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 January 1, 2000
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 ______
2,065,279 common shares were outstanding as of January 28, 2000.
2,188,928 Class B common shares were outstanding as of January 28, 2000.
The Exhibit Index appears on page 15.
<PAGE>
KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets
--January 1, 2000 and June 30, 1999 2
Condensed Consolidated Statements of Income
--Six Months and Three Months Ended January 1, 2000
and December 31, 1998 3
Condensed Consolidated Statements of Cash Flows
--Six Months Ended January 1, 2000 and December 31, 1998 4
Notes to Condensed Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT INDEX 15
2
<PAGE>
KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
(Unaudited) (Audited)
Jan. 1, 2000 June 30, 1999
---------------- ---------------
Assets
<S> <C> <C>
Current assets
Cash and equivalents $ 1,610,762 $ 1,621,002
Accounts receivable - net 20,006,284 18,930,039
Inventories 13,695,285 13,149,649
Prepaid expenses and other 2,076,447 2,008,809
---------------- ----------------
Total current assets 37,388,778 35,709,499
---------------- ----------------
Property, plant and equipment 70,517,887 66,656,411
Less accumulated depreciation 33,850,786 31,357,471
---------------- ----------------
Net property, plant and equipment 36,667,101 35,298,940
---------------- ----------------
Goodwill 5,100,890 575,433
Other assets 3,058,338 3,476,117
---------------- ----------------
$ 82,215,107 $ 75,059,989
================ ================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 10,538,585 $ 9,129,514
Other accrued liabilities 9,011,376 8,444,285
---------------- ----------------
Total current liabilities 19,549,961 17,573,799
---------------- ----------------
Long-term debt 20,770,000 17,700,000
Deferred income taxes and other long-term liabilities 8,076,426 8,027,405
---------------- ----------------
Total liabilities 48,396,387 43,301,204
---------------- ----------------
Stockholders' Equity
Common stock (Common - 2,074,964 and 2,073,148
shares issued, Class B common -
2,188,928 and 2,238,227 shares issued,
Preferred - unissued) 8,527,774 8,622,750
Additional paid-in capital 3,696,512 4,409,415
Accumulated other comprehensive income:
Foreign currency translation adjustment 7,353 (29,983)
Minimum supplemental executive retirement plan
liability adjustment (449,385) (448,623)
Retained earnings 22,036,466 19,205,226
---------------- ----------------
Total stockholders' equity 33,818,720 31,758,785
---------------- ----------------
$ 82,215,107 $ 75,059,989
================ ================
</TABLE>
See accompanying notes.
3
<PAGE>
KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
For the Six Months Ended For the Three Months Ended
------------------------ --------------------------
Jan. 1, 2000 Dec. 31, 1998 Jan. 1, 2000 Dec. 31, 1998
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales $ 71,486,514 $ 80,037,720 $ 35,798,890 $ 36,359,076
Cost of sales 52,169,347 61,490,520 25,875,233 27,705,780
-------------- --------------- -------------- ---------------
Gross profit 19,317,167 18,547,200 9,923,657 8,653,296
Selling and administrative expenses 12,166,141 12,899,773 6,268,392 6,691,504
Impairment loss - 600,000 - 600,000
-------------- --------------- -------------- ---------------
Operating income 7,151,026 5,047,427 3,655,265 1,361,792
Other expenses (income) 689,871 (330,727) 371,922 (44,380)
-------------- --------------- -------------- ---------------
Income before income taxes 6,461,155 5,378,154 3,283,343 1,406,172
Income taxes 2,286,000 1,831,000 1,153,000 381,000
-------------- --------------- -------------- ---------------
Net income $ 4,175,155 $ 3,547,154 $ 2,130,343 $ 1,025,172
============== =============== ============== ===============
Basic earnings per share:
Net income per share $ .98 $ 0.66 $ .50 $ 0.21
============== =============== ============== ===============
Weighted average shares outstanding 4,280,508 5,377,363 4,269,500 4,803,596
Diluted earnings per share:
Net income per share $ .97 $ 0.66 $ .50 $ 0.21
============== =============== ============== ===============
Weighted average shares outstanding 4,284,573 5,395,805 4,272,441 4,814,648
Cash dividend - common stock $ .33 $ .33 $ .165 $ .165
Cash dividend - Class B common stock $ .30 $ .30 $ .15 $ .15
</TABLE>
See accompanying notes.
