UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ___________ To _____________
Commission File Number 2-18868
KNAPE & VOGT MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)
Michigan 38-0722920
(State of Incorporation) (IRS Employer Identification No.)
2700 Oak Industrial Drive, NE
Grand Rapids, Michigan 49505
(Address of principal executive offices) (Zip Code)
(616) 459-3311
(Telephone Number)
Indicate by check mark whether the registrant (1) has 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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO ______
2,445,844 common shares were outstanding as of January 29, 1999.
2,249,290 Class B common shares were outstanding as of January 29, 1999.
The Exhibit Index appears on page 14.
<PAGE>
KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets
--December 31, 1998 and June 30, 1998..................................2
Condensed Consolidated Statements of Income
--Six Months and Three Months Ended December 31, 1998 and 1997.........3
Condensed Consolidated Statements of Cash Flows
--Six Months Ended December 31, 1998 and 1997..........................4
Notes to Condensed Consolidated Financial Statements.................5-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................7-10
Item 3. Quantitative and Qualitative Disclosures About Market Risk......11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................12
SIGNATURES....................................................................13
EXHIBIT INDEX.................................................................14
1
<PAGE>
KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
(Unaudited) (Audited)
Dec. 31, 1998 June 30, 1998
----------------- -----------------
Assets
<S> <C> <C>
Current assets
Cash and equivalents $ 2,348,083 $ 3,057,158
Accounts receivable - net 22,036,426 25,677,043
Inventories 13,271,547 12,808,532
Prepaid expenses and other 2,416,861 2,882,694
Net assets held for sale - 18,648,000
----------------- -----------------
Total current assets 40,072,917 63,073,427
----------------- -----------------
Property, plant and equipment 63,926,292 60,901,901
Less accumulated depreciation 29,077,400 24,247,181
----------------- -----------------
Net property, plant and equipment 34,848,892 36,654,720
----------------- -----------------
Other assets 4,173,944 4,304,940
----------------- -----------------
$ 79,095,753 $ 104,033,087
================= =================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 12,354,067 $ 17,765,610
Other accrued liabilities 6,507,871 7,031,650
---------------- ----------------
Total current liabilities 18,861,938 24,797,260
---------------- ----------------
Long-term debt 15,800,000 9,700,000
Deferred income taxes and other long-term liabilities 8,240,493 7,779,153
---------------- ----------------
Total liabilities 42,902,431 42,276,413
---------------- ----------------
Stockholders' Equity
Common stock 9,390,268 11,871,250
Additional paid-in capital 9,515,508 33,724,990
Restricted stock grants (118,125) -
Accumulated other comprehensive income:
Foreign currency translation adjustment (157,453) -
Minimum supplemental executive retirement plan
liability adjustment (447,189) -
Retained earnings 18,010,313 16,160,434
---------------- ----------------
Total stockholders' equity 36,193,322 61,756,674
---------------- ----------------
$ 79,095,753 $ 104,033,087
================ ================
</TABLE>
See accompanying notes.
2
<PAGE>
KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
For the Six Months Ended For the Three Months Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1998 Dec. 31, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 80,037,720 $ 87,336,259 $ 36,359,076 $ 42,677,957
Cost of sales 61,490,520 65,588,877 27,705,780 32,434,480
---------------- ---------------- ---------------- --------------
Gross profit 18,547,200 21,747,382 8,653,296 10,243,477
Selling and administrative expenses 12,899,773 13,981,742 6,691,504 6,767,474
Impairment loss 600,000 - 600,000 -
---------------- ---------------- ---------------- --------------
Operating income 5,047,427 7,765,640 1,361,792 3,476,003
Other expenses (income) (330,727) 746,404 (44,380) 323,793
---------------- ---------------- ---------------- --------------
Income from continuing operations
before income taxes 5,378,154 7,019,236 1,406,172 3,152,210
Income taxes - continuing operations 1,831,000 2,532,000 381,000 1,135,000
---------------- ---------------- ---------------- --------------
Income from continuing operations 3,547,154 4,487,236 1,025,172 2,017,210
Loss from discontinued operation,
net of taxes - (93,639) - (294,525)
---------------- ---------------- ---------------- --------------
Net income $ 3,547,154 $ 4,393,597 $ 1,025,172 $ 1,722,685
================ ================ ================ ==============
Basic earnings per share:
Income from continuing operations $ .66 $ .76 $ .21 $ .34
Loss from discontinued operation - (.02) - (.05)
---------------- ---------------- ---------------- --------------
Net income per share $ .66 $ .74 $ .21 $ .29
================ ================ ================ ==============
Weighted average shares outstanding 5,377,363 5,915,080 4,803,596 5,915,666
Diluted earnings per share:
Income from continuing operations $ .66 $ .75 $ .21 .34
Loss from discontinued operation - (.01) - (.05)
---------------- ---------------- ---------------- --------------
Net income per share $ .66 $ .74 $ .21 $ .29
================ ================ ================ ==============
Weighted average shares outstanding 5,395,805 5,949,990 4,814,648 5,951,026
Cash dividend - common stock $ .33 $ .33 $ .165 $ .165
Cash dividend - Class B common stock $ .30 $ .30 $ .15 $ .15
</TABLE>
See accompanying notes.
