-----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, S9/VNbSiydpl9TVL4hTzxVFzaYwdOXFwQJUX6VsXRAnDPVQdvrlkRFXl1WuQ44uw h9JWQL8bVx5r/CNDf3YseA== /in/edgar/work/20000915/0000926044-00-000128/0000926044-00-000128.txt : 20000923 0000926044-00-000128.hdr.sgml : 20000923 ACCESSION NUMBER: 0000926044-00-000128 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000701 FILED AS OF DATE: 20000915 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KNAPE & VOGT MANUFACTURING CO CENTRAL INDEX KEY: 0000056362 STANDARD INDUSTRIAL CLASSIFICATION: [2540 ] IRS NUMBER: 380722920 STATE OF INCORPORATION: MI FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-01859 FILM NUMBER: 723540 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-K 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended July 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 or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2700 Oak Industrial Drive, N.E., Grand Rapids, MI 49505 (Address of principal executive offices) (Zip Code) (616) 459-3311 (Registrant's telephone number, including area code) Securities registered pursuant to 12(b) of the Act: --------------------------------------------------- Title of each class Name of each exchange on which registered None None Securities Registered pursuant to Section 12(g) of the Act: ----------------------------------------------------------- Common Stock, par value $2.00 per share (Title of class) 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 ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by nonaffiliates of the registrant was $70,383,493 as of August 25, 2000. Number of shares outstanding of each class of common stock as of August 25, 2000: 2,227,216 shares of Common Stock, par value $2.00 per share, and 2,388,095 shares of Class B Common Stock, par value $2.00 per share. Documents incorporated by reference. Certain portions of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on October 13, 2000, are incorporated by reference into Part III of this Report. 1 PART I ITEM 1--BUSINESS Item 1(a)--General Development of Business The Company is engaged primarily in the design, manufacture, and marketing of storage hardware and ergonomic products, which serve the consumer, contract builder, hardware, and original equipment manufacturer markets. The Company was incorporated in Michigan in 1906, reorganized in Delaware in 1961, and reorganized in Michigan in 1985. The Company's main plant and corporate offices are located at 2700 Oak Industrial Drive, N.E., Grand Rapids, Michigan 49505, and its telephone number is (616) 459-3311. Unless otherwise noted or indicated by the context, the term "Company" includes Knape & Vogt Manufacturing Company, its predecessors and its subsidiaries. The following significant events occurred in fiscal 2000: - On October 1, 1999, the Company acquired the assets of Idea Industries, Inc. Idea Industries designed, manufactured and marketed ergonomic products including adjustable keyboard mechanisms, keyboard and mouse platforms, wrist rests and CPU holders. - On April 14, 2000, the Board of Directors of the Company authorized a ten-percent stock dividend payable on May 19, 2000, to shareholders of record on May 5, 2000. All per share data and weighted average shares outstanding have been adjusted to reflect this dividend. Item 1(b)--Financial Information About Industry Segments The Company believes that a dominant portion of the Company's operations is in a single industry segment -- the design, manufacture, and marketing of storage hardware and ergonomic products. Accordingly, no separate industry segment information is presented. Item 1(c)--Narrative Description of Business Products, Services, Markets and Methods of Distribution. The Company's storage products include a complete line of decorative and utility wall-attached shelving systems. Drawer slides manufactured by the Company include precision, Euro-style and utility slides. Precision drawer slides use ball bearings, while Euro-style and utility drawer slides use rollers. The Company's many different hardware products include closet rods, kitchen storage products and various fixtures. The Company's ergonomic products include adjustable keyboard trays, gel wrists rests and floating mousepads. Approximately 27% of the Company's sales were to the consumer market, 71% of the Company's sales were to original equipment manufacturers and specialty distributors, and 2% of the Company's sales were to the office furniture dealer network. Most sales are made through independent sales representatives. New Product and Capital Spending Information. Management believes that capital spending in fiscal 2001 will remain consistent with the $9,112,810 spent in fiscal 2000. The cost to complete the items classified as construction in progress at July 1, 2000, was estimated to be approximately $4.5 million. The fiscal 2001 spending will reflect investments made to improve manufacturing technology and to bring new products and product enhancements to the Company's customers. Sources and Availability of Raw Materials. Most of the Company's storage products are produced primarily from steel or wood. Historically, the Company has not experienced difficulty in obtaining these raw materials and does not anticipate any difficulty in the future, as the raw materials used are not unique. Patents, Licenses, Etc. Patents, trademarks and licenses play a part in the Company's business, but the Company as a whole is not dependent to any material extent upon any single patent. Seasonal Nature of Business. The Company's business is not seasonal. Working Capital Practices. The Company does not believe that it, or the industry in general, has any special practices or special conditions affecting working capital items that are significant for an understanding of the Company's business. Importance of Limited Number of Customers. The Company sells to both the consumer market and to the OEM/specialty distributor market, as well as direct sales to the dealer network. The consumer market is comprised of a broad base of retail outlets. The OEM/specialty distributor market is more concentrated with a fewer number of customers and is more closely tied to the office furniture industry. The dealer network is also closely tied to the office furniture industry. The Company does not believe that its business is dependent upon any single or small number of customers, the loss of which would have a materially adverse effect upon 2 the Company. The Company estimates that at present it has over 1,300 active customers with approximately 35,000 outlets, of which the five largest customers account for approximately 19% of sales and no one of which accounts for more than 6% of sales. Backlog of Orders. The Company typically has a short lead-time on its orders and therefore does not believe that information concerning backlog is material to an understanding of its business. Government Contracts. The Company does not believe that any portion of its business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government. Competition. All aspects of the business in which the Company is engaged are highly competitive. Competition is based upon price, service and quality. In the various markets served by the Company, it competes with a number of manufacturers that have significantly greater resources and sales, including several conglomerate corporations, and with numerous smaller companies. While the Company is not aware of any reliable statistics that are available to enable the Company to accurately determine its relative position in the industry, either overall or with respect to any particular product or market, the Company believes that it is one of the three leading manufacturers of drawer slides in North America. Research, Design and Development. Approximately $1,690,000 was spent in fiscal 2000 in the development of new products and in the improvement of existing products; approximately $1,543,000 was spent in fiscal 1999 and $1,225,000 in fiscal 1998 for the same purposes. The amount of research and development expenditures was determined by specific identification of the costs, which are expensed as incurred. Environmental Matters. The Company does not believe that existing environmental regulations will have any material effect upon the capital expenditures, earnings and competitive position of the Company. Employees. At July 1, 2000, the Company employed 890 persons. None of the Company's employees are represented by collective bargaining agents. Item 1(d)--Information About Foreign Operations The Company's Canadian operation accounted for approximately 7% of consolidated sales. Approximately 4% of consolidated net sales were derived from export shipments from the Company's United States operations to customers in other foreign countries. The Company does not know of any particular risks attendant thereto, except that fluctuating exchange rates between the United States and Canadian currencies and other factors beyond the control of the Company, such as tariff and foreign economic policies, may affect future results of such business. Reference is made to Notes 2, 3 and 13 of the Notes to the Company's Consolidated Financial Statements contained herein for the fiscal year ended July 1, 2000, for a presentation of additional information concerning the Company's foreign operations. ITEM 2--PROPERTIES The Company owned or leased the following offices and manufacturing facilities as of July 1, 2000: Location Description Interest Grand Rapids, Michigan Executive offices and manufacturing facilities; Owned 444,000 sq. ft. on 41 acres. Sparks, Nevada Warehouse; 76,000 sq. ft. Leased Muncie, Indiana Manufacturing facilities and office; Owned 98,000 sq. ft. on 12 acres. Mississauga, Ontario Office; 1,900 sq. ft. Leased
The facilities indicated as owned are owned in fee by the Company and are subject to no material encumbrances. The Company believes that its facilities are generally adequate for its operations and are maintained in a state of good repair. The Company believes it is in compliance with all applicable state and federal air and water pollution control laws. During the five years ended July 1, 2000, the Company spent approximately $28,000,000 for expansion, modernization and improvements of its facilities and equipment. 3 ITEM 3--LEGAL PROCEEDINGS In September 1999, when the Company sold The Hirsh Company the purchaser assumed the lease for the facility located in Skokie, Illinois. The Company guaranteed all of the lease obligations to the landlord through the expiration of the lease in August 2000. As of July 1, 2000, the purchaser is in default under the lease agreement and the landlord has filed suit against the purchaser and the Company as the guarantor. The claim is for payment of the unpaid rent, unpaid property taxes, building repairs and legal costs. A former employee in connection with benefits paid under an executive retirement plan has also sued the Company. The initial ruling was in favor of the former employee; however, the Company has filed an appeal in the case. The Company is also subject to other legal proceedings and claims, which arise in the ordinary course of its business. In the opinion of management, based on the information presently known, the ultimate liability for these matters, taking into account established accruals of approximately $880,000, will not have a materially adverse effect on the Company's financial position or the results of its operations. ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended July 1, 2000. ADDITIONAL ITEM--EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company were, at July 1, 2000, as follows: Year First Elected Name Age Positions and Offices Held an Executive Officer - ----------------------------------------------------------------------------------------------------------- William R. Dutmers 44 Chairman of the Board of Directors, Chief Executive Officer and President 1998 Michael G. Van Rooy 48 Senior Vice President of Manufacturing 1993 James S. Dahlke 50 Vice President of Business Development 1999
Mr. Dutmers was named Chairman of the Board of Directors in January 1998. Mr. Dutmers has been a member of the Board of Directors since April 1996. He was named Chief Executive Officer and President in May 1999. Mr. Dutmers was the President of G & L, Inc., a business consulting firm, from 1991 to 1997. Mr. Van Rooy has been the Senior Vice President of Manufacturing since December 1993. Mr. Van Rooy joined the Company in 1985 in the engineering department and has held a variety of management positions. Mr. Dahlke was named the Vice President of Business Development in October 1999. Mr. Dahlke joined the Company in August 1999. Mr. Dahlke served as the President and Chief Operating Officer of Harrow Industries from 1996 to 1999. Prior to that he served as President and CEO of Medalist Industries. All terms of office are on an annual basis and will expire on October 13, 2000. 4 PART II ITEM 5--MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Market Price. The Company's Common Stock is traded on the NASDAQ National Market under the ticker symbol KNAP. Stock price quotations can be found in major daily newspapers (listed KnapeV) and in the Wall Street Journal (listed KnapeVogt). As of August 25, 2000, there were approximately 3,100 shareholders of the Company's Common Stock and Class B Common Stock. Fiscal 2000 Fiscal 1999 ----------------------------------------------------------------------------- Quarter High Low High Low - -------------------------------------------------------------------------------------------------------------------- First $16.02 $11.93 $20.68 $15.34 Second $15.80 $12.56 $18.64 $15.00 Third $16.36 $12.44 $16.36 $10.91 Fourth $16.00 $13.52 $16.25 $10.91
