is based on the Black-Scholes option-pricing model. Upon adoption of SFAS No. 123R the Company is required to incorporate a volatility factor in the fair value calculation. The volatility factor is developed through the use of a sample of peer group companies. The peer group consists of publicly-traded companies that operate in the Company’s same industry. The Company granted 2,094,210 (of which 60,000 were granted in the three months ended June 30, 2006) incentive Class D membership units during the six months ended June 30, 2006, the fair value of which was determined to be $1.6 million.

Compensation expense related to Class D Units was $0.4 and $0.2 million for the three and six months ended June 30, 2006, respectively, and $0.08 and $0.13 million for the three and six months ended June 30, 2005, respectively.

The following table sets forth information about the fair value of the Class D Unit grant on the date of grant using the Black-Scholes option-pricing model and the weighted average assumptions used for such grant:


	As of June 30, 2006			As of December 31, 2005
Weighted-average fair value of Class D Units granted	$	0.78		$	0.58
Dividend yield		0.0	%		0.0	%
Risk-free interest rate		4.51	%		3.68	%
Volatility		34.3	%		0.0	%
Expected lives		4.64			4.00

A summary of Class D Unit activity under the Plan is as follows:


	Six Months Ended June 30, 2006
	Units	Weighted-Average Exercise Price
Beginning balance	4,386,217	$	0.45
Granted	2,094,210	$	2.05

Ending balance	6,480,427	$	0.96

Exercisable balance	1,801,675	$	0.49

The intrinsic values of the issued and exercisable Class D Units at June 30, 2006 were $8.9 million and $3.3 million, respectively.

3.	Trade Accounts Receivable

Trade accounts receivable consists of the following:


	June 30, 2006			December 31, 2005
Trade accounts receivable, gross	$	45,465		$	38,235
Less: Allowance for uncollectible accounts		(1,585	)		(1,220	)

	$	43,880		$	37,015

4.	Inventories

Inventories consist of the following:


	June 30, 2006		December 31, 2005
Raw materials and supplies	$	12,625	$	11,982
Work in process		6,458		7,231
Finished goods		6,402		4,984

	$	25,485	$	24,197

5.	Intangible assets

Amortizable intangible assets consist of the following:


	Norcraft Holdings, L.P.
	June 30, 2006					December 31, 2005
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Customer relationships	$	67,000	$	(12,035	)	$	67,000	$	(9,803	)
Deferred financing costs		16,360		(7,990	)		15,628		(7,232	)

Total	$	83,360	$	(20,025	)	$	82,628	$	(17,035	)


	Norcraft Companies, L.P.
	June 30, 2006					December 31, 2005
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Customer relationships	$	67,000	$	(12,035	)	$	67,000	$	(9,803	)
Deferred financing costs		12,827		(7,319	)		12,095		(6,751	)

Total	$	79,827	$	(19,354	)	$	79,095	$	(16,554	)

Intangible assets not subject to amortization consist of the following:


	June 30, 2006		December 31, 2005
Goodwill	$	148,459	$	148,459
Brand names		49,000		49,000

Total	$	197,459	$	197,459

There were no impairment losses or other gains and losses on disposal of intangible assets for the six months ended June 30, 2006 and 2005.

6.	Accrued expenses

Accrued expenses consist of the following:


	June 30, 2006		December 31, 2005
Salaries, wages and employee benefits	$	8,705	$	8,573
Commissions, rebates and marketing programs		4,916		4,430
Interest		2,250		2,250
Other		6,618		5,284

	$	22,489	$	20,537

Product warranty activity is as follows:


	June 30, 2006			June 30, 2005
Beginning Balance – December 31	$	843		$	520
Accruals for warranties – current		2,521			2,102
Settlements made during the period		(2,370	)		(2,017	)

Ending Balance – June 30	$	994		$	605

Product warranty is a component of the “Other” category in the accrued expenses table above.

7.	Long-term debt

Long-term debt consists of the following:


	Norcraft Holdings, L.P.				Norcraft Companies, L.P.
	June 30, 2006		December 31, 2005		June 30, 2006		December 31, 2005
Senior subordinated notes payable (due in 2011 with semi-annual interest payments at 9%)	$	150,000	$	150,000	$	150,000	$	150,000
Senior discount notes payable (due in 2012 with interest accreting at 9.75%)		96,031		91,567		—		—

Long term debt	$	246,031	$	241,567	$	150,000	$	150,000

Senior Credit Facility

On October 21, 2003, concurrent with the Acquisition, Norcraft Companies, L.P. entered into a $70.0 million senior credit facility with a third party for up to $25.0 million in available revolving funds and a $45.0 million term loan with an original maturity of October 21, 2008 (the “Original Agreement”). Advance debt payments were made on this term loan, and it was repaid in full during 2005.

On May 2, 2006, the Company entered into an amended and restated credit facility (the “Amended Agreement”) with the same parties as the Original Agreement. The Amended Agreement increased the availability of the credit facility from $25.0 million to $60.0 million and also modified the related interest rate and certain covenants as described further below.

