-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VLU8oEz2czh4+5jXNb7w1SdAWi7eGC9YChI7QJMEzHybSiwzk2VYJMzietE2ZDsW OU2B0jGm68+VEMCI/xnYoA== 0000926044-99-000006.txt : 19990211 0000926044-99-000006.hdr.sgml : 19990211 ACCESSION NUMBER: 0000926044-99-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990210 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KNAPE & VOGT MANUFACTURING CO CENTRAL INDEX KEY: 0000056362 STANDARD INDUSTRIAL CLASSIFICATION: PARTITIONS, SHELVING, LOCKERS & OFFICE AND STORE FIXTURES [2540] IRS NUMBER: 380722920 STATE OF INCORPORATION: MI FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-01859 FILM NUMBER: 99528509 BUSINESS ADDRESS: STREET 1: 2700 OAK INDUSTRIAL DR NE CITY: GRAND RAPIDS STATE: MI ZIP: 49505 BUSINESS PHONE: 6164593311 MAIL ADDRESS: STREET 1: 2700 OAK INDUSTRIAL DRIVE, NE CITY: GRAND RAPIDS STATE: MI ZIP: 49505 10-Q 1 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. 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 KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Audited) Dec. 31, 1998 June 30, 1998 ----------------- ----------------- Assets 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 ================ ================
See accompanying notes. 2 KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the Six Months Ended For the Three Months Ended Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1998 Dec. 31, 1997 ------------- ------------- ------------- ------------- 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
See accompanying notes. 3 KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended Dec. 31, 1998 Dec. 31, 1997 --------------- --------------- 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
See accompanying notes. 4 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: Dec. 31, 1998 June 30, 1998 ------------- ------------- 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 ============ ==============
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 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: Six Months Ended December 31, Three Months Ended December 31, 1998 1997 1998 1997 ---- ---- ---- ---- 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 =============== =============== =============== ===============
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 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: Six Months Ended December 31, Three Months Ended December 31, 1998 1997 1998 1997 ---- ---- ---- ---- 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% ====== ====== ===== ====== ===== ====== ====== ======
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 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 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 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 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 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 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 EXHIBIT INDEX (27) Financial Data Schedule 14 EX-27 2
5 3-MOS JUN-30-1999 OCT-01-1998 DEC-31-1998 2,348,083 0 22,483,107 446,681 13,271,547 40,072,917 63,926,292 29,077,400 79,095,753 18,861,938 0 0 0 9,390,268 26,803,054 79,095,753 80,037,720 80,037,720 61,490,520 61,490,520 12,863,268 0 305,778 5,378,154 1,831,000 3,547,154 0 0 0 3,547,154 0.66 0.66
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