Dividends. The Company paid per share cash dividends on its shares of Common Stock and Class B Common Stock in the following amounts during the last two fiscal years. Per Share Cash Dividends ------------------------ Year Ended July 1, 2000 Common Stock Class B Common Stock - ----------------------- ------------ -------------------- First Quarter $.15 $.136 Second Quarter $.15 $.136 Third Quarter $.15 $.136 Fourth Quarter $.165 $.15
Per Share Cash Dividends ------------------------ Year Ended June 30, 1999 Common Stock Class B Common Stock - ------------------------ ------------ -------------------- First Quarter $.15 $.136 Second Quarter $.15 $.136 Third Quarter $.15 $.136 Fourth Quarter $.15 $.136
On August 4, 2000, the Board of Directors declared a $.165 per share cash dividend on shares of the Company's common stock and $.15 per share cash dividend on shares of its Class B common stock, payable September 8, 2000, to shareholders of record on August 25, 2000. 5 ITEM 6--SELECTED FINANCIAL DATA For the Year Ended 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ (a) (b) (c) (d) Summary of Operations Net sales................................ $149,836,870 $150,259,355 $181,632,570 $176,630,294 $163,012,030 Sales growth %......................... (0.3)% (17.3)% 2.8% 8.4% (3.1)% Gross profit............................. 40,961,356 36,092,104 42,299,900 43,548,529 38,603,382 Gross profit %......................... 27.3% 24.0% 23.3% 24.7% 23.7% Selling and administrative............... 26,400,042 25,721,924 29,152,388 28,436,330 27,438,017 Selling and administrative %........... 17.6% 17.1% 16.1% 16.1% 16.8% Operating income (loss).................. 14,456,314 9,770,180 (2,644,764) 14,738,964 7,669,365 Operating income (loss) %.............. 9.6% 6.5% (1.5)% 8.3% 4.7% Income (loss) from continuing operations............................ 8,423,730 6,161,769 (8,369,182) 8,325,228 3,103,058 Loss from discontinued operation......... - - (1,368,278) (471,624) (3,037,926) Net income (loss)........................ 8,423,730 6,161,769 (9,737,460) 7,853,604 65,132 Common Stock Data Diluted earnings per share from continuing operations............... 1.80 1.13 (1.28) 1.28 0.48 Diluted earnings per share from discontinued operation.............. - - (0.21) (0.07) (0.47) Diluted earnings per share............... 1.80 1.13 (1.49) 1.21 0.01 Weighted-average shares outstanding-diluted................. 4,684,125 5,445,009 6,550,184 6,493,561 6,486,961 Dividends per share--common.............. 0.615 0.600 0.600 0.600 0.600 Dividends per share--Class B common...... 0.559 0.545 0.545 0.545 0.545 Year-end stock price..................... 15.25 16.02 20.45 14.55 14.32 Year-end Financial Position Total assets............................. 88,287,652 75,059,989 104,033,087 125,741,698 129,225,159 Working capital.......................... 16,378,393 18,135,700 38,276,167 39,266,034 39,535,991 Current ratio............................ 1.7 2.0 2.5 4.2 4.0 Long-term debt........................... 20,050,000 17,700,000 9,700,000 29,000,000 35,000,000 Long-term debt as a % of total capital... 36.6% 35.8% 13.6% 28.3% 33.6% Stockholders' equity..................... 34,706,630 31,758,785 61,756,674 73,460,498 69,173,750 Other Data/Key Ratios Cash flow from operating activities...... 17,269,946 13,471,459 23,234,772 16,186,397 13,485,377 Capital expenditures..................... 9,112,810 4,786,263 4,228,552 7,763,482 8,032,779 Depreciation and amortization............ 5,862,588 5,914,739 7,966,383 7,728,603 7,345,353 Return on average assets................. 10.3% 6.9% (8.5)% 6.2% 0.0% Return on average equity................. 25.3% 13.2% (14.4)% 11.0% 0.1% Number of employees...................... 890 846 944 1,061 1,084 - ------------------------------------------------------------------------------------------------------------------------------------
(a) 1999 figures include an impairment charge of $600,000 pre-tax and an inventory write-off of $400,000 pre-tax recorded for the discontinuance of certain utility slides. This resulted in an after-tax reduction of $650,000, or $0.12 per diluted share. (b) 1998 figures include 1) an adjustment to the inventory obsolescence reserve of $910,000 recorded in cost of sales; 2) a restructuring charge for the reorganization of KV Canada of $3,992,276 recorded in operating expenses, and an income tax benefit of $600,000, for an after-tax effect of $3,392,276, or $0.52 per diluted share; 3) an impairment charge for the sale of Hirsh of $11,800,000 recorded in operating expenses, and an income tax expense of $1,000,000, for an after-tax effect of $12,800,000, or $1.96 per diluted share; 4) a $448,284 write-off of idle equipment; and 5) an after-tax charge of $937,268 or $0.15 per diluted share to record the sale of Roll-it, a discontinued operation. (c) 1997 figures include an after-tax charge of $246,235 or $0.04 per diluted share to record the March 1997 sale of Modar. (d) 1996 figures include an inventory liquidation of $863,000 recorded in cost of sales, a restructuring charge of $3,496,000 recorded in operating expenses, and an income tax benefit of $1,534,000, for an after-tax effect of $2,825,000, or $0.44 per diluted share. The 1996 figures also include an after-tax charge of $2,700,000 to recognize the estimated loss on the sale of Roll-it, the Company's discontinued store fixture operation. 6 ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's financial condition and results of operations. The discussion should be read in conjunction with the consolidated financial statements and footnotes. Overview The Company increased consolidated net income to $8.4 million, or $1.80 per diluted share in fiscal 2000, from $6.2 million, or $1.13 per diluted share in the prior year. Overall, the net income increase reflects the Company's emphasis on continuous improvement in all aspects of its business. Specifically, the implementation of lean manufacturing techniques reduced production costs, improving the Company's gross margins and profitability. In addition, the Company has accomplished the following key items during fiscal 2000: - On October 1, 1999, the Company acquired the assets of Idea Industries, Inc. Idea Industries designed, manufactured and marketed ergonomic products including adjustable keyboard mechanisms, keyboard and mouse platforms, wrist rests and CPU holders. This acquisition expanded the Company's ergonomic offering and provided another distribution channel, the office furniture dealers. - On April 14, 2000, the Board of Directors of the Company authorized a ten-percent stock dividend payable on May 19, 2000, to shareholders of record on May 5, 2000. All per share data and weighted average shares outstanding have been adjusted to reflect this dividend. Results of Operations The table below shows certain items in the Consolidated Statements of Operations from continuing operations as a percentage of net sales: July 1, June 30, June 30, Year ended 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------- Net sales......................................... 100.0% 100.0% 100.0% Cost of sales..................................... 72.7 76.0 76.7 ------------------------------------------------------- Gross profit 27.3 24.0 23.3 Selling and administrative expenses............... 17.6 17.1 16.1 Restructuring and impairment of assets............ .1 .4 8.7 ------------------------------------------------------- Operating income (loss)......................... 9.6 6.5 (1.5) Interest expense.................................. 1.0 .5 .6 Other expense (income)............................ - (.2) .3 ------------------------------------------------------- Income (loss) from continuing operations before income taxes............................ 8.6 6.2 (2.4) Income taxes - continuing operations.............. 3.1 2.1 2.2 ------------------------------------------------------- Income (loss) from continuing operations.......... 5.5% 4.1% (4.6)% - ---------------------------------------------------------------------------------------------------------------
Sales In accordance with Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterprise and Related Information, the Company operates as a single reportable segment, storage products. While the Company does not maintain its sales records by product category, management believes the table below (unaudited) approximates total net sales (in millions) for each of the product categories: 7 July 1, June 30, June 30, Year ended 2000 % 1999 % 1998 % - ----------------------------------------------------------------------------------------------------------------------- Shelving systems $ 49.3 32.9% $ 55.5 37.0% $ 83.0 45.7% Drawer slides 70.0 46.7% 70.8 47.1% 69.8 38.4% Hardware/Other 30.5 20.4% 24.0 15.9% 28.8 15.9% - ----------------------------------------------------------------------------------------------------------------------- Total $ 149.8 100% $ 150.3 100% $ 181.6 100% - -----------------------------------------------------------------------------------------------------------------------
Net sales in fiscal 2000 were $149.8 million. This was a slight decline from fiscal 1999 and was due exclusively to the impact of Hirsh sales in fiscal 1999. Excluding the impact of The Hirsh Company, which was sold in September 1998, fiscal 1999 net sales were $142.8 million. Accordingly, on like sales, fiscal 2000 net sales actually increased approximately $7.0 million or 4.9%. The growth resulted from the ergonomic products introduced as a result of the acquisition of Idea Industries and strong sales of the Company's precision drawer slides. The Company continues to successfully target the OEM office furniture market with its products, however, the retail market remains highly competitive and price sensitive. As a result, management must evaluate opportunities in this market on a customer by customer basis. Net sales in fiscal 1999 declined $31.4 million, or 17.3% to $150.3 million. The most significant decline was in shelving systems and was primarily due to the sales contribution of Hirsh. In addition, the Company performed a profitability review of its current product offerings and decided to discontinue certain product lines which were either unprofitable or provided only a minimal return. Specifically, the Company opted to re-deploy production assets, which were utilized to produce certain utility slides to the production of the more profitable precision drawer slides. While this decision improved the bottom line, it did result in lower net sales for fiscal 1999. Gross Profit Gross profit, as a percentage of net sales, was 27.3% in fiscal 2000, compared to 24.0% in fiscal 1999, and 23.3% in fiscal 1998. The significant improvement in the fiscal 2000 margins compared to fiscal 1999 can be attributed to the introduction of more profitable products resulting in a more favorable product mix. In addition, the emphasis on lean manufacturing continues to identify and eliminate non-value-added operations from the business, thus, reducing costs. The improvement in gross profit in fiscal 1999 from fiscal 1998 reflects the sale of Hirsh and the discontinuance of other low-margin product lines, which resulted in a more favorable product mix. In the third quarter of fiscal 1999, the Company started to realize some of the benefits from the implementation of lean manufacturing techniques, which not only resulted in reduced manufacturing costs, but also allowed the Company to improve its service to its customers. These improvements were partially offset by the $.4 million inventory write-off incurred with product line discontinuance. During fiscal 2001, the Company expects its margins to benefit from the introduction of new products and the utilization of continuous improvement techniques in its manufacturing operations. Selling and Administrative Selling and administrative expenses, as a percent of net sales, were 17.6% in fiscal 2000, compared to 17.1% in fiscal 1999 and 16.1% in fiscal 1998. The increase in fiscal 2000 represents costs incurred to launch several new products and costs, such as royalties and goodwill, associated with the Idea acquisition. The increase in fiscal 1999 compared to fiscal 1998 reflects severance and strategic planning costs incurred during the year. These increases were only partially offset by reductions in costs, which are variable with performance, such as incentive programs and commissions. Restructuring/Impairment In fiscal 2000, the Company recorded a loss of $105,000 in accordance with Financial Accounting Standard No. 121. The loss reflected management's best estimate of the loss to be incurred on the sale of the Company's former powder coat facility. Following the fiscal 2000 year-end, management signed a buy/sell agreement on the facility with a third party and anticipates closing the sale during the first quarter of fiscal 2001. In the second quarter of fiscal 1999, as a result of the decision to re-deploy certain utility slide production assets, the Company recorded an impairment loss of $.6 million pre-tax to write the related tooling assets down to their estimated fair value. In addition, excess inventory of $.4 million pre-tax related to the discontinued product lines was charged directly to cost of sales. 