10-Q 1 knapevogt10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ____________________To ____________________ Commission File Number 2-18868 KNAPE & VOGT MANUFACTURING COMPANY (Exact name of registrant as specified in its charter) Michigan 38-0722920 (State of Incorporation) (IRS Employer Identification No.) 2700 Oak Industrial Drive, NE Grand Rapids, Michigan 49505 (Address of principal executive offices) (Zip Code) (616) 459-3311 (Telephone Number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES __X__ NO ______ 2,266,221 common shares were outstanding as of April 27, 2001. 2,351,620 Class B common shares were outstanding as of April 27, 2001. KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES INDEX Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Condensed Consolidated Balance Sheets --March 31, 2001 and July 1, 2000............................2 Condensed Consolidated Statements of Income --Nine Months and Three Months Ended March 31, 2001 and April 1, 2000 .........................................3 Condensed Consolidated Statements of Cash Flows --Nine Months Ended March 31, 2001 and April 1, 2000.........4 Notes to Condensed Consolidated Financial Statements.......5-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................8-10 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................................11 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................12 SIGNATURES....................................................................13 1 KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Audited) Mar. 31, 2001 July 1, 2000 --------------------- ------------------ Assets Current assets Cash and equivalents $ 2,308,539 $ 2,351,622 Accounts receivable - net 18,087,998 20,631,951 Inventories 16,466,499 15,092,393 Prepaid expenses and other 3,051,989 3,133,098 --------------------- ------------------ Total current assets 39,915,025 41,209,064 --------------------- ------------------ Property, plant and equipment 78,556,152 73,632,488 Less accumulated depreciation 37,431,939 35,270,625 --------------------- ------------------ Net property, plant and equipment 41,124,213 38,361,863 --------------------- ------------------ Goodwill 5,228,912 4,978,420 Other assets 2,956,252 3,738,305 --------------------- ------------------ $ 89,224,402 $ 88,287,652 ===================== ================== Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 11,128,945 $ 12,833,665 Other accrued liabilities 9,135,810 11,997,006 --------------------- ------------------ Total current liabilities 20,264,755 24,830,671 --------------------- ------------------ Long-term debt 24,280,000 20,050,000 Deferred income taxes and other long-term liabilities 8,446,035 8,700,351 --------------------- ------------------ Total liabilities 52,990,790 53,581,022 --------------------- ------------------ Stockholders' Equity Common stock (Common - 2,265,721 and 2,222,852 shares issued, Class B common - 2,352,120 and 2,392,853 shares issued, Preferred - unissued) 9,235,682 9,231,410 Additional paid-in capital 8,502,727 8,482,908 Unearned stock grant (94,500) (94,500) Accumulated other comprehensive income: Foreign currency translation adjustment (177,429) (39,172) Derivative adjustment (541,067) - Minimum supplemental executive retirement plan liability adjustment (1,128,069) (1,130,405) Retained earnings 20,436,268 18,256,389 --------------------- ------------------ Total stockholders' equity 36,233,612 34,706,630 --------------------- ------------------ $ 89,224,402 $ 88,287,652 ===================== ==================
See accompanying notes. 2 KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the Nine Months Ended For the Three Months Ended ------------------------- -------------------------- Mar. 31, 2001 Apr. 1, 2000 Mar. 31, 2001 Apr. 1, 2000 ---------------- ---------------- ---------------- ---------------- Net sales $ 106,229,784 $ 110,191,475 $ 33,569,582 $ 38,704,961 Cost of sales 77,627,826 80,365,025 25,143,424 28,195,678 ---------------- ---------------- ---------------- ---------------- Gross profit 28,601,958 29,826,450 8,426,158 10,509,283 ---------------- ---------------- ---------------- ---------------- Selling and administrative expenses 20,278,103 18,938,712 6,809,199 6,772,571 Impairment loss on assets held for sale 300,000 - 300,000 - ---------------- ---------------- ---------------- ---------------- Operating expenses 20,578,103 18,938,712 7,109,199 6,772,571 ---------------- ---------------- ---------------- ---------------- Operating income 8,023,855 10,887,738 1,316,959 3,736,712 Other expenses 1,312,597 1,052,994 457,168 363,123 ---------------- ---------------- ---------------- ---------------- Income before income taxes 6,711,258 9,834,744 859,791 3,373,589 Income taxes 2,352,000 3,483,000 297,000 1,197,000 ---------------- ---------------- ---------------- ---------------- Net income $ 4,359,258 $ 6,351,744 $ 562,791 $ 2,176,589 ================ ================ ================ ================ Basic earnings per share: Net income per share $ 0.94 $ 1.35 $ 0.12 $ 0.47 ================ ================ ================ ================ Weighted average shares outstanding 4,616,561 4,696,151 4,618,312 4,670,923 Diluted earnings per share: Net income per share $ 0.94 $ 1.35 $ 0.12 $ 0.47 ================ ================ ================ ================ Weighted average shares outstanding 4,618,331 4,700,076 4,618,507 4,673,734 Cash dividend - common stock $ .495 $ .45 $ .165 $ .15 Cash dividend - Class B common stock $ .45 $ .409 $ .15 $ .136