3
<PAGE>
KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
Six Months Ended
Dec. 31, 1998 Dec. 31, 1997
--------------- ---------------
<S> <C> <C>
Operating Activities:
Net income $ 3,547,154 $ 4,393,597
Non-cash items:
Depreciation and amortization 3,138,106 3,826,709
Deferred income taxes (284,295) 155,000
Other long-term liabilities 176,583 (210,597)
Impairment loss 600,000 -
Stock grants earned 118,125 -
Changes in operating assets and liabilities:
Accounts receivable 3,550,016 119,686
Inventories (463,015) (2,477,121)
Net assets of discontinued operation 141,448
Other current assets 1,150,238 (297,528)
Accounts payable and accrued expenses (6,214,089) 7,152,629
Net cash provided by operating activities 5,318,823 12,803,823
------------ -----------
Investing Activities:
Additions to property, plant and equipment (1,316,005) (2,673,543)
Sale of property, plant and equipment - 1,705
Sale of Hirsh subsidiary 18,129,569 -
Payments for other assets (202,825) 807,138
Net cash provided by (used for) investing activities 16,610,739 (1,864,700)
------------ -----------
Financing Activities:
Cash dividends paid (1,697,275) (1,876,663)
Proceeds from issuance of common stock 569,943 206,771
Repurchase and retirement of common stock (27,544,264) -
Borrowings (payments) on long-term debt 6,100,000 (10,200,000)
Net cash used for financing activities (22,571,596) (11,869,892)
------------ ------------
Effect of Exchange Rate Changes on Cash (67,041) 8,607
------------ ------------
Net Decrease in Cash and Equivalents (709,075) (922,162)
Cash and equivalents, beginning of year 3,057,158 1,146,546
------------ ------------
Cash and equivalents, end of period $ 2,348,083 $ 224,384
============ ============
Cash Paid During the Period - interest $ 295,792 $ 756,628
- income taxes $ 2,359,000 $ 2,091,110
</TABLE>
See accompanying notes.
4
<PAGE>
KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Financial Statement Preparation
The accompanying unaudited condensed consolidated financial statements and
related notes have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. The information furnished reflects all
adjustments which are, in the opinion of management, necessary for a fair
statement of the results of operations and consist of only normal recurring
adjustments. Interim results are not necessarily indicative of the results for
the year-end and are subject to year-end adjustments, and audit by independent
public accountants. The balance sheet at June 30, 1998, has been taken from the
audited financial statements at that date. The condensed consolidated financial
statements and notes should be read in conjunction with the Company's 1998
annual report.
Note 2 - Common Stock and Per Share Information
Income per share is determined based on the weighted average number of shares
outstanding during each period. The numerator was the same for the calculation
of both basic and diluted earnings per share. The denominator was increased in
the diluted computation due to the recognition of stock options as common stock
equivalents.
Common stock is $2 par - shares authorized 6,000,000 of common stock and
4,000,000 of Class B common stock.
Note 3 - Inventories
Inventories are valued at the lower of FIFO (first-in, first-out) cost or
market. Inventories are summarized as follows:
<TABLE>
Dec. 31, 1998 June 30, 1998
------------- -------------
<S> <C> <C>
Finished products $ 8,057,694 $ 7,369,923
Work in process 1,907,568 1,719,891
Raw materials 3,306,285 3,718,718
---------- --------------
Total $ 13,271,547 $ 12,808,532
============ ==============
</TABLE>
Note 4 - New Accounting Standards Not Yet Adopted
Statement of Accounting Standards (SFAS) No. 131, "Disclosures About Segments of
an Enterprise and Related Information" will be adopted by the Company in the
fourth quarter of fiscal 1999. The statement establishes standards for the way
that public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement
Benefits" will be adopted by the Company in the fourth quarter of fiscal 1999.