8 In September 1998, the Company sold Hirsh, a wholly-owned subsidiary. The sale of Hirsh reflected the Company's desire to enhance its corporate margins and profitability and remain focused on its core products. The sale resulted in a pre-tax loss of $11.8 million, 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 $1.0 million, resulting in a total loss related to the sale of Hirsh of $12.8 million. A pre-tax restructuring charge of $4.0 million was recorded in the third quarter of fiscal 1998 for Knape & Vogt Canada. In March 1998, Knape & Vogt announced its plans to reorganize its Canadian operation, including the sale of the Company's manufacturing facility and equipment in the Toronto area. The sale was completed in May of 1998. The Company continues to sell and distribute its products in Canada and maintains a sales office in the Toronto area. Other Expenses/(Income) and Income Taxes Interest expense was $1.4 million in fiscal 2000, compared to $.8 million and $1.2 million, respectively, in fiscal years 1999 and 1998. The increase in interest expense during fiscal 2000 reflects the higher level of borrowings needed to support the Idea acquisition, capital expenditures and share repurchases. The lower interest expense incurred in fiscal 1999 reflected the lower average borrowing levels resulting from proceeds received from the sale of Hirsh, along with improved cash flow from operating activities. Other miscellaneous expense was $2,345 in fiscal 2000 compared to income of $.4 million in fiscal 1999. Fiscal 1999 included interest received on Michigan Single Business Tax refunds and two patent infringement settlements, partially offset by losses incurred on the disposal of fixed assets. The effective tax rate was 35.4% in fiscal 2000, compared to 33.9% in fiscal 1999. See Note 10 to the Consolidated Financial Statements for a reconciliation of the effective tax rate. Net Income Income from continuing operations in fiscal 2000 was $8.4 million, or $1.80 per diluted share compared to $6.2 million or $1.13 per diluted share in fiscal 1999 and a net loss of $8.4 million, or $1.28 per diluted share in fiscal 1998. The loss recorded in fiscal 1998 was primarily due to the losses incurred on the sale of Hirsh and the restructuring of Knape & Vogt Canada. The results of operations of Roll-it, net of income taxes, were presented as a discontinued operation in fiscal 1998. On March 27, 1998, the Company signed an agreement to sell Roll-it which resulted in an additional loss of $.9 million, due to the difference between the original estimate and the actual loss from the sale of Roll-it. Net income was $8.4 million or $1.80 per diluted share in fiscal 2000 compared to $6.2 million, or $1.13 per diluted share in fiscal 1999 and a loss of $9.7 million, or $1.49 per diluted share in fiscal 1998. The increase over fiscal 1999 reflected the gross profit improvement achieved during fiscal 2000. The improvement in fiscal 1999 compared to fiscal 1998 was due to the $12.8 million after-tax charge recorded for the sale of Hirsh, the $3.4 million restructuring charge for Knape & Vogt Canada and the additional loss of $.9 million on the sale of Roll-it, all in fiscal 1998. Without these charges, net income would have been $7.4 million, or $1.14 per diluted share in fiscal 1998. Liquidity And Capital Resources Cash flows from operating activities generated $17.3 million in fiscal 2000 compared to $13.5 million in fiscal 1999 and $23.2 million in fiscal 1998. The improvement in fiscal 2000 compared to fiscal 1999 reflected the higher net income earned during the year and improved working capital performance. In fiscal 1999, the cash flows from the change in accounts payable were substantially lower than in fiscal 1998, due to two factors. First, in fiscal 1998, 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 was still utilizing the more aggressive payment policy with its vendors in fiscal 1999, payables decreased due to the sale of Hirsh. Cash flows used in investing activities were $14.1 million in fiscal 2000. During fiscal 2000, the Company incurred $9.1 million of capital expenditures, compared to $4.8 million and $4.2 million, respectively, in fiscal 1999 and 1998. The expenditures in fiscal 2000 were primarily for improvements in the Company's manufacturing process, including the completion of the new powder coat paint line and the new facility at the Company's Indiana subsidiary and tooling for new products. Management believes that capital expenditures will remain at approximately the same level in fiscal 2001, as investments are made to improve manufacturing technology and to bring new products and product enhancements to the Company's customers. The cost to complete the items classified as construction in progress at July 1, 2000, was estimated to be approximately $4.5 million. Investing activities in fiscal 2000 also included the net cash paid for the acquisition of Idea Industries, Inc. On October 1, 1999, the Company acquired substantially all of the assets of Idea Industries, Inc. (Idea). Idea designed, manufactured and marketed ergonomic products, including adjustable keyboard mechanisms, keyboard and computer mouse 9 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 terms of the Idea acquisition agreement provide for additional consideration to be paid if Idea's sales exceed certain targeted levels. The maximum amount of contingent consideration is $550,000 payable through 2001. In calendar year 1999, the additional consideration payment was $41,797, which has been included in goodwill. Any additional consideration paid will be recorded as goodwill when payment is made. The results of the Idea acquisition were not material to the Company's consolidated operating results, therefore pro forma financial statements have not been prepared. Following the financial strategy announced in fiscal 1998, the Company completed a Dutch Auction early in the second quarter of fiscal 1999. This resulted in the repurchase of 1,353,862 shares of the Company's stock at a price of $19.09 per share. In addition, the Company repurchased an additional 633,810 shares at prices ranging from approximately $12 to $17 per share through July 1, 2000. In total, the cost of the repurchased shares was $35.7 million. At the August 20, 1999, Board of Directors meeting, the Board approved an additional 440,000 shares for the stock repurchase program. At July 1, 2000, the Company has remaining authorization to repurchase an additional 375,791 shares. On April 14, 2000, the Board of Directors declared a 10% stock dividend of the Company's common stock and Class B common stock. On May 19, 2000, shareholders received one additional share of stock for each ten shares held. All per share data and weighted average shares outstanding have been restated to reflect the 10% stock dividend. During fiscal 1999, the Company renegotiated its revolving credit facility. The new facility allows for borrowings up to $45 million and expires on November 1, 2004. In addition, the Company entered into an interest rate swap agreement in order to fix the interest rate on a portion of the borrowings under the revolving credit facility. The swap agreement, which expires on June 1, 2006, fixed the interest on $17 million of borrowings through August 31, 1999, and increased to $20 million on September 1, 1999. The swap agreement fixed the rate at 6.25% plus the Company's credit spread on the revolving credit agreement. On October 29, 1999, the revolving credit facility was amended to modify certain covenants. At July 1, 2000, the Company was in compliance with all of the covenants. The Company's outstanding debt at July 1, 2000, was $20.1 million, compared to $17.7 million in fiscal 1999. The debt to total capital ratio increased to 36.6% at July 1, 2000, from 35.8% at June 30, 1999. The Company continues to manage its debt levels in an effort to reach its targeted capital structure. The Company believes that cash flows from operations and funds available under the credit facility will be sufficient to fund working capital requirements and capital expenditures in fiscal 2001. Legal Contingencies In September 1999, when the Company sold The Hirsh Company the purchaser assumed the lease for the facility located in Skokie, Illinois. The Company guaranteed all of the lease obligations to the landlord through the expiration of the lease in August 2000. As of July 1, 2000, the purchaser is in default on the lease agreement and the landlord has filed suit against the purchaser and the Company as the guarantor. The claim is for payment of the unpaid rent, unpaid property taxes, building repairs and legal costs. A former employee in connection with benefits paid under an executive retirement plan has also sued the Company. The initial ruling was in favor of the former employee; however, the Company has filed an appeal in the case. The Company is also subject to other legal proceedings and claims, which arise in the ordinary course of its business. In the opinion of management, based on the information presently known, the ultimate liability for these matters, taking into account established accruals of approximately $880,000, will not have a materially adverse effect on the Company's financial position or the results of its operations. Inflation Inflation has not had a significant effect on the Company over the past three years nor is it expected to have a significant effect in the foreseeable future. The Company continuously attempts to minimize the effect of inflation through cost reductions and improved productivity. 10 Year 2000 Readiness Disclosure As of the date of this report, the Company has not experienced any Year 2000 issues arising from its systems or those of its material vendors and suppliers. To the extent that there may be any ongoing Year 2000 issues that might arise at a later date, the Company has contingency plans in place to address such issues. Forward-Looking Statements This report contains certain forward-looking statements, which involve risks and uncertainties. When used in this report, the words "believe," "anticipate," "think," "intend," "goal," "forecast," "expect" and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements concerning new product introductions, future revenue growth and gross margin improvement. Such statements are subject to certain risks and uncertainties, which could 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. 11 ITEM 7A--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 on the Company's variable rate revolving credit agreement. A discussion of the Company's accounting policies for derivative financial instruments is included in the Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements. Additional information relating to financial instruments and debt is included in Note 5 - Long-Term Debt and Note 7 - - Derivative Financial Instruments. 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 July 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. Liability Amount Maturity Date - --------- ------- ------------- Variable rate revolving credit agreement $45 million November 1, 2004 First $20,000,000 at an interest rate of 6.84% plus weighted average credit spread of .5% Amounts in excess of $20,000,000 had an interest rate ranging from 5.39% to 7.51% in 2000 Interest Rate Swaps Notional amount $17 million August 31, 1999 Increased to $20 million June 1, 2006 Pay fixed/Receive variable - 6.84% Pay fixed interest rate - 6.25%