4
<PAGE>
KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
Six Months Ended
----------------
Jan. 1, 2000 Dec. 31, 1998
-------------- ---------------
<S> <C> <C>
Operating Activities:
Net income $ 4,175,155 $ 3,547,154
Non-cash items:
Depreciation and amortization 2,909,397 3,138,106
Deferred income taxes (177,000) (284,295)
Other long-term liabilities 232,024 176,583
Loss on disposal of fixed assets 3,947 -
Impairment loss - 600,000
Stock grants earned - 118,125
Changes in operating assets and liabilities:
Accounts receivable (385,370) 3,550,016
Inventories (294,933) (463,015)
Other current assets (35,660) 1,150,238
Accounts payable and accrued expenses 1,317,205 (6,214,089)
------------- --------------
Net cash provided by operating activities 7,744,765 5,318,823
------------- --------------
Investing Activities:
Additions to property, plant and equipment (3,522,911) (1,316,005)
Sale of Hirsh subsidiary - 18,129,569
Net cash paid for acquisition (5,267,877) -
Changes in other non-current assets 107,366 (202,825)
------------- --------------
Net cash provided by (used for) investing activities (8,683,422) 16,610,739
------------- --------------
Financing Activities:
Cash dividends paid (1,343,915) (1,697,275)
Proceeds from issuance of common stock 184,741 569,943
Repurchase and retirement of common stock (1,000,258) (27,544,264)
Borrowings on long-term debt 3,070,000 6,100,000
------------- --------------
Net cash provided by (used for) financing activities 910,568 (22,571,596)
------------- --------------
Effect of Exchange Rate Changes on Cash 17,849 (67,041)
------------- --------------
Net Decrease in Cash and Equivalents (10,240) (709,075)
Cash and equivalents, beginning of year 1,621,002 3,057,158
------------- --------------
Cash and equivalents, end of period $ 1,610,762 $ 2,348,083
============== ==============
Cash Paid During the Period - interest $ 664,351 $ 295,792
- income taxes $ 2,440,000 $ 2,359,000
</TABLE>
See accompanying notes.
5
<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, 1999, 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 1999
annual report.
Effective July 1, 1999, the Company adopted a 52- or 53-week fiscal year,
changing the year-end date from June 30 to the Saturday nearest the end of June.
Certain prior year information has been reclassified to conform to the current
year presentation.
Note 2 - Common Stock and Per Share Information
Common stock is $2 par - shares authorized 6,000,000 of common stock and
4,000,000 of Class B common stock.
The following table reconciles the numerators and denominators used in the
calculations of basic and diluted EPS for each of the periods presented:
<TABLE>
For the six months ended For the three months ended
------------------------ --------------------------
Jan. 1, 2000 Dec. 31, 1998 Jan. 1, 2000 Dec. 31, 1998
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Numerators:
Numerator for both basic and
diluted EPS, net income $4,175,155 $3,547,154 $2,130,343 $1,025,172
========== ========== ========== ==========
Denominators:
Denominator for basic EPS,
weighted-average common shares
outstanding 4,280,508 5,377,363 4,269,500 4,803,596
Potentially dilutive shares
resulting from stock option plans 4,065 18,442 2,941 11,052
---------- ---------- ---------- ----------
Denominator for diluted EPS 4,284,573 5,395,805 4,272,441 4,814,648
=========== ========== ========== ==========
</TABLE>
The following exercisable stock options were not included in the computation of
diluted EPS because the option prices were greater than average quarterly market
prices.