The Original Agreement provided for a $25.0 million revolving credit facility and a $45.0 million term loan facility. The Amended Agreement provides for a revolving credit facility with maximum borrowings of $60.0 million and no term loan facility.

Borrowings under the amended revolving credit facility are available until its maturity for use for general corporate purposes, including acquisitions of assets and capital stock of other companies, to the extent permitted by the Amended Agreement. The amended revolving credit facility matures on May 2, 2011 and has no scheduled amortization or commitment reductions.

Borrowings under the Amended Agreement bear interest at a variable interest rate based on either an adjusted LIBOR rate or an alternate base rate plus an applicable margin of 1.75% and 0.75%, respectively. The applicable margin percentage will be subject to adjustment in the future based on the ratio of Norcraft’s consolidated indebtedness to its consolidated EBITDA. On the last day of each calendar quarter, Norcraft is required to pay each lender under the Amended Agreement a 0.375% per annum commitment fee in respect of any unused commitments of such lender under the revolving loan facility.

The Amended Agreement includes customary representations and warranties and affirmative and negative covenants substantially similar to those in the Original Agreement. The Amended Agreement contains covenants, which, among other things, limit: (i) additional indebtedness; (ii) dividends; (iii) capital expenditures and (iv) acquisitions, mergers and consolidations. The Amended Agreement also contains certain financial covenants, including maximum leverage ratio, minimum interest coverage ratio and minimum fixed charge coverage ratio. Indebtedness under the Amended Agreement is secured by substantially all of Norcraft’s assets, including its real and personal property, inventory, accounts receivable, intellectual property and other intangibles. In addition, the Amended Agreement is guaranteed by Intermediate Holdings and secured by its assets (including Norcraft’s equity interests), as well as guaranteed by and secured by the equity interests and substantially all of the assets of Norcraft’s subsidiaries.

The Amended Agreement also contains customary events of default, and upon the occurrence of such events of default, the outstanding obligations under the Amended Agreement may be accelerated and become due and payable immediately.

Approximately $5.0 million of letters of credit were outstanding at June 30, 2006 and December 31, 2005. The total available credit under the revolver at June 30, 2006 and December 31, 2005 was $55.0 million and $20.0 million, respectively. No amounts were outstanding under the senior credit facility at December 31, 2005 or June 30, 2006.

Senior Subordinated Notes

On October 21, 2003, concurrent with the Acquisition, an offering of $150 million, 9% senior subordinated notes (the “Senior Subordinated Notes”) due in 2011 was completed by Norcraft Companies, L.P. and Norcraft Finance Corp., as co-issuers. Interest payments are required semiannually on May 1 and November 1, and began on May 1, 2004. The Senior Subordinated Notes are subordinated to all existing and future senior debt, including indebtedness under the senior credit facility.

Subsequent to November 1, 2007, the Company has the option to redeem the notes, in whole or part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest. At any time prior to November 1, 2006, the Company may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to 109% of the principal amount, plus accrued and unpaid interest.

If the Company experiences a change of control prior to November 1, 2007, they may redeem all, but not less than all, of the Senior Subordinated Notes at a redemption price equal to 100% of the principal amount plus a make-whole premium as defined.

If the Company experiences a change of control subsequent to November 1, 2007, it may be required to offer to purchase the Senior Subordinated Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest.

Additionally, the terms of the indenture governing the Senior Subordinated Notes limit the Company’s ability to, among other things, incur additional indebtedness, dispose of assets, make acquisitions, make other investments, pay dividends and make various other payments. The terms also include cross-default provisions. The indenture also contains certain financial covenants including maximum leverage ratio, minimum interest coverage ratio and minimum fixed charge coverage ratio. The Company was in compliance with these financial covenants at June 30, 2006.

Holdings Senior Discount Notes

On August 17, 2004 Holdings and Norcraft Capital Corp., a 100% owned finance subsidiary of Holdings issued, on a joint and several basis, $118.0 million aggregate principal amount at maturity ($80.3 million gross proceeds) of 9 3/4% Senior Discount Notes due 2012 (the “Senior Notes”). The net proceeds of this offering were used to make a distribution to Holdings’ limited partners. Norcraft Capital Corp. was formed on August 12, 2004 and has no operations. Interest accrues on the Senior Notes in the form of an increase in the accreted value of the note prior to September 1, 2008. Thereafter, cash interest on the Senior Notes will accrue and be payable semiannually in arrears on March 1 and September 1 of each year, commencing March 1, 2009 at a rate of 9³/4% per annum. Holdings has no independent operating assets or liabilities other than its investment in Norcraft.

At any time on or after September 1, 2008, Holdings may redeem the Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium, declining ratably to par, plus accrued and unpaid interest. At any time on or prior to September 1, 2007, Holdings’ may redeem up to 35% of the aggregate accreted value of the Senior Notes with the proceeds of qualified equity offerings at a redemption price equal to 109.75% of the accreted value.

If Holdings experiences a change in control prior to September 1, 2008, it may redeem all, but not less than all, of the Senior Notes at a purchase price equal to 100% of the accreted value plus a make-whole premium as defined.

If Holdings experiences a change in control prior to September 1, 2008, it may be required to offer to purchase the Senior Notes at a purchase price equal to 101% of the accreted value plus accrued and unpaid interest.