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. The Company does not hedge its exposure to translation gains and losses relating to foreign currency net asset exposures. 12 ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Immediately following are the consolidated balance sheets of the Company and its subsidiaries as of July 1, 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended July 1, 2000, the notes thereto, summary of accounting policies, and the independent auditors' report. 13 Knape & Vogt Manufacturing Company and Subsidiaries Consolidated Statements of Operations - ------------------------------------------------------------------------------------------------------------------------ Year ended July 1, 2000 June 30, 1999 June 30, 1998 - ------------------------------------------------------------------------------------------------------------------------ Net Sales $ 149,836,870 $ 150,259,355 $ 181,632,570 Cost of Sales 108,875,514 114,167,251 139,332,670 --------------------------------------------------------------------------------------------------------------------- Gross Profit 40,961,356 36,092,104 42,299,900 --------------------------------------------------------------------------------------------------------------------- Expenses Selling and shipping 20,891,588 19,953,864 22,594,546 Administrative and general 5,508,454 5,768,060 6,557,842 Restructuring and impairment of assets 105,000 600,000 15,792,276 --------------------------------------------------------------------------------------------------------------------- Total Expenses 26,505,042 26,321,924 44,944,664 --------------------------------------------------------------------------------------------------------------------- Operating Income (Loss) 14,456,314 9,770,180 (2,644,764) --------------------------------------------------------------------------------------------------------------------- Other Expenses (Income) Interest 1,407,239 802,202 1,224,394 Other, net 2,345 (355,791) 569,024 --------------------------------------------------------------------------------------------------------------------- Total Other Expenses 1,409,584 446,411 1,793,418 --------------------------------------------------------------------------------------------------------------------- Income (Loss) From Continuing Operations Before Income Taxes 13,046,730 9,323,769 (4,438,182) Income Taxes - Continuing Operations 4,623,000 3,162,000 3,931,000 --------------------------------------------------------------------------------------------------------------------- Income (Loss) From Continuing Operations 8,423,730 6,161,769 (8,369,182) --------------------------------------------------------------------------------------------------------------------- Discontinued Operation, Net of Income Taxes Loss from operations - - (431,010) Estimated loss on sale - - (937,268) --------------------------------------------------------------------------------------------------------------------- Total Discontinued Operation, Net of Income Taxes - - (1,368,278) --------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ 8,423,730 $ 6,161,769 $ (9,737,460) --------------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share Income (loss) from continuing operations $ 1.80 $ 1.13 $ (1.29) Loss from discontinued operation - - (0.21) --------------------------------------------------------------------------------------------------------------------- Net Income (Loss) Per Share $ 1.80 $ 1.13 $ (1.50) --------------------------------------------------------------------------------------------------------------------- Weighted Average Shares Outstanding 4,679,918 5,432,192 6,512,418 --------------------------------------------------------------------------------------------------------------------- Diluted Earnings Per Share Income (loss) from continuing operations $ 1.80 $ 1.13 $ (1.28) Loss from discontinued operation - - (0.21) --------------------------------------------------------------------------------------------------------------------- Net Income (Loss) Per Share $ 1.80 $ 1.13 $ (1.49) --------------------------------------------------------------------------------------------------------------------- Weighted Average Shares Outstanding 4,684,125 5,445,009 6,550,184 --------------------------------------------------------------------------------------------------------------------- Dividends Per Share Common stock $ .615 $ .600 $ .600 Class B common stock $ .559 $ .545 $ .545 ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 14 Knape & Vogt Manufacturing Company and Subsidiaries Consolidated Balance Sheets - ------------------------------------------------------------------------------------------------------------------ July 1, 2000 June 30, 1999 - ------------------------------------------------------------------------------------------------------------------ Assets Current Assets Cash $ 2,351,622 $ 1,621,002 Accounts receivable, less allowances of $556,000 and $389,000, respectively 20,631,951 18,930,039 Refundable income taxes 140,086 140,708 Inventories 15,092,393 13,149,649 Prepaid expenses 1,213,607 1,868,101 Net assets held for sale 1,779,405 - - ------------------------------------------------------------------------------------------------------------------ Total Current Assets 41,209,064 35,709,499 - ------------------------------------------------------------------------------------------------------------------ Property and Equipment Land and improvements 1,156,531 1,815,127 Buildings 14,489,756 14,436,028 Machinery and equipment 53,349,222 48,180,990 Construction in progress 4,636,979 2,224,266 - ------------------------------------------------------------------------------------------------------------------ 73,632,488 66,656,411 Less accumulated depreciation 35,270,625 31,357,471 - ------------------------------------------------------------------------------------------------------------------ Net Property and Equipment 38,361,863 35,298,940 - ------------------------------------------------------------------------------------------------------------------ Goodwill, net 4,978,420 575,433 - ------------------------------------------------------------------------------------------------------------------ Other Assets 3,738,305 3,476,117 - ------------------------------------------------------------------------------------------------------------------ $ 88,287,652 $ 75,059,989 - ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 15 Knape & Vogt Manufacturing Company and Subsidiaries Consolidated Balance Sheets - ------------------------------------------------------------------------------------------------------------------ July 1, 2000 June 30, 1999 - ------------------------------------------------------------------------------------------------------------------ Liabilities and Stockholders' Equity Current Liabilities Accounts payable $ 12,833,665 $ 9,129,514 Accruals: Income taxes 1,317,297 732,344 Taxes other than income 560,809 864,734 Compensation 4,689,373 3,055,717 Restructuring costs 252,241 377,515 Miscellaneous 5,177,286 3,413,975 - ------------------------------------------------------------------------------------------------------------------ Total Current Liabilities 24,830,671 17,573,799 Supplemental Retirement Benefits 4,488,351 3,155,405 Long-Term Debt 20,050,000 17,700,000 Deferred Income Taxes 4,212,000 4,872,000 - ------------------------------------------------------------------------------------------------------------------ Total Liabilities 53,581,022 43,301,204 - ------------------------------------------------------------------------------------------------------------------ Stockholders' Equity Stock: Common, $2 par - 6,000,000 shares authorized; 2,222,852 and 2,073,148 issued 4,445,704 4,146,296 Class B common, $2 par - 4,000,000 shares authorized; 2,392,853 and 2,238,227 issued 4,785,706 4,476,454 Preferred - 2,000,000 shares authorized and unissued - - Additional paid-in capital 8,482,908 4,409,415 Unearned stock grant (94,500) - Accumulated other comprehensive income (loss) (1,169,577) (478,606) Retained earnings 18,256,389 19,205,226 - ------------------------------------------------------------------------------------------------------------------ Total Stockholders' Equity 34,706,630 31,758,785 - ------------------------------------------------------------------------------------------------------------------ $ 88,287,652 $ 75,059,989 - ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 16 Knape & Vogt Manufacturing Company and Subsidiaries Consolidated Statements of Stockholders' Equity - -------------------------------------------------------------------------------------------------------------------------- Accumulated Additional Restricted other Common paid-in stock comprehensive Retained stock capital grants income (loss) earnings Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance, July 1, 1997 $ 11,807,658 $ 33,340,541 $ - $ (1,345,978) $ 29,658,277 $ 73,460,498 Net loss for 1998 - - - - (9,737,460) (9,737,460) Cash dividends - - - - (3,760,383) (3,760,383) Stock issued under stock option plan 63,592 384,449 - - - 448,041 Foreign currency translation - - - (259,327) - (259,327) adjustment Sale of Knape & Vogt Canada assets - - - 1,605,305 - 1,605,305 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1998 11,871,250 33,724,990 - - 16,160,434 61,756,674 Net income for 1999 - - - - 6,161,769 6,161,769 Cash dividends - - - - (3,116,977) (3,116,977) Stock issued under stock option plan 75,986 472,431 - - - 548,417 Tax benefit from exercise of stock options - 69,133 - - - 69,133 Stock grants issued 21,000 215,250 (236,250) - - - Stock grants earned - - 236,250 - - 236,250 Repurchase and retirement of shares of common stock (3,345,486) (30,072,389) - - - (33,417,875) Foreign currency translation - - - (29,983) - (29,983) adjustment Minimum SERP adjustment, net of tax benefit of $263,901 - - - (448,623) - (448,623) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1999 8,622,750 4,409,415 - (478,606) 19,205,226 31,758,785 Net income for 2000 - - - - 8,423,730 8,423,730 Cash dividends - - - - (2,741,146) (2,741,146) 10% stock dividend 841,308 5,783,992 - - (6,631,421) (6,121) Stock issued under stock option plan 26,610 173,623 - - - 200,233 Tax benefit from exercise of stock options - 8,671 - - - 8,671 Stock grants issued 12,000 82,500 (94,500) - - - Repurchase and retirement of shares of common stock (271,258) (1,975,293) - - - (2,246,551) Foreign currency translation - - - (9,019) - (9,019) adjustment Minimum SERP adjustment, net of tax benefit of $353,000 - - - (681,952) - (681,952) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, July 1, 2000 $ 9,231,410 $ 8,482,908 $ (94,500) $ (1,169,577) $ 18,256,389 $ 34,706,630 - ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 17 Knape & Vogt Manufacturing Company and Subsidiaries Consolidated Statements of Cash Flows - -------------------------------------------------------------------------------------------------------------------------- July 1, June 30, June 30, Year ended 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income (loss) $ 8,423,730 $ 6,161,769 $ (9,737,460) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation of fixed assets 5,027,282 5,123,290 6,604,799 Amortization of other assets 835,306 791,449 1,361,584 Decrease in deferred income taxes (308,000) (810,856) (752,000) Increase in supplemental retirement benefits 299,101 605,313 264,957 Increase in prepaid pensions (1,175,341) - - Decrease in deferred lease costs - (93,248) (556,992) Loss on sale of the discontinued operation - - 937,268 Write-off of foreign currency translation adjustment - - 1,605,305 Loss on sale of The Hirsh Company - - 12,800,000 Impairment loss 105,000 600,000 - Loss on disposal of property and equipment 37,855 593,431 - Stock grants earned - 236,250 - Changes in operating assets and liabilities (net of acquisition): Decrease (increase) in: Accounts receivable (1,045,595) 6,717,542 (809,180) Refundable income taxes - 33,961 1,157,735 Inventories (1,692,041) (341,117) 1,903,218 Net assets of discontinued operation - - (995,000) Net assets held for sale - 490,116 - Prepaid expenses 683,326 882,696 384,903 Increase (decrease) in: Accounts payable 2,515,619 (8,631,246) 8,776,835 Accrued restructuring costs (123,512) (436,172) 672,004 Accruals 3,687,216 1,548,281 (383,204) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 17,269,946 13,471,459 23,234,772 - ------------------------------------------------------------------------------------------------------------------------ Investing Activities Additions to property and equipment (9,112,810) (4,786,263) (4,228,552) Proceeds from sales of property and equipment 4,330 20,250 2,564,744 Net cash paid for acquisition (5,309,674) - - Proceeds from the sale of The Hirsh Company - 18,157,884 - Disposition of discontinued operation - - 2,045,364 Other, net 328,332 (312,330) 803,530 - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used for) investing activities (14,089,822) 13,079,541 1,185,086 - ------------------------------------------------------------------------------------------------------------------------ Financing Activities Proceeds from issuance of common stock 200,233 548,417 448,041 Repurchase and retirement of common stock (2,246,551) (33,417,875) - Cash dividends declared (2,747,267) (3,116,977) (3,760,383) Borrowings (payments) on long-term debt 2,350,000 8,000,000 (19,300,000) - ------------------------------------------------------------------------------------------------------------------------ Net cash used for financing activities (2,443,585) (27,986,435) (22,612,342) - ------------------------------------------------------------------------------------------------------------------------ Effect