The statement revises existing disclosure requirements for pension and other
postretirement benefit plans. Its intent is to improve the understandability of
benefit disclosures, to eliminate certain requirements that the Financial
Accounting Standards Board believes are no longer necessary and to standardize
footnote disclosures.
The Company is currently evaluating the impact, if any, that SFAS No. 131 and
SFAS No. 132 may have on its financial statements.
5
<PAGE>
Effective for fiscal years beginning after June 15, 1999, the Company must adopt
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
The statement requires companies to recognize all derivative contracts as either
assets or liabilities in the balance sheet and to measure them at fair value.
Then based on certain conditions, it is determined whether the derivative is
considered to be a hedge instrument, which determines when the resulting gain or
loss on the derivative is recognized. Historically, the Company has not entered
into derivative contracts either to hedge existing risks or for speculative
purposes. Accordingly, the Company does not expect adoption of this new standard
to affect its financial statements.
Note 5 - Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income", issued in June 1997, was adopted
by the Company in the first quarter ended September 30, 1998. This statement
requires that all components of comprehensive income and total comprehensive
income be reported in one of the following: a statement of income and
comprehensive income, a statement of comprehensive income or a statement of
stockholders' equity. Comprehensive income is comprised of net income and all
changes to stockholders' equity, except those due to investments by owners and
distributions to owners.
Comprehensive income and its components consist of the following:
<TABLE>
Six Months Ended December 31, Three Months Ended December 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 3,547,154 $ 4,393,597 $ 1,025,172 $ 1,722,685
Other comprehensive income:
Foreign currency translation adjustment (157,453) (373,370) (64,817) (368,847)
Minimum SERP liability adjustment (447,189) - (447,189) -
---------------- --------------- --------------- ---------------
Comprehensive income $ 2,942,512 $ 4,020,227 $ 513,166 $ 1,353,838
=============== =============== =============== ===============
</TABLE>
Note 6 - Sale of The Hirsh Company
On September 1, 1998, the Company sold The Hirsh Company (Hirsh), a wholly-owned
subsidiary. This resulted in a pre-tax loss of $11,800,000, which was included
in the June 30, 1998, financial results. The loss includes the write-off of the
unamortized balance of goodwill recorded in connection with the purchase of
Hirsh. In connection with the sale, the Company recognized an additional tax
cost of $1,000,000, resulting in a total loss related to the sale of Hirsh of
$12,800,000.
Note 7 - Stock Repurchase
On September 1, 1998, the Company announced its intention to purchase up to
1,200,000 shares of the Company's common stock pursuant to a Dutch Auction
self-tender offer at a price range of $19 to $22 per share. The Board of
Directors also approved the purchase in the open market or in privately
negotiated transactions, following the completion of the Dutch Auction, of
shares of common stock in an amount which when added to the number of shares of
common stock purchased in the Dutch Auction would equal 1,350,000. The Dutch
Auction was concluded on October 7, 1998, with the purchase of 1,230,784 shares
at a price of $21 per share. An additional 58,200 shares were purchased in the
second quarter of fiscal 1999 for approximately $1,069,000.
At the January 22, 1999 Board of Directors meeting, the Board approved another
400,000 shares for the stock repurchase program.
Note 8 - Impairment Loss
During the second quarter of fiscal 1999, the Company decided to re-deploy
certain production assets to product lines considered to have higher growth
potential. This resulted in the write-down of the tooling ($.6 million pre-tax)
and excess inventory ($.4 million pre-tax, charged directly to cost of sales)
related to the discontinued product lines.
6
<PAGE>
KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed in this section include forward-looking statements
involving risks and uncertainties. When used in this document, the words
"believes," "expected," "anticipates," "goal," and similar expressions identify
forward-looking statements. Forward-looking statements include, but are not
limited to, statements concerning future improvements in gross profit, and the
expected ability of the Company and its key customers, dealers and suppliers to
successfully manage Year 2000 issues. Such statements are subject to certain
risks and uncertainties which would cause actual results to differ materially
from those expressed or implied by such forward-looking statements. Readers are
cautioned not to place undue reliance on those forward-looking statements which
speak only as of the date of this report.