<TABLE>
Jan. 1, 2000 Dec. 31, 1998
----------------- ------------------
<S> <C> <C>
Exercise Price
$15.00 20,625 -
$15.50 20,000 -
$18.41 10,450 14,575
$20.00 10,000 17,500
</TABLE>
Note 3 - Inventories
Inventories are valued at the lower of FIFO (first-in, first-out) cost or
market.
6
<PAGE>
Inventories are summarized as follows:
<TABLE>
Jan. 1, 2000 June 30, 1999
------------ -------------
<S> <C> <C>
Finished products $ 8,429,521 $ 8,523,866
Work in process 1,730,034 1,634,904
Raw materials 3,535,730 2,990,879
-------------- --------------
Total $ 13,695,285 $ 13,149,649
============== ==============
</TABLE>
Note 4 - New Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounts Standard No. 133, Accounting for Derivative Instruments and
Hedging Activities. The statement requires companies to recognize all derivative
contracts on the balance sheet at fair value and establishes accounting rules or
changes in fair value that result from hedging activities. The statement is
effective for fiscal years beginning after June 15, 2000. Management is
currently evaluating the impact that the statement may have on its financial
statements.
Note 5 - Comprehensive Income
Comprehensive income is comprised of net income and all changes to stockholders'
equity, except those due to investments by stockholders.
Comprehensive income and its components consist of the following:
<TABLE>
For the Six Months Ended For the Three Months Ended
------------------------ --------------------------
Jan. 1, 2000 Dec. 31, 1998 Jan. 1, 2000 Dec. 31, 1998
-------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 4,175,155 $ 3,547,154 $ 2,130,343 $ 1,025,172
Other comprehensive income:
Foreign currency translation adjustment 37,336 (157,453) 38,352 (64,817)
Minimum SERP liability adjustment (762) (447,189) (830) (447,189)
------------- ------------- ------------- -------------
Comprehensive income $ 4,211,729 $ 2,942,512 $ 2,167,865 $ 513,166
============= ============= ============= =============
</TABLE>
Note 6 - Acquisition
On October 1, 1999, the Company acquired substantially all of the assets of Idea
Industries, Inc. ("Idea"). Idea designs, manufactures and markets ergonomic
office products, including adjustable keyboard mechanisms, keyboard and computer
mouse platforms, wrist rests and CPU holders. The acquisition was recorded using
the purchase method of accounting. Accordingly, the purchase price was allocated
to the assets acquired and liabilities assumed, based on the estimated fair
values at the date of the acquisition. The cost of the acquisition in excess of
net identifiable assets acquired has been recorded as goodwill and is being
amortized on a straight-line basis over 15 years. The financial statements
reflect the preliminary allocation of the purchase price. Goodwill associated
with the acquisition may be adjusted pending subsequent finalization of the
closing balance sheet.
The terms of the Idea acquisition agreement provide for additional consideration
to be paid if Idea's sales exceed certain targeted levels. The consideration, if
earned, will be paid in cash and recorded as additional purchase price. The
maximum amount of contingent consideration is $550,000 payable through 2001.
The results of the acquisition were not material to the Company's consolidated
operating results, therefore pro forma financial statements have not been
prepared.
7
<PAGE>
Note 7 - 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 included 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 8 - 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.
At each of the January 22, 1999, and the August 20, 1999, Board of Directors
meetings, the Board approved an additional 400,000 shares for the stock
repurchase program. Utilizing these Board authorizations, the Company has
purchased 59,648 shares during the first six months of fiscal 2000 for
approximately $1.0 million with the price per share ranging from approximately
$14.25 to $17.125.
8
<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," "expects," "anticipates," "goal," "think," "forecast," "project,"
and similar expressions identify forward-looking statements. Forward-looking
statements include, but are not limited to, statements concerning future revenue
growth, 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 that speak only as of the date of this report.