of Exchange Rate Changes on Cash (5,919) (721) 103,096 - ------------------------------------------------------------------------------------------------------------------------ Net Increase (Decrease) in Cash 730,620 (1,436,156) 1,910,612 Cash, beginning of year 1,621,002 3,057,158 1,146,546 - ------------------------------------------------------------------------------------------------------------------------ Cash, end of year $ 2,351,622 $ 1,621,002 $ 3,057,158 - ------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 18 Knape & Vogt Manufacturing Company and Subsidiaries Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Knape & Vogt Manufacturing Company and its wholly-owned subsidiaries (the Company). All material intercompany balances, transactions and stockholdings have been eliminated in consolidation. Year End 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. The year ended July 1, 2000, contained 52 weeks. Description of Business, Revenue Recognition and Concentration of Credit Risk The Company designs, manufactures and distributes storage products including decorative and utility wall-attached shelving systems, drawer slides, kitchen and closet storage products, ergonomic products and cabinet hardware. On August 20, 1996, the Company announced its decision to sell its store fixture operation and this portion of the business was shown as a discontinued operation. The sale of Roll-it was completed in March 1998. The Company primarily sells its products to hardware chains, home centers, specialty distributors and original equipment manufacturers and recognizes revenue upon shipment of products to customers. No single customer accounts for more than 10% of consolidated sales. The Company performs ongoing credit evaluations and maintains reserves for potential credit losses. Foreign Currency Translation The accounts of the foreign subsidiary are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52. Assets and liabilities are translated at year-end exchange rates. Income and expense accounts are translated at average exchange rates in effect during the year. Translation adjustments resulting from fluctuations in the exchange rates are recorded in accumulated other comprehensive income, a separate component of stockholders' equity. Fair Value of Financial Instruments The carrying amounts of the Company's financial instruments, which consist of cash, receivables, bank revolving credit agreement and accounts payable, approximate their fair values. The fair market value of the interest rate swap agreement at July 1, 2000, was approximately $798,000 based on information received from the issuing financial institution. Cash Equivalents From time to time, the Company holds short-term investments with a maturity of three months or less when purchased which are considered cash equivalents. Inventories Inventories are stated at the lower of FIFO (first-in, first-out) cost or market. 19 Knape & Vogt Manufacturing Company and Subsidiaries Notes to Consolidated Financial Statements Property, Equipment and Depreciation Property and equipment are stated at cost and depreciated, for financial reporting purposes, using the straight-line method over the estimated useful lives of the assets. For income tax purposes, accelerated depreciation methods and shorter useful lives are used. Management estimates that the cost to complete the items classified in construction in progress at July 1, 2000, was approximately $4.5 million. Accounting for the Impairment of Long-Lived Assets In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill Goodwill represents the amount by which the cost of businesses purchased exceeds the fair value of the net assets acquired. Goodwill is amortized over periods of 15 to 40 years using the straight-line method. Accumulated amortization of goodwill was $388,095 and $138,285 at July 1, 2000, and June 30, 1999, respectively. The Company periodically reviews goodwill for impairment based upon undiscounted operating income over the remaining life of the goodwill. While the estimates are based on management's historical experience and assumptions regarding future operations, the amounts the Company will ultimately realize could differ from those used in the fiscal 2000 SFAS No. 121 analysis. Income Taxes The Company accounts for certain income and expenses in different periods for financial reporting and income tax purposes. The Company utilizes the liability method to account for deferred income taxes by applying statutory tax rates in effect at the balance sheet date to differences between the financial reporting and tax bases of assets and liabilities. The resulting deferred tax liabilities or assets are adjusted to reflect changes in tax laws or rates by means of charges or credits to income tax expense. Use of Estimates in Preparation of Financial Statements The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Advertising Costs incurred for advertising, including costs incurred under cooperative advertising programs with customers, are expensed as incurred. Advertising expense was $1,038,000 in 2000, $799,000 in 1999, and $636,000 in 1998. 20 Knape & Vogt Manufacturing Company and Subsidiaries Notes to Consolidated Financial Statements Earnings Per Share During fiscal 1998, the Company adopted SFAS No. 128, Earnings per Share. SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes the dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. SFAS No. 128 requires that earnings per share amounts for all prior periods presented be restated to give effect to the provisions of the statement. SFAS No. 128 did not materially impact earnings per share information previously reported. For the periods presented, the numerators remained the same in both the basic and diluted earnings per share calculations. The denominator was increased in the diluted computation due to the recognition of stock options as common stock equivalents. The following table reconciles the numerators and denominators used in the calculations of basic and diluted EPS for each of the last three years: 2000 1999 1998 - --------------------------------------------------------------------------------------- Numerators: Numerator for both basic and diluted EPS, net income (loss) $8,423,730 $6,161,769 $(9,737,460) - --------------------------------------------------------------------------------------- Denominators: Denominator for basic EPS, weighted-average common shares outstanding 4,679,918 5,432,192 6,512,418 Potentially dilutive shares resulting from stock option plans 4,207 12,817 37,766 - --------------------------------------------------------------------------------------- Denominator for diluted EPS 4,684,125 5,445,009 6,550,184 - ---------------------------------------------------------------------------------------
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. 2000 1999 1998 ------------------------------------------------------------------------ Exercise Price $16.74 11,192 15,125 - $18.18 10,725 14,850 -
Derivative Financial Instruments The Company uses an interest rate swap agreement to modify a portion of the variable rate revolving line of credit to a fixed rate obligation, thereby reducing the exposure to market rate fluctuations. The interest rate swap agreement is designated as a hedge and effectiveness is determined by matching the principal balance and terms with that specific obligation. Amounts currently due to or from interest rate swap counter parties are recorded in interest expense in the period in which they accrue. 21 Knape & Vogt Manufacturing Company and Subsidiaries Notes to Consolidated Financial Statements New Accounting Standards In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivatives on the balance sheet at fair value and establishes accounting rules for changes in fair value that result from hedging activities. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. Based on management's evaluation of its derivative instrument, it does not believe that adoption of the standard will have a material effect on its financial position or results of operations. Reclassifications Certain prior year information has been reclassified to conform to the current year presentation. 2. Restructuring and Impairment of Assets A restructuring charge of $3,392,276, or $0.52 per diluted share was recorded in the third quarter of fiscal 1998 for Knape & Vogt Canada. In March 1998, Knape & Vogt announced its plans to reorganize its Canadian operation, including the sale of the Company's manufacturing facility and equipment in the Toronto area. The sale was completed in May of 1998. The Company continues to sell and distribute its products in Canada and maintain a sales office in the Toronto area. In September 1998, the Company sold The Hirsh Company, a wholly-owned subsidiary. Hirsh manufactured free-standing shelving, wood storage products and workshop accessories. The sale resulted in a loss of $12,800,000, which was included in the restructuring and impairment of assets line of the fiscal 1998 consolidated statement of operations. The loss included the write-off of the unamortized balance of goodwill recorded in connection with the purchase of Hirsh. In connection with its restructuring activities, the Company has recorded reserves for various costs to be incurred. Amounts paid or charged against these reserves were as follows: Fiscal 1998 Costs Paid June 30, Costs Paid June 30, Costs Paid July 1, Additions or Charged 1998 or Charged 1999 or Charged 2000 ----------------------------------------------------------------------------------------------------------- Facilities and equipment $1,076,453 $(1,063,232) $13,221 $(13,221) $ - $ - $ - Severance 994,698 (575,269) 419,429 (358,095) 61,334 (61,334) - Settlement cost 681,300 (303,037) 378,263 (80,101) 298,162 (45,921) 252,241 Other exit costs 340,650 (322,631) 18,019 - 18,019 (18,019) - ----------------------------------------------------------------------------------------------------------- Total $3,093,101 $(2,264,169) $828,932 $(451,417) $377,515 $(125,274) $252,241 -----------------------------------------------------------------------------------------------------------
22 Knape & Vogt Manufacturing Company and Subsidiaries Notes to Consolidated Financial Statements Summary operating results for Hirsh (in thousands) were as follows: Year ended June 30, 1998 ---------------------------------------------------- Revenues $ 35,634 Costs and expenses 47,880 ---------------------------------------------------- Loss before taxes (12,246) Income tax expense 998 ---------------------------------------------------- Net loss $ (13,244) ----------------------------------------------------
During the second quarter of fiscal 1999, the Company decided to re-deploy certain drawer slide 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. During fiscal 2000, the Company offered its former powder coat facility for sale. As a result of this decision, the related assets were transferred to the category "Net Assets Held for Sale" and a loss of $105,000 was recorded. In July 2000, management entered into a Buy/Sell agreement for the facility and anticipates closing the sale during fiscal 2001. The loss was determined based upon this Buy/Sell agreement. This transaction was treated as a non-cash item for cash flow purposes. 3. Discontinued Operation On August 20, 1996, the Company announced its decision to sell the Roll-it division of Knape & Vogt Canada Inc., the Company's store fixture operation. Accordingly, Roll-it was reported as a discontinued operation, and the consolidated financial statements were reclassified to segregate the net assets and operating results of the business. During fiscal 1996, the Company recorded an estimated loss of $3.9 million pre-tax or $2.7 million after-tax on the sale of Roll-it. During the third quarter of fiscal 1997, the Company recorded an additional after-tax loss of $471,624, which was an adjustment to the estimated provision for operating loss of Roll-it through fiscal 1997. Income or loss attributable to Roll-it's operations beyond fiscal year 1997 through the date of the sale were reflected as incurred in the appropriate periods. On March 27, 1998, the Company signed an agreement to sell Roll-it which resulted in an additional loss of $937,268, which represented the difference between the original estimate and the actual loss from the sale of Roll-it. Summary operating results of the discontinued operation (in thousands) were as follows: Year ended June 30, 1998 ------------------------------------------------------- Revenues $ 11,865 Costs and expenses 12,519 ------------------------------------------------------- Loss before taxes (654) Income tax benefit (223) ------------------------------------------------------- Net loss $ (431) -------------------------------------------------------