Additionally, the terms of the indenture governing the Senior Notes limit Holdings’ ability to, among other things, incur additional indebtedness, dispose of assets, make acquisitions, make other investments, pay dividends and make various other payments. The terms also include cross-default provisions. The indenture also contains certain financial covenants including maximum leverage ratio, minimum interest coverage ratio and minimum fixed charge coverage ratio. The Company was in compliance with these financial covenants at June 30, 2006.

Norcraft’s senior credit facility and the indenture governing the Senior Subordinated Notes each contain restrictions on Norcraft’s ability to pay dividends and make certain other payments to Holdings. Pursuant to each arrangement, Norcraft may be subject to certain limitations, including with respect to its ability to pay dividends or make such payments in connection with (i) repurchases of certain interests of Holdings, (ii) the payment by

Holdings of taxes, costs and other expenses required to maintain its legal existence and legal, accounting and other overhead costs in the ordinary course of business and (iii) permitted income tax distributions by Holdings to its limited partners.

The following represents certain condensed consolidating financial information as of June 30, 2006 and December 31, 2005 and for the periods ended June 30, 2006 and 2005 for the issuers and for Norcraft Canada Corporation, a wholly-owned subsidiary of Norcraft Companies, L.P., which fully and unconditionally guarantees the senior subordinated notes. In addition, the terms and conditions of the Senior Subordinated Notes limit Norcraft Companies, L.P.’s ability to pay dividends or other payments to Norcraft Holdings, L.P. In this regard, the net assets of Norcraft are deemed to be restricted assets of Holdings. As such, condensed financial information for Norcraft Holdings, L.P. is also presented.

CONDENSED CONSOLIDATING BALANCE SHEETS

As of June 30, 2006


	Norcraft Companies, L.P. (1)		Norcraft Finance Corp (1)		Norcraft Canada		Elim- inations			Consolidated Norcraft Companies, L.P.		Norcraft Holdings, L.P.		Elim- inations			Consolidated Norcraft Holdings, L.P.
Current Assets	$	86,567	$	—	$	2,133	$	—		$	88,700	$	—	$	—		$	88,700
Property, plant & equipment		32,240		—		4,488		—			36,728		—		—			36,728
Investments in subsidiary		2,228		—		—		(2,228	)		—		205,577		(205,577	)		—
Other assets		270,777		—		213		(3,765	)		267,225		2,862		—			270,087

Total assets	$	391,812	$	—	$	6,834	$	(5,993	)	$	392,653	$	208,439	$	(205,577	)	$	395,515

Current liabilities	$	36,235	$	—	$	841	$	—		$	37,076	$	—	$	—		$	37,076
Long-term debt		150,000		—		3,765		(3,765	)		150,000		96,031		—			246,031
Members’ equity subject to put request		—		—		—		—			—		55,574		—			55,574
Member’s equity		205,577		—		2,228		(2,228	)		205,577		56,834		(205,577	)		56,834

Total liabilities & member’s equity	$	391,812	$	—	$	6,834	$	(5,993	)	$	392,653	$	208,439	$	(205,577	)	$	395,515

As of December 31, 2005


	Norcraft Companies, L.P. (1)		Norcraft Finance Corp (1)		Norcraft Canada		Elim- inations			Consolidated Norcraft Companies, L.P.		Norcraft Holdings, L.P.		Elim- inations			Consolidated Norcraft Holdings, L.P.
Current Assets	$	62,207	$	—	$	1,859	$	—		$	64,066	$	—	$	—		$	64,066
Property, plant & equipment		31,958		—		4,527		—			36,485		—		—			36,485
Investments in subsidiary		2,099		—		—		(2,099	)		—		186,085		(186,085	)		—
Other assets		272,242		—		213		(3,901	)		268,554		3,052		—			271,606

Total assets	$	368,506	$	—	$	6,599	$	(6,000	)	$	369,105	$	189,137	$	(186,085	)	$	372,157

Current liabilities	$	32,421	$	—	$	599	$	—		$	33,020	$	—	$	—		$	33,020
Long-term debt		150,000		—		3,901		(3,901	)		150,000		91,567		—			241,567
Members’ equity subject to put request		—		—		—		—			—		46,094		—			46,094
Member’s equity		186,085		—		2,099		(2,099	)		186,085		51,476		(186,085	)		51,476

Total liabilities & member’s equity	$	368,506	$	—	$	6,599	$	(6,000	)	$	369,105	$	189,137	$	(186,085	)	$	372,157

(1)	Co-issuers

CONDENSED CONSOLIDATING INCOME STATEMENTS

For the Three Months Ended June 30, 2006


	Norcraft Companies, L.P. (1)		Norcraft Finance Corp (1)		Norcraft Canada		Elim- inations			Consolidated Norcraft Companies, L.P.		Norcraft Holdings, L.P.		Elim- inations			Consolidated Norcraft Holdings, L.P.
Net sales	$	121,876	$	—	$	4,860	$	(4,860	)	$	121,876	$	—	$	—		$	121,876
Cost of sales		82,591		—		4,728		(4,860	)		82,459		—		—			82,459