RESULTS OF OPERATIONS
Net Sales
The following table indicates the Company's net sales (in millions) and
percentage of total sales by product category for the six-month and three-month
periods ended January 1, 2000 and December 31, 1998:
<TABLE>
Six Months Ended Three Months Ended
---------------- ------------------
Jan. 1, Dec. 31, Jan. 1, Dec. 31,
2000 % 1998 % 2000 % 1998 %
-------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shelving systems $24.6 34.4% $31.4 39.2% $12.3 34.3% $12.0 32.9%
Drawer slides 33.6 47.0% 36.3 45.3% 16.7 46.7% 18.7 51.3%
Hardware/ Other 13.3 18.6% 12.3 15.5% 6.8 19.0% 5.7 15.8%
--------------------- --------------------- -------------------- ---------------------
Total $71.5 100.0% $80.0 100.0% $35.8 100.0% $36.4 100.0%
===================== ===================== ==================== =====================
</TABLE>
Net sales for the second quarter and first six months of fiscal 2000 decreased
$.6 million and $8.6 million, respectively, from the same periods in the prior
year. Overall, sales of precision drawer slides have increased during both the
second quarter and the six-month period, however, the increase has not been
sufficient to offset the decline in certain utility slides which were
discontinued during fiscal 1999, as they were unprofitable. In addition, most of
the sales decline for the six-month period i due to the contribution of The
Hirsh Company, which was sold in September 1998. Excluding its contribution, net
sales for the first six months of fiscal 1999 would have been $72.6 million.
Gross Profit
Gross profit, as a percentage of net sales, was 27.7% for the second quarter and
27.0% for the first six months of fiscal 2000 compared to 23.8% and 23.2%,
respectively, for the same periods in the prior year. The increase in gross
profit during fiscal 2000 reflects the Company's restructuring efforts,
including the sale of The Hirsh Company, and its emphasis on cost reduction
combined with continuous improvement in the manufacturing process. During the
second quarter of fiscal 1999, the Company recorded a $400,000 inventory
write-off for potentially obsolete inventory related to certain product lines
that were discontinued.
Operating Expenses
Selling and administrative expenses, as a percentage of net sales, for the
second quarter of fiscal 2000 decreased to 17.5% from 18.4% in the same period
in the prior year. The prior year included charges for severance payments and
costs associated with the Company's strategic planning effort. For the six-month
period ended January 1, 2000, selling and general administrative expenses, as a
percentage of net sales, increased to 17.0% from 16.1% in the prior year. The
prior year included Michigan Single Business Tax refunds of $852,460 pre-tax.
Fiscal 2000 expenses included higher levels of spending associated with the
launch of certain new products and additional development costs being incurred
to bring other new products to market.
9
<PAGE>
KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
As a result of the decision to re-deploy certain production assets, the Company
recorded an impairment loss of $600,000 in the second quarter of fiscal 1999.
This loss reflected the write-down of the related tooling assets to their
estimated fair value.
Other Expenses/(Income)
Interest expense was $362,513 for the quarter and $688,861 for the six months
ended January 1, 2000, compared with $188,613 and $305,778, respectively, for
the same periods in the prior year. The increase in interest expense was
attributable to the higher level of borrowings during fiscal 2000.
Other miscellaneous expense/(income) was $9,409 for the second quarter and
$1,010 for the first six months of fiscal 2000. This compares to $(232,993) and
$(636,505), respectively, for fiscal 1999. In fiscal 1999, the Company received
interest income on Michigan Single Business Tax refunds and two patent
infringement settlements.
Income Taxes
The effective tax rates for the quarter and six months ended January 1, 2000,
were 35.1% and 35.4% compared with the rates of 27.1% and 34.0%, respectively,
for the same periods in the prior year. The increase from the prior year was
primarily due to foreign tax credits recognized in the second quarter of fiscal
1999.