RESULTS OF OPERATIONS
Net Sales
The following table indicates the Company's sales (in millions) and percentage
of total sales by product category for the six month and three month periods
ended December 31, 1998 and 1997:
<TABLE>
Six Months Ended December 31, Three Months Ended December 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shelving systems $31.4 39.2% $41.1 47.1% $12.0 32.9% $19.4 45.4%
Drawer slides 36.3 45.3% 31.9 36.5% 18.7 51.3% 16.3 38.2%
Hardware 12.3 15.5% 14.3 16.4% 5.7 15.8% 7.0 16.4%
------ ------ ----- ------ ----- ------ ------ ------
Total $80.0 100.0% $87.3 100.0% $36.4 100.0% $42.7 100.0%
====== ====== ===== ====== ===== ====== ====== ======
</TABLE>
Net sales for the second quarter and first six months of fiscal 1999 decreased
$6.3 million and $7.3 million, respectively, from the same periods in the prior
year. The decrease in net sales was attributable to the sale of the Hirsh
Company in September 1998. This was also the reason for the significant decline
in shelving systems during fiscal 1999. Excluding the contribution of the Hirsh
sales in the prior year, second quarter fiscal 1999 sales increased 7.4 percent
and net sales for the first six months of fiscal 1999 increased 6.0 percent
compared to the same periods in fiscal 1998.
The overall sales growth as well as the growth in drawer slides was attributable
to the rapid growth in the precision drawer slide business. Sales of precision
slides increased approximately 35 percent in the second quarter of fiscal 1999
compared to the second quarter of fiscal 1998.
Gross Profit
Gross profit, as a percentage of net sales, was 23.8% for the second quarter and
23.2 % for the first six months of fiscal 1999 compared to 24.0% and 24.9%,
respectively, for the same periods in the prior year. The gross profit
improvement realized in the second quarter of fiscal 1999 reflects the Company's
focus on its manufacturing process combined with its continued evaluation of
customer and product line profitability. As a result of the evaluation process,
the Company recorded a reserve of $400,000 for potentially obsolete inventory
related to certain product lines it has decided to discontinue.
Operating Expenses
Selling and administrative expenses, as a percentage of net sales, for the
second quarter of fiscal 1999 increased from 15.9% in the same period in the
prior year to 18.4%. For the six month period ended December 31, 1998, selling
and general administrative expenses, as a percentage of net sales, of 16.1%
remained comparable to the prior year of 16.0%. The increase in the second
quarter was primarily attributable to severance payments and costs associated
with the Company's strategic planning effort.
As a result of the decision to re-deploy certain production assets, the Company
also recorded an impairment loss of $600,000 in the second quarter of fiscal
1999. This loss reflects the write-down of the related tooling assets to their
estimated fair value.
7
<PAGE>
KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Other Expenses/(Income)
Interest expense was $188,613 for the quarter and $305,778 for the six months
ended December 31, 1998, compared to $307,921 and $717,112, respectively, for
the same periods in the prior year. The decrease in interest expense was
attributable to the fact that the Company has reduced its average borrowing
level during fiscal 1999.
Other income was $232,993 for the second quarter and $636,505 for the first six
months of fiscal 1999. This compares to other expense of $15,872 and $29,292,
respectively, for fiscal 1998. The income recognized in fiscal 1999 reflects
interest income received on Michigan Single Business tax refunds and two patent
infringement settlements.
Income Taxes
The effective tax rates for the quarter and six months ended December 31, 1998,
were 27.1% and 34.0% compared with the rates of 36.0% and 36.1%, respectively,
for the same periods in the prior year. The decrease was primarily due to
foreign tax credits recognized in the second quarter of fiscal 1999.
Income from Continuing Operations
Income from continuing operations was $1,025,172 for the second quarter and
$3,547,154 for the first six months of 1999. This compares to $2,017,210 and
$4,487,236, respectively, for the same periods in the prior year.
Loss from Discontinued Operation
The second quarter and first six months of fiscal 1999 do not include any
income, or loss, recorded on discontinued operation, due to the fact that the
discontinued operation, Roll-it, was sold in fiscal 1998. Loss from discontinued
operation for the second quarter of fiscal 1998 was $294,525 or $.05 per diluted
share and for the first six months of fiscal 1998 was $93,639 or $.01 per
diluted share.