Gross profit		39,285		—		132		—			39,417		—		—			39,417
Equity in earnings of subsidiary		10		—		—		(10	)		—		15,037		(15,037	)		—
Selling, general and administrative expenses		20,585		—		122		—			20,707		—		—			20,707

Income (loss) from operations		18,710		—		10		(10	)		18,710		15,037		(15,037	)		18,710
Other expense:
Interest expense		3,373		—		—		—			3,373		2,267		—			5,640
Amortization of deferred financing		278		—		—		—			278		96		—			374
Other, net		22		—		—		—			22		—		—			22

		3,673		—		—		—			3,673		2,363		—			6,036

Net income	$	15,037	$	—	$	10	$	(10	)	$	15,037	$	12,674	$	(15,037	)	$	12,674

For the Three Months Ended June 30, 2005


	Norcraft Companies, L.P. (1)		Norcraft Finance Corp (1)		Norcraft Canada		Elim- inations			Consolidated Norcraft Companies, L.P.		Norcraft Holdings, L.P.		Elim- inations			Consolidated Norcraft Holdings, L.P.
Net sales	$	104,087	$	—	$	3,606	$	(3,606	)	$	104,087	$	—	$	—		$	104,087
Cost of sales		73,121		—		3,325		(3,606	)		72,840		—		—			72,840

Gross profit		30,966		—		281		—			31,247		—		—			31,247
Equity in earnings of subsidiary		191		—		—		(191	)		—		10,033		(10,033	)		—
Selling, general and administrative expenses		16,595		—		90		—			16,685		—		—			16,685

Income (loss) from operations		14,562		—		191		(191	)		14,562		10,033		(10,033	)		14,562
Other expense:
Interest expense		3,832		—		—		—			3,832		2,061		—			5,893
Amortization of deferred financing		585		—		—		—			585		88		—			673
Other, net		112		—		—		—			112		—		—			112

		4,529		—		—		—			4,529		2,149		—			6,678

Net income	$	10,033	$	—	$	191	$	(191	)	$	10,033	$	7,884	$	(10,033	)	$	7,884

CONDENSED CONSOLIDATING INCOME STATEMENTS

For the Six Months Ended June 30, 2006


	Norcraft Companies, L.P. (1)		Norcraft Finance Corp (1)		Norcraft Canada		Elim- inations			Consolidated Norcraft Companies, L.P.		Norcraft Holdings, L.P.		Elim- inations			Consolidated Norcraft Holdings, L.P.
Net sales	$	230,542	$	—	$	9,340	$	(9,340	)	$	230,542	$	—	$	—		$	230,542
Cost of sales		159,346		—		9,003		(9,340	)		159,009		—		—			159,009

Gross profit		71,196		—		337		—			71,533		—		—			71,533
Equity in earnings of subsidiary		72		—		—		(72	)		—		25,603		(25,603	)		—
Selling, general and administrative expenses		38,278		—		245		—			38,523		—		—			38,523

Income (loss) from operations		32,990		—		92		(72	)		33,010		25,603		(25,603	)		33,010
Other expense:
Interest expense		6,765		—		—		—			6,765		4,464		—			11,229
Amortization of deferred financing		568		—		—		—			568		190		—			758
Other, net		54		—		20		—			74		—		—			74

		7,387		—		20		—			7,407		4,654		—			12,061

Net income	$	25,603	$	—	$	72	$	(72	)	$	25,603	$	20,949	$	(25,603	)	$	20,949

For the Six Months Ended June 30, 2005


	Norcraft Companies, L.P. (1)		Norcraft Finance Corp (1)		Norcraft Canada		Elim- inations			Consolidated Norcraft Companies, L.P.		Norcraft Holdings, L.P.		Elim- inations			Consolidated Norcraft Holdings, L.P.
Net sales	$	196,041	$	—	$	5,794	$	(5,794	)	$	196,041	$	—	$	—		$	196,041
Cost of sales		136,277		—		5,459		(5,794	)		135,942		—		—			135,942

Gross profit		59,764		—		335		—			60,099		—		—			60,099
Equity in earnings of subsidiary		167		—		—		(167	)		—		19,356		(19,356	)		—
Selling, general and administrative expenses		31,551		—		168		—			31,719		—		—			31,719

Income (loss) from operations		28,380		—		167		(167	)		28,380		19,356		(19,356	)		28,380
Other expense:
Interest expense		7,725		—		—		—			7,725		4,059		—			11,784
Amortization of deferred financing		1,187		—		—		—			1,187		174		—			1,361
Other, net		112		—		—		—			112		—		—			112

		9,024		—		—		—			9,024		4,233		—			13,257

Net income	$	19,356	$	—	$	167	$	(167	)	$	19,356	$	15,123	$	(19,356	)	$	15,123

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Six Months Ended June 30, 2006