Net Income
For the quarter ended January 1, 2000, net income was $2,130,343 or $.50 per
diluted share compared to $1,025,172 or $.21 per diluted share for the second
quarter of last year. Net income of $4,175,155, or $.97 per diluted share was
recorded for the first six months of fiscal 2000 compared with $3,547,154, or
$.66 per diluted share for the same period in the prior year. Fiscal 1999
results included the impairment loss and related inventory obsolescence reserve
recorded in the second quarter, which decreased net income by $650,000 for both
the second quarter and the fiscal year. This charge was partially offset by
income recognized in the first quarter of fiscal 1999 on the Michigan Single
Business Tax refunds and the two patent settlements of approximately $895,000.
Liquidity and Capital Resources
Net cash from operating activities for the first six months of fiscal 2000
provided $7,744,765 compared with $5,318,823 for the first six months of fiscal
1999. Cash flows were positively impacted by the increase in accounts payable
and accrued expenses. The conversion to a 52-week fiscal year resulted in an
accounts payable increase due to timing of payments at the end of December. The
increase in accrued expenses reflected an increase in certain benefit-related
accruals such as pension and vacation.
Capital expenditures totaled $3,522,911 for the six months ended January 1,
2000, compared to $1,316,005 for the six months ended December 31, 1998. The
increased capital spending reflects investments in manufacturing technology,
manufacturing support systems and tooling for new products. At January 1, 2000,
the only significant capital expenditure commitment was for the new facility
being constructed at the Company's Indiana location. The commitment for the new
building approximated $1.3 million. Commitments for the related machinery and
equipment have not been signed. Capital expenditures during the remainder of the
fiscal year are anticipated to remain at approximately the same level as those
in the first six months.
10
<PAGE>
KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
On October 1, 1999, the Company acquired substantially all of the assets of Idea
Industries, Inc. ("Idea") for a purchase price of $5,267,877. Idea designs,
manufactures and markets ergonomic office products, including adjustable
keyboard mechanisms, keyboard and computer mouse platforms, wrist rests and CPU
holders. The acquisition was recorded using the purchase method of accounting.
Accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed, based on the estimated fair values at the date of the
acquisition. The cost of the acquisition in excess of net identifiable assets
acquired has been recorded as goodwill and is being amortized on a straight-line
basis over 15 years. The financial statements reflect the preliminary allocation
of the purchase price. Goodwill associated with the acquisition may be adjusted
pending subsequent finalization of the closing balance sheet.
The terms of the Idea acquisition agreement provide for additional consideration
to be paid if Idea's sales exceed certain targeted levels. The consideration, if
earned, will be paid in cash and recorded as additional purchase price. The
maximum amount of contingent consideration is $550,000 payable through 2001.
In fiscal 1999, the Company recorded $18,129,569 of proceeds from the sale of
the Hirsh subsidiary and the related loss in fiscal 1998.
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.
At each of the January 22, 1999, and the August 20, 1999, Board of Directors
meetings, the Board approved an additional 400,000 shares for the stock
repurchase program. Utilizing these Board authorizations, the Company has
purchased 59,648 shares during the first six months of fiscal 2000 for
approximately $1.0 million with the price per share ranging from approximately
$14.25 to $17.125. Since the beginning of the stock repurchase program in fiscal
1999, the Company has purchased 1,732,396 shares for approximately $34.4
million.
The long-term debt balance increased to $20,770,000 at January 1, 2000 compared
with $17,700,000 at June 30, 1999, and $15,800,000 at December 31, 1998. The
increase from June 30, 1999, reflects funds utilized to acquire Idea. The
increase from the December 31, 1998, balance reflects funds utilized for the
stock repurchase program.
Anticipated cash flows from operations and available balances on the revolving
credit line are expected to be adequate to fund working capital, capital
expenditures, stock repurchases and dividend payments.