23 Knape & Vogt Manufacturing Company and Subsidiaries Notes to Consolidated Financial Statements 4. Acquisition On October 1, 1999, the Company acquired substantially all of the assets of Idea Industries, Inc. (Idea). Idea designed, manufactured and marketed ergonomic 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 terms of the Idea acquisition agreement provide for additional consideration to be paid if Idea's sales exceed certain targeted levels. The maximum amount of contingent consideration is $550,000 payable through 2001. In calendar year 1999, the additional consideration payment was $41,797, which has been included in goodwill. Any additional consideration paid will be recorded as goodwill when payment is made. The results of the acquisition were not material to the Company's consolidated operating results, therefore pro forma financial statements have not been prepared. 5. Inventories Inventories are summarized as follows: July 1, 2000 June 30, 1999 ---------------------------------------------------------------------------- Finished products $ 8,778,556 $ 8,523,866 Work in process 2,339,958 1,634,904 Raw materials and supplies 3,973,879 2,990,879 ---------------------------------------------------------------------------- $ 15,092,393 $ 13,149,649 ----------------------------------------------------------------------------
6. Long-Term Debt On June 1, 1999, the Company replaced its prior credit facility with a new revolving credit agreement that provides for up to $45,000,000 in borrowings through November 1, 2004. At July 1, 2000, there was a $20,050,000 balance outstanding under this agreement. The interest rate on the first $20,000,000 of the outstanding balance was 7.34%, which was the 90-day LIBOR rate plus an additional 50 basis points credit spread. The interest rate on the remaining $50,000 was based on the federal funds rate and averaged 7.2% for the month of June 2000. The interest rate is adjusted to market rates at the end of each interest period and is based on the LIBOR rate, or, at the Company's option, several other common indices. The agreement requires the Company to pay a non-use fee on amounts not outstanding under the credit facility. At July 1, 2000, the non-use fee was .125%. Both the interest rate and the non-use fees on this agreement fluctuate according to the ratio of the Company's funded debt to EBITDA (earnings before interest, income taxes, depreciation and amortization). Compensating balances are not required by this agreement. The Company is required under this agreement as amended to maintain certain financial ratios, and at July 1, 2000, was in compliance with these covenants. The Company entered into a seven-year interest rate swap agreement with a notional amount of $17,000,000 through August 31, 1999, and increasing to $20,000,000 thereafter, which converts a corresponding amount of the revolving credit agreement into a fixed-rate obligation with an effective interest rate of 6.25% plus the Company's credit spread on the revolving credit agreement. The swap agreement will terminate on June 1, 2006. 24 Knape & Vogt Manufacturing Company and Subsidiaries Notes to Consolidated Financial Statements 7. Lease Commitments The Company leases certain real property and equipment under operating lease agreements which expire at various dates through fiscal 2005. Annual minimum rental payments required under all noncancelable operating leases are as follows: 2001-$397,518; 2002-$402,046; 2003-$404,626; 2004-$227,695; 2005-$45,057. Rent expense under all operating leases was approximately $629,000, $553,000, and $1,848,000 in fiscal 2000, 1999, and 1998, respectively. The signed agreement for the sale of the assets of Hirsh (see Note 2) included the assumption of the lease for the Hirsh building by the buyer of the assets of Hirsh. The Company continues to guarantee to the landlord all lease obligations through the expiration of this lease in August 2000. Monthly lease payments are $108,731. 8. Derivative Financial Instruments The Company has entered into an interest rate swap agreement designated as a partial hedge of the Company's variable rate revolving credit agreement. The purpose of this swap is to fix the interest rate on the variable rate debt and reduce the exposure to interest rate fluctuations. At July 1, 2000, the Company had an interest rate swap with a notional amount of $20,000,000. Under this agreement, the Company will pay the counterparty interest at a fixed rate of 6.25%, and the counterparty will pay the Company interest at a variable rate equal to LIBOR. The LIBOR rate on this agreement was 6.84% at July 1, 2000. The notional amount does not represent an amount exchanged by the parties, and thus is not a measure of exposure of the Company. The variable rate is subject to change over time as LIBOR fluctuates. Neither the Company nor the counterparty, which is a prominent bank institution, is required to collateralize the respective obligation under the swap. The Company is exposed to loss if the counterparty should default. At July 1, 2000, the Company had no exposure to credit loss on the interest rate swap. The Company does not believe that any reasonably likely change in interest rates would have a materially adverse effect on the financial position, the results of operations or cash flows of the Company. 9. Retirement Plans The Company has several noncontributory defined benefit pension plans and defined contribution plans covering substantially all of its employees. The defined benefit plans provide benefits based on the participants' years of service. The Company's funding policy for defined benefit plans is to make annual contributions, which equal or exceed regulatory requirements. The Company's Board of Directors annually approves contributions to defined contribution plans. The assets of the defined benefit plans consist primarily of equity securities, debt securities and cash equivalents. The pension and profit-sharing plans at July 1, 2000, and June 30, 1999, hold a combined total of 284,637 shares of the Company's Class B common stock. The defined postretirement plan covers substantially all employees and provides certain health care benefits. The plan is unfunded and contributory. 25 Knape & Vogt Manufacturing Company and Subsidiaries Notes to Consolidated Financial Statements Pension Benefits Postretirement Benefits ---------------------------------------------------------------------------------------- 2000 1999 2000 1999 ---------------------------------------------------------------------------------------- Change in benefit obligations Benefit obligations at beginning of year $13,149,390 $12,292,838 $2,106,167 $2,093,739 Service cost 298,385 307,112 127,919 97,320 Interest cost 908,750 915,727 189,623 146,127 Actuarial (gains)/losses 502,596 651,301 598,931 (56,649) Benefits paid (1,290,191) (1,013,125) (129,414) (174,370) Other 1,068 (4,463) - - ---------------------------------------------------------------------------------------- Benefit obligation at end of year $13,569,998 $13,149,390 $2,893,226 $2,106,167 ---------------------------------------------------------------------------------------- Change in plan assets Fair value of plan assets at beginning of year $13,833,561 $13,389,253 $ - $ - Actual return on plan assets 253,090 706,224 - - Employer contributions 1,340,651 762,036 129,414 174,370 Benefits paid (1,290,191) (1,013,125) (129,414) (174,370) Other 62,652 (10,827) - - ---------------------------------------------------------------------------------------- Fair value of plan assets at end of year $14,199,763 $13,833,561 $ - $ - ---------------------------------------------------------------------------------------- Funded status $415,310 $684,171 $(2,893,226) $(2,106,167) Unrecognized transition amount (184,900) (239,300) 576,450 624,487 Unrecognized net actuarial loss 2,017,212 643,546 1,146,629 602,271 Unrecognized prior service cost 1,019,232 1,153,202 - - ---------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $3,266,854 $2,241,619 $(1,170,147) $( 879,409) ---------------------------------------------------------------------------------------- Weighted -average assumptions Discount rate 7.5% 7.25% 7.5% 7.25% Expected return on plan assets 8.5% 8.5% N/A N/A ----------------------------------------------------------------------------------------
The net periodic benefit cost related to the defined benefit pension plans is made up of the following components: Pension Benefits Post Retirement Benefits ---------------------------------------------------------------------------------------------------------- 2000 1999 1998 2000 1999 1998 ---------------------------------------------------------------------------------------------------------- Service cost $298,385 $307,112 $ 267,092 $127,919 $ 97,320 $ 85,042 Interest cost 908,750 915,727 885,949 189,623 146,127 156,507 Expected return on plan assets (1,080,874) (841,093) (2,102,398) - - - Net amortization 189,155 276,217 1,282,412 102,610 68,497 75,651 ---------------------------------------------------------------------------------------------------------- Net periodic pension cost $315,416 $657,963 $ 333,055 $420,152 $311,944 $317,200 ----------------------------------------------------------------------------------------------------------
The health care cost trend rate used to determine the postretirement benefit obligation was 6.31% for 2000. This rate decreases gradually to 5.25% in 2002, and remains at that level thereafter. The trend rate is a significant factor in determining the amounts reported. A one-percentage-point change in these assumed health care cost trend rates would have the following effect: 26 Knape & Vogt Manufacturing Company and Subsidiaries Notes to Consolidated Financial Statements One-Percentage Point Increase Decrease --------------------------------------------------------------------------------------- Effect on total of service and interest cost components $ 50,085 $ (41,307) Effect on postretirement benefit obligation 366,314 (309,707)
The Company also has a non-qualified supplemental retirement program for designated officers of the Company which includes death and disability benefits. The plan is funded from the general assets of the Company. The pension benefit obligation and pension expense under this plan are as follows: 2000 1999 1998 ----------------------------------------------------------------------------- Pension benefit obligation $3,318,204 $2,275,996 $1,365,232 Pension expense 343,131 435,226 320,534
Expense for the discretionary profit sharing plan amounted to $673,344, $744,511 and $758,055 in fiscal 2000, 1999 and 1998, respectively. The Company also provides a 401(k) plan for all of its employees. Employees may contribute up to 15 percent of their pay. For all hourly employees, the Company will match 25 percent of the first 4 percent that an employee contributes. The amount expensed for the Company match provision of the plan was $143,791, $195,483, and $172,550 in fiscal 2000, 1999 and 1998, respectively. 10. Income Taxes The components of income (loss) from continuing operations before income taxes consists of: July 1, June 30, June 30, Year ended 2000 1999 1998 -------------------------------------------------------------------------------- United States $ 12,056,990 $ 9,098,594 $ (919,274) Foreign 989,740 225,175 (3,518,908) -------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes $ 13,046,730 $ 9,323,769 $ (4,438,182) --------------------------------------------------------------------------------
Income tax expense from continuing operations consists of: July 1, June 30, June 30, Year ended 2000 1999 1998 -------------------------------------------------------------------------------- Current: United States $ 4,557,000 $ 3,950,000 $ 3,740,000 Foreign - - 541,000 State and local 331,000 326,000 368,000 -------------------------------------------------------------------------------- Total current 4,888,000 4,276,000 4,649,000 -------------------------------------------------------------------------------- Deferred: United States (680,000) (1,133,000) 377,000 Foreign 427,000 97,000 (955,000) State and local (12,000) (78,000) (140,000) -------------------------------------------------------------------------------- Total deferred (265,000) (1,114,000) (718,000) -------------------------------------------------------------------------------- Income tax expense $ 4,623,000 $ 3,162,000 $ 3,931,000 --------------------------------------------------------------------------------
27 Knape & Vogt Manufacturing Company and Subsidiaries Notes to Consolidated Financial Statements The difference between the federal statutory tax rate and the effective tax rate on continuing operations was as follows: July 1, June 30, June 30, Year ended 2000 1999 1998 ---------------------------------------------------------------------------- Income (loss) from continuing operations $ 4,436,000 $ 3,170,000 $ (1,509,000) Foreign earnings taxed at different rate 99,000 20,000 237,000 Nondeductible losses-Hirsh Sale - - 5,012,000 Write-off of foreign currency translation adjustment - - 546,000 State and local income taxes 104,000 102,000 530,000 Tax credits and other (16,000) (130,000) (885,000) ------------------------------------------------------------------------------- Income tax expense $ 4,623,000 $ 3,162,000 $ 3,931,000 -------------------------------------------------------------------------------