	Norcraft Companies, L.P. (1)			Norcraft Finance Corp (1)		Norcraft Canada			Elim- inations			Consolidated Norcraft Companies, L.P.			Norcraft Holdings, L.P.			Elim- inations			Consolidated Norcraft Holdings, L.P.
Cash flows from operating activities	$	31,778		$	—	$	393		$	—		$	32,171		$	—		$	—		$	32,171
Cash flows from investing activities		(6,406	)		—		(211	)		(136	)		(6,753	)		6,118			(6,118	)		(6,753	)
Cash flows from financing activities		(8,516	)		—		(136	)		136			(8,516	)		(6,118	)		6,118			(8,516	)
Cumulative translation adjustment		—			—		(66	)		—			(66	)		—			—			(66	)

Net increase (decrease) in cash		16,856			—		(20	)		—			16,836			—			—			16,836
Cash, beginning of period		854			—		79			—			933			—			—			933

Cash, end of period	$	17,710		$	—	$	59		$	—		$	17,769		$	—		$	—		$	17,769

For the Six Months Ended June 30, 2005


	Norcraft Companies, L.P. (1)			Norcraft Finance Corp (1)		Norcraft Canada			Elim- inations			Consolidated Norcraft Companies, L.P.			Norcraft Holdings, L.P.			Elim- inations			Consolidated Norcraft Holdings, L.P.
Cash flows from operating activities	$	23,272		$	—	$	62		$	—		$	23,334		$	—		$	—		$	23,334
Cash flows from investing activities		(6,398	)		—		(267	)		280			(6,385	)		4,323			(4,323	)		(6,385	)
Cash flows from financing activities		(17,298	)		—		280			(280	)		(17,298	)		(4,323	)		4,323			(17,298	)
Cumulative translation adjustment		—			—		(117	)		—			(117	)		—			—			(117	)

Net decrease (increase) in cash		(424	)		—		(42	)		—			(466	)		—			—			(466	)
Cash, beginning of period		664			—		159			—			823			—			—			823

Cash, end of period	$	240		$	—	$	117		$	—		$	357		$	—		$	—		$	357

(1)	Co-issuers

Item 2.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

Uncertainty of Forward Looking Statements and Information

This report contains “forward looking statements.” All statements other than statements of historical acts included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward looking statements. Forward looking statements give our current expectations and projections relating to the financial condition, results of operations, plans, objectives, future performance and business of our company. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

These forward looking statements are based on our expectations and beliefs concerning future events affecting us. They are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Although we believe that the expectations reflected in our forward looking statements are reasonable, we do not know whether our expectations will prove correct. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties.

Because of these factors, we caution that investors should not place undue reliance on any of our forward looking statements. Further, any forward looking statement speaks only as of the date on which it is made and except as required by law we undertake no obligation to update any forward looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances.

Company Overview

The following discussion of our financial condition and results of operations should be read together with the consolidated financial statements and the accompanying notes included elsewhere in this quarterly report. Additionally, the following discussion should be read together with the Selected Financial Data and our consolidated financial statements and the accompanying notes included in our 2005 annual report on Form 10-K.

All of our operations are conducted through Norcraft Companies, L.P. (“Norcraft”). Norcraft is a wholly-owned subsidiary of Norcraft Holdings, L.P., (“Holdings”). The words “Company”, “we”, “us”, and “our” refer to Holdings together with Norcraft.

We continue to experience significant organic sales growth due to industry growth and increased market share. Our profitability at the gross margin level has also grown, but was offset by material price increases in our industry and transportation cost increases. Profitability levels for Norcraft at the net income level have improved relative to prior-year periods because of the items discussed above, leveraged selling, general and administrative expenses and reduced interest expense.

General

We are a leader in manufacturing, assembling and finishing kitchen and bathroom cabinetry in the United States. We provide our customers with a single source for a broad range of high-quality cabinetry, including stock, semi-custom and custom cabinets. Our cabinets are manufactured in both framed and full access construction. We market our products through four brands: Mid Continent Cabinetry, UltraCraft, StarMark and Fieldstone. The Mid Continent and Ultracraft brands correspond to those divisions, while both the StarMark and Fieldstone brands correspond to the StarMark division.

We were founded as Marshall Millworks, Inc. in 1966 as a single millwork manufacturing facility located in Marshall, Minnesota. For the next 32 years, Marshall Millworks sold its products under the Mid Continent brand and grew organically, adding capacity as needed to support growth. Marshall Millworks subsequently changed its name to Norcraft Companies, Inc. and, in 1998, Norcraft Companies, L.L.C. was formed and acquired the operating business of Norcraft Companies, Inc. In June 2000, we acquired the assets of The UltraCraft Company, located in Liberty, North Carolina, in order to expand our product offering and customer base through the addition of a semi-custom full access cabinetry line. To further expand the breadth of our product offering, market presence, and manufacturing capabilities, we acquired the StarMark and Fieldstone brands through the acquisition of the assets of StarMark, Inc., located in Sioux Falls, South Dakota, in March 2002.

On October 21, 2003, 100% of the outstanding membership units of Norcraft Companies, LLC were acquired by Holdings, a new entity formed at the direction of funds associated with Apax Partners, L.P. (formerly Saunders Karp & Megrue L.L.C.), and Trimaran Fund Management, L.L.C, or Trimaran and our chief executive officer, Mark Buller, and his relatives.