Net Income
For the quarter ended December 31, 1998, net income was $1,025,172 or $.21 per
diluted share compared to $1,722,685 or $.29 per diluted share for the second
quarter of last year. Net income of $3,547,154, or $.66 per diluted share was
recorded for the first six months of fiscal 1999 compared to $4,393,597, or $.74
for the same period in the prior year. The impairment loss and related inventory
obsolescence reserve recorded in the second quarter of fiscal 1999 were the
primary reasons for the decline on both a quarterly and year to date basis.
Due to the impact that the repurchase of shares as part of the Dutch Auction
tender offer had on the weighted average shares outstanding computation, the
quarterly earnings per diluted share for fiscal 1999 of $.42 in the first
quarter and $.21 in the second quarter do not equal the six month earnings per
diluted share of $.66.
Liquidity and Capital Resources
Net cash from operating activities for the first six months provided $5,318,823
as compared to $12,803,823 for the first six months of fiscal 1998. In fiscal
1999, the current liabilities are substantially lower than at June 30, 1998, due
to two factors. First, in the prior year, the Company adopted a more aggressive
payment policy with its vendors which resulted in a higher accounts payable
balance and a significant one-time increase in cash flows. Second, even though
the Company is still utilizing the more aggressive payment policy with its
vendors, payables have decreased in fiscal 1999 due to the sale of the Hirsh
Company.
8
<PAGE>
KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Capital expenditures totaled $1,316,005 for the six months ended December 31,
1998, compared to $2,673,543 for the six months ended December 31, 1997. Due to
the strategic planning efforts currently underway at the Company, it is
difficult for management to predict the anticipated level of capital
expenditures for the remainder of the year, however, there are no significant
capital commitments existing at December 31, 1998. The strategic planning
efforts should be substantially completed by the end of the third quarter of
fiscal 1999. In fiscal 1999, the Company recorded $18,129,569 of proceeds from
the sale of the Hirsh subsidiary. The related loss was recorded in fiscal 1998.
In early October 1998, the Company completed the Dutch Auction tender offer with
the repurchase of 1,230,784 shares of stock at $21 per share. Through the end of
the second quarter of fiscal 1999, the Company repurchased another 58,200 shares
on the open market. For the six months ended December 31, 1998, the Company has
returned $29.2 million to its shareholders through the repurchase of common
stock and issuance of dividends. At the January 22, 1999 meeting, the Board
approved another 400,000 shares for the stock repurchase program.
The Company has been able to successfully fund these repurchases while still
maintaining a long-term debt balance of $15.8 million at December 31, 1998. This
compares to a long-term debt balance of $18.8 million one year ago and $9.7
million at June 30, 1998. The continued strong cash flows from operations of
$5.3 million for the first six months of fiscal 1999 and the cash received from
the sale of the Hirsh Company have enabled KV to reduce long-term debt when
compared to the same period in the prior year and still return a significant
amount of cash to its shareholders. The increase from the June 30, 1998 balance
reflects amounts borrowed to fund the Dutch Auction tender offer.
On September 30, 1998, the Company filed a registration statement for a Stock
Dividend Sale Plan and announced its intention to convert the quarterly cash
dividends to quarterly stock dividends beginning in the third quarter of fiscal
1999. At the January 22, 1999 meeting, the Board deferred a decision on whether
to authorize the replacement of the quarterly cash dividends with quarterly
stock dividends until fiscal 2000. The Board intends to further evaluate the
potential benefits of quarterly stock dividends before proceeding.
Anticipated cash flow from operations and available balances on the revolving
credit line will be utilized to fund working capital, capital expenditures and
dividend payments.
Year 2000
The Year 2000 issue is the result of computer systems that use two digits rather
than four to define the applicable year, which may prevent such systems from
accurately processing dates ending in the year 2000 and after. This could result
in system failures or in miscalculations, causing disruption of operations,
including, but not limited to, an inability to process transactions, to send and
receive electronic data, or to engage in routine business activities and
operations.
In 1995, the Company established a Year 2000 task force for Information
Technology ("IT") to develop and implement a Year 2000 readiness program. The
Company has developed a Year 2000 readiness plan, and has completed the audit,
assessment and scope phases of its plan. The Company has completed an inventory
of the software applications that it uses. The Company has also installed its
Corporate Information System software at its subsidiaries to improve efficiency
and to facilitate Year 2000 compliance. The Company estimates that the readiness
program phase is approximately 76% complete for the Company's IT systems. The
Company's readiness program includes installing software releases designed to
cause the software to be Year 2000 compliant. The Company is in the process of
testing its IT systems for Year 2000 compliance, and will continue testing
activities in 1999.