The sources of the net deferred income tax liability were as follows: July 1, 2000 June 30, 1999 ------------------------------------------------------------------------------ Property and equipment $ 7,108,000 $ 6,978,000 Pension accrual 1,111,000 762,000 Net operating loss carryforward (369,000) (797,000) Supplemental retirement plan (1,044,000) (693,000) Benefit related accruals (996,000) - Stock basis of Canadian subsidiary (1,436,000) (1,436,000) Other (162,000) 58,000 ------------------------------------------------------------------------------ $ 4,212,000 $ 4,872,000 ------------------------------------------------------------------------------
For Canadian tax purposes, the Company has net operating losses expiring through 2005 totaling approximately $1,800,000. The tax benefit reflected above for these loss carryforwards is net of a valuation allowance of $476,000. 11. Stock Option Plans The 1987 Stock Option Plan granted key employees of the Company options to purchase shares of common stock. Options were granted at or above the market price of the Company's common stock on the date of the grant, were exercisable from that date and terminated ten years from the grant date. The plan, as amended in October 1994 and in October 1991, authorized a total of 300,000 shares to be available for issuance under the plan. Grants can no longer be made under the 1987 Stock Option Plan. 28 Knape & Vogt Manufacturing Company and Subsidiaries Notes to Consolidated Financial Statements Shareholders at the 1997 annual meeting approved the Company's 1997 Stock Incentive Plan. Under this plan, up to 660,000 shares of the Company's common stock are available for issuance. Issuance can be in the form of stock options or restricted stock; however, no more than 55,000 shares can be issued as restricted stock. Stock options can be granted as incentive stock options or nonqualified stock options. The number of shares of common stock subject to an option granted to a participant under this plan will be determined based on the amount of the participant's election under the EVA bonus plan. Each participant may elect to receive options by electing to forego a portion of the cash bonus that may be earned by them, with the option price determined in accordance with the plan. The exercise price per share of common stock purchasable under an option shall be a single fixed exercise price equal to 100% of the fair market value of the common stock at the award date increased by a fixed percentage increase (based on U.S. Treasury Securities plus 2% less a projected dividend yield) compounded annually over the term of the option. In general, the options vest three years after the date the option was granted and expire five years after the grant date. During fiscal 2000 and 1999, 198,206 and 195,635 options were granted to participants at an exercise price of $19.04 per share and $26.54 per share, respectively. Included in the 198,206 options are 27,500 options granted to William Dutmers, Chairman, President and CEO, which are not part of the 1997 Stock Incentive Plan (as explained below). Transactions under the plans are as follows: Weighted Weighted average average July 1, exercise June 30, exercise Year ended 2000 price 1999 price -------------------------------------------------------------------------------------- Options outstanding, beginning of year 176,931 $18.41 147,445 $13.91 Granted 198,206 19.04 195,635 26.54 Exercised (14,637) 13.78 (38,416) 17.75 Forfeited (55,349) 20.32 (127,733) 26.54 -------------------------------------------------------------------------------------- Options outstanding and exercisable, end of year 305,151 $18.64 176,931 $17.92 -------------------------------------------------------------------------------------- Options available for grant, end of year 214,639 136,373 -------------------------------------------------------------------------------------- Weighted average fair value of options granted during the year $2.84 $1.99 --------------------------------------------------------------------------------------
The Company accounts for its stock option plans in accordance with APB Opinion 25, Accounting for Stock Issued to Employees. Since the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation cost is recognized under APB Opinion 25. In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the Company is required to provide pro forma information regarding net income and earnings per share as if compensation costs for the Company's stock option plan had been determined using a fair value based estimate. The Company uses the Black-Scholes option-pricing model to determine the fair value of each option at the grant date with the following weighted average assumptions: 2000 1999 -------------------------------------------------------------------------------- Dividends per share $ 0.615 $ 0.600 Expected volatility 0.3241 0.3251 Risk-free interest rate 5.70% 5.45% Expected lives 2.3 5.4 --------------------------------------------------------------------------------
29 Knape & Vogt Manufacturing Company and Subsidiaries Notes to Consolidated Financial Statements Under the accounting provisions of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 2000 1999 ---------------------------------------------------------------------------------- Net income: As reported $ 8,423,730 $ 6,161,769 Pro forma 7,860,825 5,772,277 Earnings per share: As reported $ 1.80 $ 1.13 Pro forma 1.68 1.06 ----------------------------------------------------------------------------------
Of the 660,000 shares available for issuance under the 1997 Stock Incentive Plan, no more than 55,000 shares may be issued as restricted stock. The Executive Compensation Committee shall, subject to the approval of the Board of Directors, determine the eligible persons to whom, and the price (if any) to be paid by the participant. The participant shall not be permitted to sell, transfer, pledge, or assign the shares of the restricted stock awarded under this Plan. Subject to these limits, the Committee has sole discretion to set, accelerate or waive the restrictions of the stock. Except as provided above, upon issuance of the restricted stock, the participant will have all the rights of a shareholder with respect to the shares, including the right to vote them and to receive all dividends and other related distributions. If termination of employment occurs within the restricted period, all shares of stock still subject to restriction will vest or be forfeited in accordance with the terms and conditions established by the Committee. On July 1, 1998, Mr. Dutmers was granted 11,550 shares of common stock. The stock was subject to restrictions on transfer for one year. The stock was the principal compensation for one year's service by Mr. Dutmers to the Company as Chairman of the Board of Directors. In addition, under the EVA bonus plan, Mr. Dutmers was eligible to receive a target bonus of 65% times the value of the above awarded shares which was determined by using the average stock price in the 30-day period preceding the date of grant. Mr. Dutmers elected to receive up to 50% of his fiscal 1999 target bonus in leveraged stock options. The deferred compensation expense related to the restricted stock grants was amortized to expense on a straight-line basis over the one-year period. On February 1, 2000, Mr. Dutmers was granted 6,600 shares of restricted common stock and the option to purchase an additional 27,500 shares of the Company's common stock at a price of $14.43 per share. The grant and the options will vest if the Company achieves specific financial objectives within a five-year performance period. During the performance period, the grantee may vote and receive dividends on the restricted shares, but the shares are subject to transfer restrictions and are forfeited if the grantee terminates employment or the Company does not achieve its financial objectives. 30 Knape & Vogt Manufacturing Company and Subsidiaries Notes to Consolidated Financial Statements 12. Stockholders' Equity The Company has three classes of stock, common stock, Class B common stock and unissued preferred stock. Each share of common stock entitles the holder thereof to one vote on all matters submitted to the shareholders. Each share of Class B common stock entitles the holder to ten votes on all such matters, except that the holders of common stock are entitled to elect, voting separately as a class, at least one quarter of the Company's directors to be elected at each meeting held for the election of directors. In all other instances, holders of common stock and Class B common stock vote together, except for matters affecting the powers, preferences or rights of the respective classes or as otherwise required under the Michigan Corporation Act. With respect to dividend rights, each share of common stock is entitled to cash dividends at least ten percent (10%) higher than those payable on each share of Class B common stock. Class B common stock is subject to certain restrictions on transfer, but is convertible into common stock on a share-for-share basis at anytime. On April 14, 2000, the Board of Directors declared a 10% stock dividend of the Company's common stock and Class B common stock. On May 19, 2000, shareholders received one additional share of stock for each ten shares held. All per share data and weighted average shares outstanding have been restated to reflect the 10% stock dividend. On September 1, 1998, the Company announced its intention to purchase up to 1,320,000 shares of the Company's common stock pursuant to a Dutch Auction self-tender offer at a price range of $17.27 to $20 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 1,485,000. The Dutch Auction was concluded on October 7, 1998, with the purchase of 1,353,862 shares at a price of $19.09 per share. At the January 22, 1999, Board of Directors meeting, the Board approved another 440,000 shares for the stock repurchase program. Utilizing both of the Board authorizations, the Company has purchased an additional 633,810 shares through the end of the fiscal 2000 with the price per share ranging from approximately $12 to $17. In total, the Company spent approximately $35.7 million on share repurchases. 13. Business Segments Effective for the year ended June 30, 1999, the Company adopted SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. In accordance with SFAS No. 131, the Company operates on a worldwide basis within a single reportable segment, storage products. The nature of the products, production processes, types of customers and methods of distribution are consistent across the Company and its subsidiaries and therefore have been aggregated into one reported segment. The Company's primary product categories include shelving systems, drawer slides and builder's hardware. Geographic information related to net sales and long-lived assets are summarized between domestic and foreign locations as follows: 31 Knape & Vogt Manufacturing Company and Subsidiaries Notes to Consolidated Financial Statements Year ended July 1, 2000 June 30, 1999 June 30, 1998 ---------------------------------------------------------------------------------- Net sales: United States $132,432,934 $133,805,266 $158,810,004 Canada 10,881,653 9,919,229 14,868,871 Other foreign 6,522,283 6,534,860 7,953,695 Long-lived assets: United States 38,361,863 35,298,940 36,654,720 Canada - - - Other foreign - - -
The Company does not believe that it is dependent upon any single customer, since none account for more than 10% of consolidated net sales and operating income. 14. Supplemental Cash Flow Information Total interest paid during the years ended July 1, 2000, June 30, 1999 and 1998, was $1,383,957, $754,166 and $1,310,066, respectively. Total income taxes paid during the years ended July 1, 2000, June 30, 1999 and 1998, were $4,345,000, $3,912,773 and $3,686,753, respectively. 15. Quarterly Results (Unaudited) The table below sets forth summary unaudited information on a quarterly basis for the Company. Year ended July 1, 2000 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------------------------------------------------------------------------------- Net sales $35,687,624 $35,798,890 $38,704,961 $39,645,395 Gross profit 9,393,510 9,923,657 10,509,283 11,134,906 Net income 2,044,812 2,130,343 2,176,589 2,071,986 Earnings per share, net- diluted 0.44 0.45 0.46 0.45 Cash dividend-common stock 0.15 0.15 0.15 0.165 Cash dividend-Class B common stock $ 0.136 $ 0.136 $ 0.136 $ 0.15 ----------------------------------------------------------------------------------- Year ended June 30, 1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------------------------------------------------------------------------------- Net sales $43,678,644 $36,359,076 $36,038,270 $34,183,365 Gross profit 9,893,904 8,653,296 8,945,301 8,599,603 Net income 2,521,982 1,025,172 1,565,117 1,049,498 Earnings per share, net- diluted 0.38 0.19 0.31 0.22 Cash dividend-common stock 0.15 0.15 0.15 0.15 Cash dividend-Class B common stock $ 0.136 $ 0.136 $ 0.136 $ 0.136 -----------------------------------------------------------------------------------