Year 2000
In 1995, the Company established a Year 2000 task force for Information
Technology ("IT") which over the next four years developed and implemented a
Year 2000 Readiness Plan. As a part of the plan, the Company completed an
inventory of the software applications used by the Company and installed its
corporate information system software at its subsidiaries to improve efficiency
and facilitate Year 2000 compliance. The Company's Readiness Plan also included
installing software releases to cause software utilized by the Company to be
Year 2000 compliant. By December 1998, the Company had reached its goal to be
substantially completed with all Year 2000 compliance and all IT systems were
tested during 1999.
11
<PAGE>
KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
In addition, in preparation for Year 2000, the Company evaluated its non-IT
systems such as imbedded chips in production equipment and personal computer
hardware and software. Remediation of non-IT systems was substantially completed
by mid-1999 and during the remainder of the year, the Company finished the
process of testing and implementing the upgrade of its non-IT systems to become
Year 2000 compliant as new releases were available from software vendors.
In addition to reviewing its internal systems, the Company had formal
communications with its significant customers, vendors and freight companies
concerning Year 2000 compliance, including commerce.
The Company completed its Year 2000 assessment and remediation by December 31,
1999, after spending approximately $885,850 on the Year 2000 issue.
As of February 4, 2000, the Company has not experienced any materially adverse
effects on its operations as a result of the Year 2000 issue. Nevertheless,
there is no assurance that the systems of other companies that interact with the
Company are sufficiently Year 2000 compliant so as to avoid any future 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.
12
<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 the foreign
currency exchange rate as measured against the U.S. dollar and changes in U.S.
interest rates. The Company holds a derivative instrument in the form of an
interest rate swap, which is viewed as a risk management tool and is not used
for trading or speculative purposes. The intent of the interest rate swap is to
effectively fix the interest rate on part of the borrowings under the Company's
variable rate revolving credit agreement.
Quantitative disclosures relating to financial instruments and debt are included
in the tables below.
The following table provides information on the Company's fixed maturity
investments as of January 1, 2000, that are sensitive to changes in interest
rates. The table also presents the corresponding interest rate swap on this
debt. Since the interest rate swap effectively fixes the interest rate on the
notional amount of debt, changes in interest rates have no current effect on the
interest expense recorded by the Company on the portion of the debt covered by
the interest rate swap.
<TABLE>
Liability Amount Maturity Date
- --------- ------ -------------
<S> <C> <C>
Variable rate revolving credit
agreement $45 million November 1, 2004
First $20,000,000 at an interest rate
of 6.11% plus weighted average
credit spread of .625 %
Amounts in excess of $20,000,000 have
an interest rate of approximately 5.97%
Interest Rate Swap
- ------------------
Notional amount $20 million June 1, 2006
Pay fixed/Receive variable - 6.11%
Pay fixed interest rate - 6.25%
</TABLE>
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 through working capital
management. The Company does not hedge its exposure to translation gains and
losses relating to foreign currency net asset exposures.
13
<PAGE>
KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) Knape & Vogt Manufacturing Company's Annual Meeting of Shareholders
was held on October 15, 1999.
(b) Proxies were distributed by Knape & Vogt Manufacturing Company
pursuant to Regulation 14A under the Securities Exchange Act of 1934.
There was no opposition to management's nominees as listed in the
proxy statement and all nominees were elected.
The vote on the nominees was:
For Withheld
William R. Dutmers (1) (4) 18,678,863 587,635
Thomas A. Hilborn (2) (5) 1,673,876 30,662
Richard S. Knape (1) (4) 18,677,982 588,516
Robert J. Knape (2) (4) 18,675,738 590,760
Michael J. Kregor (1) (4) 18,635,254 631,244
Gregory Lambert (3) (5) 1,673,323 31,215
(1) Term expires in 2002.
(2) Term expires in 2001.
(3) Term expires in 2000.
(4) Elected by vote of holders of Common stock and Class B Common
stock voting as a class.
(5) Elected by vote of holders of Common stock voting as a class.