Results of Operations

The following tables outline for the periods indicated, selected operating data as a percentage of net sales.


	Norcraft Holdings, L.P.
	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	67.7	%	70.0	%	69.0	%	69.3	%

Gross profit	32.3	%	30.0	%	31.0	%	30.7	%
Selling, general and administrative expenses	17.0	%	16.0	%	16.7	%	16.2	%

Income from operations	15.3	%	14.0	%	14.3	%	14.5	%

Interest expense	4.6	%	5.7	%	4.9	%	6.0	%
Amortization of deferred financing costs	0.3	%	0.6	%	0.3	%	0.7	%
Other, net	0.0	%	0.1	%	0.0	%	0.1	%

Net income	10.4	%	7.6	%	9.1	%	7.7	%


	Norcraft Companies, L.P.
	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	67.7	%	70.0	%	69.0	%	69.3	%

Gross profit	32.3	%	30.0	%	31.0	%	30.7	%
Selling, general and administrative expenses	17.0	%	16.0	%	16.7	%	16.2	%

Income from operations	15.3	%	14.0	%	14.3	%	14.5	%

Interest expense	2.8	%	3.7	%	2.9	%	3.9	%
Amortization of deferred financing costs	0.2	%	0.6	%	0.2	%	0.6	%
Other, net	0.0	%	0.1	%	0.0	%	0.1	%

Net income	12.3	%	9.6	%	11.2	%	9.9	%

Three Months Ended June 30, 2006 Compared with Three Months Ended June 30, 2005

Net Sales. Net sales increased by $17.8 million, or 17.1%, from $104.1 million for the three months ended June 30, 2005 to $121.9 million for the same period of 2006. Each division contributed to the strong growth in sales with Mid Continent making up over half of the overall increase in net sales, StarMark making up just over a quarter, and UltraCraft making up the remainder. As the housing market grew, Norcraft has been able to capture a larger share of the market in each division, due to our ability to deliver innovative, quality products on time. We also implemented price increases which contributed approximately 3.0% of the total increase in sales.

Cost of Sales. Cost of sales increased by $9.7 million, or 13.2%, from $72.8 million for the three months ended June 30, 2005 to $82.5 million for same period of 2006. The increase was primarily attributable to our increased sales volume. Cost of sales as a percentage of net sales decreased from 70.0% for the three months ended June 30, 2005 to 67.7% for the same period of 2006.

Gross Profit. Gross profit increased by $8.2 million, or 26.1%, from $31.2 million for the three months ended June 30, 2005 to $39.4 million for the same period of 2006. Gross profit as a percentage of net sales increased from 30.0% for the three months ended June 30, 2005 to 32.3% for the same period of 2006. Gross profit was positively impacted by production efficiencies and an increase in average selling price. This increase was partially offset by increased freight costs and material prices.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $4.0 million, or 24.1%, from $16.7 million for the three months ended June 30, 2005 to $20.7 million for the same period of 2006. Selling, general and administrative expenses were $3.3 million higher than the prior-year period because of increased sales and marketing expense to generate new customers, market our new products, and support our increased sales volume. The remaining increase in selling, general and administrative expenses was in administrative costs that indirectly support our increased sales volume. Selling, general and administrative expenses as a percentage of net sales increased from 16.0% for the three months ended June 30, 2005 to 17.0% for the same period of 2006.

Income from Operations. Income from operations increased by $4.1 million, or 28.5%, from $14.6 million for the three months ended June 30, 2005 compared to $18.7 million for the same period of 2006. The increase in income from operations was a result of factors described above. Income from operations as a percentage of net sales increased from 14.0% for the three months ended June 30, 2005 to 15.3% for the same period of 2006.

Interest, Amortization of Deferred Financing Fees, and Other Expenses. Holdings’ consolidated interest, amortization of deferred financing fees, and other expenses decreased by $0.7 million, or 9.6%, from $6.7 million for the three months ended June 30, 2005 to $6.0 million for the same period of 2006. Interest expense decreased $0.3 million from decreased indebtedness, due to the early payment of the term loan in 2005. The average debt balances were $244.9 million and $255.9 during the three months ended June 30, 2006 and 2005, respectively. The borrowing rates on the Senior Subordinated Notes and the Senior Notes are fixed at 9.0% and 9.75%, respectively. Amortization of deferred financing charges decreased $0.3 million during the three months ended June 30, 2006 and compared to the three months ended June 30, 2005, due to the accelerated pay-down of the term note in 2005. Interest, amortization of deferred financing fees, and other expenses for Holdings as a percentage of net sales decreased from 6.4% for the three months ended June 30, 2005 to 4.9% for the same period of 2006.

Interest, amortization of deferred financing fees, and other expenses decreased for Norcraft by $0.8 million, or 18.9%, from $4.5 million for the three months ended June 30, 2005 to $3.7 million for the same period of 2006. Interest, amortization of deferred financing fees, and other expenses for Norcraft as a percentage of net sales decreased from 4.4% for the three months ended June 30, 2005 to 3.0% for the same period of 2006.