In addition, in 1997 the Company began evaluating non-IT systems such as
imbedded chips in production equipment and personal computer hardware and
software. With respect to these non-IT systems, the company has completed the
audit phase, and the assessment and scope phases are approximately 60% complete.
The company is presently in the process of testing and implementation, and is
upgrading its non-IT systems to become Year 2000 compliant. The Company's goal
is to complete the remediation of non-IT systems by June 30, 1999.
9
<PAGE>
KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Finally, the Company has had formal communications with its significant
customers, vendors and freight companies concerning Year 2000 compliance,
including electronic commerce. There can be no assurance that the systems of
other companies that interact with the Company will be sufficiently Year 2000
compliant so as to avoid an adverse impact on the Company's operations,
financial condition and results of operations. The Company does not believe that
its products and services involve any Year 2000 risks.
To date, the Company has spent approximately $720,000 on the Year 2000 issue and
expects to spend an additional $144,000 to complete this work.
The Company presently anticipates that it will complete its Year 2000 assessment
and remediation by December 31, 1999. However, there can be no assurance that
the Company will be successful in implementing its Year 2000 remediation plan
according to the anticipated schedule. In addition, the Company may be adversely
affected by the inability of other companies whose systems interact with the
Company to become Year 2000 compliant and by potential interruptions of utility,
communication or transportation systems as a result of Year 2000 issues.
Although the Company expects its internal systems to be Year 2000 compliant as
described above, the Company intends to prepare a contingency plan that will
specify what it plans to do if it or important external companies are not Year
2000 compliant in a timely manner. The Company has begun to prepare its
contingency plan.
10
<PAGE>
KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to market risks, which include changes in U.S. interest
rates and changes in foreign currency exchange rates as measured against the
U.S. dollar.
Interest Rate Risk -- The interest payable for the Company's revolving credit
agreement is principally between 40 and 50 basis points above the federal funds
rate and therefore affected by changes in market interest rates. However, the
Company has the option to pay the balance in full at any time without penalty.
As a result, the Company believes that the market risk is minimal.
Foreign Currency Risk -- The Company has a sales office located in Canada. Sales
are typically denominated in Canadian dollars, thereby creating exposures to
changes in exchange rates. The changes in the Canadian/U.S. exchange rate may
positively or negatively affect the Company's sales, gross margins, and retained
earnings. The Company attempts to minimize currency exposure risk through
working capital management. There can be no assurance that such an approach will
be successful, especially in the event of a significant and sudden decline in
the value of the Canadian dollar. The Company does not hedge against foreign
currency risk.
11
<PAGE>
KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months
ended December 31, 1998.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Knape & Vogt Manufacturing Company
(Registrant)
Date: February 10, 1999 /s/ Allan E. Perry
Allan E. Perry
President and
Chief Executive Officer
Date: February 10, 1999 /s/ Jack D. Poindexter
Jack D. Poindexter
Chief Financial Officer,
Treasurer and Secretary
13
<PAGE>
EXHIBIT INDEX
(27) Financial Data Schedule
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,348,083
<SECURITIES> 0
<RECEIVABLES> 22,483,107
<ALLOWANCES> 446,681
<INVENTORY> 13,271,547
<CURRENT-ASSETS> 40,072,917
<PP&E> 63,926,292
<DEPRECIATION> 29,077,400
<TOTAL-ASSETS> 79,095,753
<CURRENT-LIABILITIES> 18,861,938
<BONDS> 0
0
0
<COMMON> 9,390,268
<OTHER-SE> 26,803,054
<TOTAL-LIABILITY-AND-EQUITY> 79,095,753
<SALES> 80,037,720
<TOTAL-REVENUES> 80,037,720
<CGS> 61,490,520
<TOTAL-COSTS> 61,490,520
<OTHER-EXPENSES> 12,863,268
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 305,778
<INCOME-PRETAX> 5,378,154
<INCOME-TAX> 1,831,000
<INCOME-CONTINUING> 3,547,154
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,547,154
<EPS-PRIMARY> 0.66
<EPS-DILUTED> 0.66
</TABLE>