Members of the Board of Directors whose terms have not yet
expired are John E. Fallon, term expiring in 2000, and Raymond E.
Knape, term expiring in 2001.
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
January 1, 2000.
14
<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 4, 2000 /s/ William R. Dutmers
William R. Dutmers
Chairman, President and
Chief Executive Officer,
Principal Financial Officer
15
<PAGE>
EXHIBIT INDEX
1.1 First Amendment dated October 29, 1999, to Loan Agreement with Old Kent
Bank - filed herewith.
(27) Financial Data Schedule
16
<PAGE>
FIRST AMENDMENT TO LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT (the "Amendment"), is made as of
October 29, 1999, by and between KNAPE & VOGT MANUFACTURING COMPANY, a Michigan
corporation (the "Company") and OLD KENT BANK, a Michigan banking corporation
(the "Bank").
R E C I T A L S :
A. Company and Bank have signed a Loan Agreement, dated as of June 1,
1999 (the "Loan Agreement"), providing for Bank to extend to Company a
revolving bank credit of up to $45,000,000;
B. Company and Bank wish to amend the Loan Agreement on the terms and
conditions set forth in this Amendment.
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. Restatement of Warranties and Representations. Company hereby
confirms to Bank that the warranties and representations set
forth in the Loan Agreement were true, accurate and complete when
made and remain true, accurate and complete as of the date of
this Amendment.
2. No Events of Default; Compliance with Covenants. Company hereby
confirms and acknowledges to Bank that no event of default has
occurred under the Loan Agreement as of the date of this
Amendment, and that as of the date of this Amendment, Company has
complied with all of the affirmative and negative covenants set
forth in the Loan Agreement.
3. Covenants.
(a) Section 4.9 of the Loan Agreement is amended in its entirety
to read as follows:
1.9 Maintain consolidated Stockholders' Equity of not
less than $29,500,000 on and after June 30, 1999,
increasing on each June 30 thereafter by 50% of
Borrower's consolidated net income, computed in
accordance with GAAP for Borrower's fiscal year
ending on that June 30.
(b) The following Section 5.9 is added to the Loan Agreement:
1.9 Permit goodwill on the Borrower's consolidated
balance sheet to exceed $15,000,000 at any time.
4. Other Provisions Not Effected. Except as hereby amended, no other
provisions of the Loan Agreement shall be amended and all
provisions of the Loan Agreement shall hereafter remain in full
and effect.
IN WITNESS WHEREOF, the parties have signed and delivered this
Amendment on the date first written above.
KNAPE & VOGT MANUFACTURING COMPANY
/s/ Jack D. Poindexter
Chief Financial Officer, Treasurer and Secretary
OLD KENT BANK
/s/ Bryce E. Tallant
Vice President
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> OCT-03-1999
<PERIOD-END> JAN-01-2000
<CASH> 1,610,762
<SECURITIES> 0
<RECEIVABLES> 20,544,772
<ALLOWANCES> 538,488
<INVENTORY> 13,695,285
<CURRENT-ASSETS> 37,388,778
<PP&E> 70,517,887
<DEPRECIATION> 33,850,786
<TOTAL-ASSETS> 82,215,107
<CURRENT-LIABILITIES> 19,549,961
<BONDS> 0
0
0
<COMMON> 8,527,774
<OTHER-SE> 25,290,946
<TOTAL-LIABILITY-AND-EQUITY> 82,215,107
<SALES> 71,486,514
<TOTAL-REVENUES> 71,486,514
<CGS> 52,169,347
<TOTAL-COSTS> 52,169,347
<OTHER-EXPENSES> 12,123,660
<LOSS-PROVISION> 43,491
<INTEREST-EXPENSE> 688,861
<INCOME-PRETAX> 6,461,155
<INCOME-TAX> 2,286,000
<INCOME-CONTINUING> 4,175,155
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,175,155
<EPS-BASIC> 0.98
<EPS-DILUTED> 0.97
</TABLE>