Net Income. Holdings’ net income increased $4.8 million from $7.9 million for the three months ended June 30, 2005 to $12.7 million for the same period of 2006, for the reasons described above. Net income as a percentage of net sales for Holdings increased from 7.6% for the three months ended June 30, 2005 to 10.4% for the same period of 2006.

Norcraft’s net income increased $5.0 million from $10.0 million for the three months ended June 30, 2005 to $15.0 million for the same period of 2006, for the reasons described above. Net income as a percentage of net sales for Norcraft increased from 9.6% for the three months ended June 30, 2005 to 12.3% for the same period of 2006.

Six Months Ended June 30, 2006 Compared with Six Months Ended June 30, 2005

Net Sales. Net sales increased by $34.5 million, or 17.6%, from $196.0 million for the six months ended June 30, 2005 to $230.5 million for the same period of 2006. Each division contributed to the strong growth in sales with Mid Continent making up over half of the overall increase in net sales, StarMark making up over a quarter, and UltraCraft making up the remainder. As the housing market grew, Norcraft has been able to capture a larger share of the market in each division, due to our ability to deliver innovative, quality products on time. During the period, we implemented price increases which contributed approximately 2.0% of the total increase in sales.

Cost of Sales. Cost of sales increased by $23.1 million, or 17.0%, from $135.9 million for the six months ended June 30, 2005 to $159.0 million for same period of 2006. The increase was primarily attributable to our increased sales volume. Cost of sales as a percentage of net sales decreased from 69.3% for the six months ended June 30, 2005 to 69.0% for the same period of 2006.

Gross Profit. Gross profit increased by $11.4 million, or 19.0%, from $60.1 million for the six months ended June 30, 2005 to $71.5 million for the same period of 2006. Gross profit as a percentage of net sales increased from 30.7% for the six months ended June 30, 2005 to 31.0% for the same period of 2006. Gross profit was positively impacted by production

efficiencies and an increase in average selling price. This increase was partially offset by increased freight costs and material prices. Effective on January 1, 2005, Norcraft changed its vacation policy. This change resulted in adjustments which increased gross profit by approximately $1.3 million, and increased gross profit as a percent of net sales by approximately 1.0% for the six months ended June 30, 2005.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $6.8 million, or 21.5%, from $31.7 million for the six months ended June 30, 2005 to $38.5 million for the same period of 2006. Effective on January 1, 2005, Norcraft changed its vacation policy. This change resulted in adjustments which decreased selling, general and administrative expenses by approximately $0.4 million for the six months ended June 30, 2005. Selling, general and administrative expenses were $5.1 million higher than the prior-year period because of increased sales and marketing expense to generate new customers, market our new products, and support our increased sales volume. The remaining increase in selling, general and administrative expenses was in administrative costs that indirectly support our increased sales volume. Selling, general and administrative expenses as a percentage of net sales increased from 16.2% for the six months ended June 30, 2005 to 16.7% for the same period of 2006.

Income from Operations. Income from operations increased by $4.6 million, or 16.3%, from $28.4 million for the six months ended June 30, 2005 compared to $33.0 million for the same period of 2006. The increase in income from operations was a result of factors described above. Income from operations as a percentage of net sales decreased from 14.5% for the six months ended June 30, 2005 to 14.3% for the same period of 2006.

Interest, Amortization of Deferred Financing Fees, and Other Expenses. Holdings’ consolidated interest, amortization of deferred financing fees, and other expenses decreased by $1.2 million, or 9.0%, from $13.3 million for the six months ended June 30, 2005 to $12.1 million for the same period of 2006. Interest expense decreased $0.6 million from decreased indebtedness, due to the early payment of the term loan in 2005. The average debt balances were $243.8 million and $258.5 during the six months ended June 30, 2006 and 2005, respectively. The borrowing rates on the Senior Subordinated Notes and the Senior Notes are fixed at 9.0% and 9.75%, respectively. Amortization of deferred financing charges decreased $0.6 million during the six months ended June 30, 2006 and compared to the six months ended June 30, 2005, due to the accelerated pay-down of the term note in 2005. Interest, amortization of deferred financing fees, and other expenses for Holdings as a percentage of net sales decreased from 6.8% for the six months ended June 30, 2005 to 5.2% for the same period of 2006.

Interest, amortization of deferred financing fees, and other expenses decreased for Norcraft by $1.6 million, or 17.9%, from $9.0 million for the six months ended June 30, 2005 to $7.4 million for the same period of 2006. Interest, amortization of deferred financing fees, and other expenses for Norcraft as a percentage of net sales decreased from 4.6% for the six months ended June 30, 2005 to 3.1% for the same period of 2006.

Net Income. Holdings’ net income increased $5.8 million from $15.1 million for the six months ended June 30, 2005 to $20.9 million for the same period of 2006, for the reasons described above. Net income as a percentage of net sales for Holdings increased from 7.7% for the six months ended June 30, 2005 to 9.1% for the same period of 2006.

Norcraft’s net income increased $6.2 million from $19.4 million for the six months ended June 30, 2005 to $25.6 million for the same period of 2006, for the reasons described above. Net income as a percentage of net sales for Norcraft increased from 9.9% for the six months ended June 30, 2005 to 11.2% for the same period of 2006.