32 Knape & Vogt Manufacturing Company and Subsidiaries Notes to Consolidated Financial Statements Year ended June 30, 1998 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------------------------------------------------------------------------------- Net sales $44,658,302 $42,677,957 $49,469,554 $44,826,757 Gross profit 11,503,905 10,243,477 11,554,926 8,997,592 Income (loss) from continuing operations 2,470,026 2,017,210 (1,056,822) (11,799,596) Income (loss) from discontinued operation 200,886 (294,525) (1,274,639) - Net income (loss) 2,670,912 1,722,685 (2,331,461) (11,799,596) Earnings (loss) per share from continuing operations-diluted 0.38 0.31 (0.16) (1.79) Earnings (loss) per share from discontinued operation-diluted 0.03 (0.05) (0.19) - Earnings (loss) per share, net-diluted 0.41 0.26 (0.35) (1.79) Cash dividend-common stock 0.15 0.15 0.15 0.15 Cash dividend-Class B common stock $ 0.136 $ 0.136 $ 0.136 $ 0.136 -----------------------------------------------------------------------------------
16. Commitments and Contingencies As described in Note 7, when the Company sold The Hirsh Company the purchaser assumed the lease for the facility located in Skokie, Illinois. The Company guaranteed all of the lease obligations to the landlord through the expiration of the lease in August 2000. As of July 1, 2000, the purchaser is in default on the lease agreement and the landlord has filed suit against the purchaser and the Company as the guarantor. The claim is for unpaid rent, unpaid property taxes, building repairs and legal costs. A former employee in connection with benefits paid under an executive retirement plan has also sued the Company. The initial ruling was in favor of the former employee; however, the Company has filed an appeal in the case. The Company is also subject to other legal proceedings and claims, which arise in the ordinary course of its business. In the opinion of management, based on the information presently known, the ultimate liability for these matters, taking into account established accruals of approximately $880,000, will not have a materially adverse effect on the Company's financial position or the results of its operations. 33 Independent Auditors' Report Board of Directors Knape & Vogt Manufacturing Company Grand Rapids, Michigan We have audited the accompanying consolidated balance sheets of Knape & Vogt Manufacturing Company and subsidiaries as of July 1, 2000 and June 30, 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended July 1, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Knape & Vogt Manufacturing Company and subsidiaries at July 1, 2000 and June 30, 1999, and the results of their operations and their cash flows for each of the three years in the period ended July 1, 2000, in conformity with generally accepted accounting principles. BDO Seidman, LLP Grand Rapids, Michigan July 28, 2000 34 ITEM 9--DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No changes in, or disagreements with, the Company's accountants occurred, requiring disclosure under Item 304 of Regulation S-K. PART III ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors of Registrant. Information relating to directors and director nominees of the Company, contained in the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held October 13, 2000, and filed pursuant to Regulation 14A, is incorporated herein by reference. Executive Officers of Registrant. Information relating to the executive officers of the Company is included in Part I of this Form 10-K. ITEM 11--EXECUTIVE COMPENSATION The information under the captions "Summary Compensation Table," "Option Grants in Last Fiscal Year," and "Aggregated Stock Option Exercises in Fiscal 2000 and Year End Option Values," is incorporated herein by reference from the Company's definitive Proxy Statement for the Company's Annual Meeting of Shareholders to be held October 13, 2000, filed pursuant to Regulation 14A. ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the captions "Voting Securities and Principal Shareholders" and "Directors and Nominees" is incorporated herein by reference from the Company's definitive Proxy Statement for the Company's Annual Meeting of Shareholders to be held October 13, 2000, filed pursuant to Regulation 14A. ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Directors and Nominees" is incorporated herein by reference from the Company's definitive Proxy Statement for the Company's Annual Meeting of Shareholders to be held October 13, 2000, filed pursuant to Regulation 14A. 35 PART IV ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements The following financial statements and schedules, all of which are set forth in Item 8, are filed as part of this report. Page Number in 10-K Report ----------- Consolidated Statements of Operations 14 Consolidated Balance Sheets 15 Consolidated Statements of Stockholders' Equity 17 Consolidated Statements of Cash Flows 18 Notes to Consolidated Financial Statements 19 Independent Auditors' Report 34 (2) Financial Statement Schedule The following financial statement schedule and related Independent Auditors' Report on such schedule are included in this Form 10-K on the pages noted. Page Number in 10-K Report ----------- Independent Auditors' Report on Schedule 37 Schedule II -- Valuation and Qualifying Accounts and Reserves 38 All other schedules are not submitted because they are not applicable or not required, or because the required information is included in the financial statements or notes thereto. (3) Exhibits Reference is made to the Exhibit Index which is found on page 40 of this Form 10-K Annual Report. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of the year ended July 1, 2000. 36 Independent Auditors' Report on Schedule Knape & Vogt Manufacturing Company Grand Rapids, Michigan The audits referred to in our report dated July 28, 2000, relating to the consolidated financial statements of Knape & Vogt Manufacturing Company which is contained in Item 8 of this Form 10-K, included the audit of the financial statement schedule listed in the accompanying table of contents. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based upon our audits. In our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein. BDO Seidman, LLP Grand Rapids, Michigan July 28, 2000 37 Knape & Vogt Manufacturing Company and Subsidiaries Schedule II - Valuation and Qualifying Accounts and Reserves Column A Column B Column C Column D Column E - ---------------------------------------------------------------------------------------------------------- Balance Charged to Balance beginning costs and end of Description of period expenses(1) Deductions(1)(2) period - ---------------------------------------------------------------------------------------------------------- Year ended July 1, 2000: Allowances deducted from assets: Accounts receivable for: Doubtful accounts $242,000 $187,000 $20,000 $409,000 Cash discounts 147,000 - - 147,000 - ---------------------------------------------------------------------------------------------------------- $389,000 $187,000 $20,000 $556,000 Year ended June 30, 1999: Allowances deducted from assets: Accounts receivable for: Doubtful accounts $ 177,000 $ 336,000 $ 271,000 $ 242,000 Cash discounts 175,000 - 28,000 147,000 - ---------------------------------------------------------------------------------------------------------- $ 352,000 $ 336,000 $ 299,000 $ 389,000 Year ended June 30, 1998: Allowances deducted from assets: Accounts receivable for: Doubtful accounts $ 268,000 $ 390,000 $ 481,000 $177,000 Cash discounts 257,000 - 82,000 175,000 - ---------------------------------------------------------------------------------------------------------- $525,000 $ 390,000 $ 563,000 $352,000
(1) Write-off of doubtful accounts and collections on accounts previously written off, including reduction in allowance balance. (2) Year ended June 30, 1998 balances include the reclassification of allowances recorded for The Hirsh Company to net assets held for sale. 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By /s/ William R. Dutmers William R. Dutmers, Chairman of the Board, President and Chief Executive Officer By /s/ Leslie J. Cummings Leslie J. Cummings, Vice President of Finance Date: September 15, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on September 15, 2000, by the following persons on behalf of the registrant in the capacities indicated. /s/ William R. Dutmers /s/ John E. Fallon William R. Dutmers, Chairman of the Board, John E. Fallon, Director Chief Executive Officer and President /s/ Thomas A. Hilborn /s/ Michael J. Kregor Thomas A. Hilborn, Director Michael J. Kregor, Director /s/ Raymond E. Knape /s/ Richard S. Knape Raymond E. Knape, Director Richard S. Knape, Director /s/ Robert J. Knape /s/ Gregory Lambert Robert J. Knape, Director Gregory Lambert, Director 39 KNAPE & VOGT MANUFACTURING COMPANY ANNUAL REPORT - FORM 10-K EXHIBIT INDEX 3(a) Certificate of Amendment to the Articles of Incorporation, and the Restated Articles of Incorporation of the Company, which were filed as Exhibit 3(a) of the Registrant's Form 10-K Annual Report for the fiscal year ended June 30, 1987, are incorporated by reference. 3(b) Bylaws as amended April 23, 1999, filed as Exhibit 3.1 of the Registrant's Form 10-Q Third Quarter Report for the fiscal year June 30, 1999, are incorporated by reference. 10(a) Supplemental Executive Retirement Plan, which was filed as Exhibit 10 of the Registrant's Form 10-K Annual Report for the fiscal year ended June 30, 1981, is incorporated by reference. 10(b) Knape & Vogt Manufacturing Company 1987 Stock Option Plan, effective October 16, 1987, which was filed as Exhibit I to Registrant's definitive Proxy Statement dated September 23, 1987, is incorporated by reference. 10(c) Knape & Vogt Manufacturing Company Employees' Retirement Savings Plan (July 1, 1989 Restatement), as amended, which was filed as Exhibit 99 to Registrant's Registration Statement on Form S-8 (Reg. No. 33-88212), is incorporated by reference. 10(d) Loan agreement with Old Kent Bank dated June 1, 1999, which was filed as Exhibit 10(d) of the Registrant's Form 10-K Annual Report for the fiscal year ended June 30, 1999, is incorporated by reference. 10(e) First amendment dated October 29, 1999, to Loan agreement with Old Kent Bank, filed as Exhibit 10.1 of the Registrant's Form 10-Q Second Quarter Report for the fiscal year July 1, 2000, is incorporated by reference. 10(f) Interest swap agreement with Bank One dated June 1, 1999, which was filed as Exhibit 10(e) of the Registrant's Form 10-K Annual Report for the fiscal year ended June 30, 1999, is incorporated by reference. 10(g) Knape & Vogt Manufacturing Company 1997 Stock Incentive Plan, which was filed as Appendix A to the Registrant's proxy statement dated September 17, 1997, is incorporated by reference. 10(h) Restricted Share Grant Agreement dated February 1, 2000, between Knape & Vogt Manufacturing Company and William R. Dutmers, filed as Exhibit 10.1 of the Registrant's Form 10-Q Third Quarter Report for the fiscal year July 1, 2000, is incorporated by reference. 10(i) Stock Option Agreement for Nonqualified Stock Option dated February 1, 2000, between Knape & Vogt Manufacturing Company and William R. Dutmers, filed as Exhibit 10.2 of the Registrant's Form 10-Q Third Quarter Report for the fiscal year July 1, 2000, is incorporated by reference. 21 Subsidiaries of Registrant. 40 23 Consent of BDO Seidman, LLP, independent public accountants. 27 Financial Data Schedule. 41 EXHIBIT 21 SCHEDULE OF SUBSIDIARIES OF KNAPE & VOGT MANUFACTURING COMPANY Knape & Vogt Canada, Inc. (organized under the laws of Ontario, Canada) Feeny Manufacturing Company (organized under the laws of Michigan) 42 EXHIBIT 23 Consent of Independent Certified Public Accountants We hereby consent to the incorporation by reference of our reports dated July 28, 2000, relating to the consolidated financial statements and schedule of Knape & Vogt Manufacturing Company, appearing in that Corporation's annual report on Form 10-K for the year ended July 1, 2000, in that corporation's previously filed Form S-8 Registration Statements (file numbers 33-20227, 33-43704, 33-88206 and 33-88212). /s/ BDO Seidman, LLP BDO Seidman, LLP Grand Rapids, Michigan September 15, 2000 43 EX-27 2 0002.txt
5 12-MOS JUL-01-2000 JUL-01-1999 JUL-01-2000 2,351,622 0 21,187,951 556,000 15,092,393 41,209,064 73,632,488 35,270,625 88,287,652 24,830,671 0 0 0 9,231,410 25,475,220 88,287,652 149,836,870 149,836,870 108,875,514 108,875,514 26,320,387 187,000 1,407,239 13,046,730 4,623,000 8,423,730 0 0 0 8,423,730 1.80 1.80
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