Liquidity and Capital Resources

Our primary cash needs are working capital, capital expenditures, display cabinets, tax distributions, and debt service. We finance these cash requirements through internally-generated cash flow and, if necessary, funds borrowed under our credit facility.

Cash provided by operating activities was $32.2 million for the six months ended June 30, 2006, compared with $23.3 million for the same period of 2005, an increase of $8.9 million. The increase was primarily due to the increase in net income of $5.8 million, complimented by the change in operating liabilities of $2.7 million and offset by the change in operating assets of $1.0 million.

Cash used in investing activities was $6.8 million for the six months ended June 30, 2006, compared with $6.4 million for the same period of 2005, an increase of $0.4 million. Capital expenditures were $3.4 million for the six months ended June 30, 2006, compared with $3.3 million for the same period of 2005, an increase of $0.1 million. Additionally, expenditures for display cabinets were $3.5 million for the six months ended June 30, 2006, compared with $3.1 million for the same period of 2005, an increase of $0.4 million.

Cash used in financing activities was $8.5 million for the six months ended June 30, 2006, compared with $17.3 million used in the same period of 2005, a decrease of $8.8 million. This decrease was primarily due to prepayments on the term loan, which were $14.5 million for the six months ended June 30, 2005. The term loan was paid in full during 2005; therefore there were no term loan payments during the six months ended June 30, 2006. Additionally, the change in book overdrafts payable was a decrease of $1.7 million for the six months ended June 30, 2006, as compared to an increase of $1.5 million during the six months ended June 30, 2005.

We anticipate that the funds generated by operations and funds available under our new amended revolving credit facility will be sufficient to meet working capital requirements, make required member tax distributions, and to finance capital expenditures over the next several years. There can be no assurance, however, that our business will generate sufficient cash flow from operations, that anticipated net sales growth and operating improvements will be realized or that future borrowings will be available under our senior credit facility in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs.

Taxes; Distributions to our Limited Partners

We are a limited partnership. As such, our income is allocated to our limited partners for inclusion in their respective tax returns. Accordingly, no liability or provision for Federal income taxes and deferred income taxes attributable to our operations are included in our financial statements. We are subject to various state and local taxes.

Norcraft’s senior credit facility and the indenture governing the Senior Subordinated Notes significantly restrict Norcraft and its subsidiaries from paying dividends and otherwise transferring assets to Holdings. Norcraft may, however, make distributions to Holdings, subject to certain limitations, to permit it to make further distributions to its equity holders to pay taxes on our net income allocated to them. There was $7.5 million of tax distribution paid for the six months ended June 30, 2006.

Inflation; Seasonality

Our costs of sales are subject to inflationary pressures and price fluctuations of the raw materials we use. We have generally been able over time to recover the effects of inflation and price fluctuations through sales price increases.

Our sales have historically been moderately seasonal and have been strongest in April through October.

Item 3. Quantitative and Qualitative Disclosures of Market Risk

As of June 30, 2006, the Company had a $60.0 million revolving credit facility which has a variable rate of interest and has the potential to expose the Company to fluctuations in the interest rate market. However, as of June 30, 2006, there were no borrowings under this facility. We have no interest rate swap agreements. The available credit under this revolver is reduced by any outstanding letters of credit. Approximately $5.0 million of letters of credit were outstanding at June 30, 2006.

Item 4. Controls and Procedures

The Company’s management, with the participation of the Company’s Principal Executive Officer and Chief Accounting Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2006. Based on that evaluation, the Company’s Principal Executive Officer and Chief Accounting Officer concluded that the Company’s disclosure controls and procedures as of June 30, 2006 were effective to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

There have not been any changes in Holdings’ internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act during Holdings’ fiscal quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, Holdings’ internal control over financial reporting.

Limitations on the Effectiveness of Controls

Holdings’ internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Holdings’ internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of Holdings’ are being made only in accordance with authorizations of management and directors and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of Holdings’ assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

During the ordinary course of business, we have become and may in the future become subject to pending and threatened legal actions and proceedings. All of the current legal actions and proceedings that we are a party to are of an ordinary or routine nature incidental to our operations, the resolution of which should not have a material adverse effect on our financial condition, results of operations or cash flows. We are not currently a party to any product liability claims. The majority of the pending legal proceedings involve claims for workers compensation. These claims are generally covered by insurance, but there can be no assurance that our insurance coverage will be adequate to cover any such liability.

Item 6. Exhibits


31.1		Certification by Mark Buller pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification by Leigh Ginter pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification by Mark Buller pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification by Leigh Ginter pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NORCRAFT HOLDINGS, L.P.

(Registrant)

NORCRAFT COMPANIES, L.P.

(Registrant)


/s/ Mark Buller		/s/ Leigh Ginter
Mark Buller		Leigh Ginter
Chief Executive Officer		Chief Financial Officer

Date: August 14, 2006 Signing on behalf of the Registrant and as principal Officer		Date: August 14, 2006 Signing on behalf of the Registrant and as principal accounting officer

Norcraft Holdings, L.P. 10-Q