See accompanying notes. 3 KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended ----------------- Mar. 31, 2001 Apr. 1, 2000 ------------------- ------------------- Operating Activities: Net income $ 4,359,258 $ 6,351,744 Non-cash items: Depreciation and amortization 4,679,463 4,395,431 Deferred income taxes (177,000) (294,000) Other long-term liabilities 163,331 (584,359) Impairment loss on assets held for sale 300,000 - Loss on disposal of fixed assets 177,630 17,446 Changes in operating assets and liabilities: Accounts receivable 2,451,390 (922,290) Inventories (1,374,106) (711,872) Other current assets 15,901 89,534 Accounts payable and accrued expenses (5,088,922) 3,605,246 -------------------- ------------------- Net cash provided by operating activities 5,506,945 11,946,880 -------------------- ------------------- Investing Activities: Additions to property, plant and equipment (6,993,220) (5,401,009) Net cash paid for acquisition (505,745) (5,309,674) Changes in other non-current assets (7,017) 190,966 -------------------- ------------------- Net cash used for investing activities (7,505,982) (10,519,717) -------------------- ------------------- Financing Activities: Cash dividends paid (2,179,379) (2,013,297) Proceeds from issuance of common stock 15,922 188,483 Repurchase and retirement of common stock (20,537) (1,898,386) Borrowings on long-term debt 4,230,000 2,300,000 -------------------- ------------------- Net cash provided by financing activities 2,046,006 (1,423,200) -------------------- ------------------- Effect of Exchange Rate Changes on Cash (90,052) 11,242 -------------------- ------------------- Net Increase (Decrease) in Cash and Equivalents (43,083) 15,205 Cash and equivalents, beginning of year 2,351,622 1,621,002 -------------------- ------------------- Cash and equivalents, end of period $ 2,308,539 $ 1,636,207 ==================== =================== Cash Paid During the Period - interest $ 1,165,448 $ 1,032,216 - income taxes $ 3,653,830 $ 2,975,000 Non-Cash Activities: Accrual of capital expenditures $ 441,599 $ 411,878
See accompanying notes. 4 KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - Basis of Financial Statement Preparation The accompanying unaudited condensed consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished reflects all adjustments, which are, in the opinion of management, necessary for a fair statement of the results of operations and consist of only normal recurring adjustments. Interim results are not necessarily indicative of the results for the year-end and are subject to year-end adjustments, and audit by independent public accountants. The balance sheet at July 1, 2000, has been taken from the audited financial statements at that date. The condensed consolidated financial statements and notes should be read in conjunction with the Company's 2000 annual report. Effective July 1, 1999, the Company adopted a 52- or 53-week fiscal year, changing the year-end date from June 30 to the Saturday nearest the end of June. Certain prior year information has been reclassified to conform to the current year presentation. Note 2 - Common Stock and Per Share Information Common stock is $2 par - shares authorized 6,000,000 of common stock and 4,000,000 of Class B common stock. The following table reconciles the numerators and denominators used in the calculations of basic and diluted EPS for each of the periods presented: For the nine months ended For the three months ended ------------------------- -------------------------- Mar. 31, 2001 Apr. 1, 2000 Mar. 31, 2001 Apr. 1, 2000 ------------------- ------------------- ---------------------- ---------------------- Numerators: Numerator for both basic and diluted EPS, net income $4,359,258 $6,351,744 $562,791 $2,176,589 =================== =================== ====================== ====================== Denominators: Denominator for basic EPS, weighted-average common shares outstanding 4,616,561 4,696,151 4,618,312 4,670,923 Potentially dilutive shares resulting from stock option plans 1,770 3,925 195 2,811 ------------------- ------------------- ---------------------- ---------------------- Denominator for diluted EPS 4,618,331 4,700,076 4,618,507 4,673,734 =================== =================== ====================== ======================
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. Mar. 31, 2001 Apr. 1, 2000 ----------------------- ---------------------- Exercise Price $13.64 21,835 - $14.09 21,450 - $16.74 11,192 11,495 $18.18 10,450 11,000
5 Note 3 - Inventories Inventories are valued at the lower of FIFO (first-in, first-out) cost or market. Inventories are summarized as follows: Mar. 31, 2001 July 1, 2000 ------------- ------------ Finished products $10,864,752 $ 8,778,556 Work in process 2,121,722 2,339,958 Raw materials 3,480,025 3,973,879 ------------ ------------ Total $16,466,499 $ 15,092,393 =========== ============
Note 4 - Adoption of New Accounting Standard The Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," on July 2, 2000. The Company uses an interest-rate swap to convert a portion of its variable-rate revolver to a fixed rate. The resulting cost of funds is lower than it would have been had fixed-rate borrowings been issued directly. The level of fixed-rate debt, after the effects of interest-rate swaps have been considered, is between 85 and 95 percent of the Company's total outstanding debt of $24,280,000 at March 31, 2001 and $20,050,000 at July 1, 2000. In accordance with the transition provisions of FAS 133, the Company recorded a net-of-tax cumulative-effect-type adjustment in accumulated other comprehensive income to recognize the fair value of the interest-rate swap designated as a cash-flow hedging instrument. The derivative was also recognized as a liability on the balance sheet at its fair value of $833,067. The Company has formally documented the relationship between the interest-rate swap and the revolver, as well as its risk-management objective and strategy for undertaking the hedge transaction. This process includes linking the derivative that has been designated as a cash-flow hedge to the specific liability on the balance sheet. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivative used in the hedging transaction is highly effective in offsetting changes in the cash flows of the hedged item. If it is determined that the derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company will discontinue hedge accounting prospectively. Note 5 - Comprehensive Income Comprehensive income is comprised of net income and all changes to stockholders' equity, except those due to investments by owners and distributions to owners. Comprehensive income and its components consist of the following: For the Nine Months Ended For the Three Months Ended ------------------------- -------------------------- Mar. 31, 2001 Apr. 1, 2000 Mar. 31, 2001 Apr. 1, 2000 ------------------- ------------------ ------------------- ------------------ Net income $4,359,258 $6,351,744 $562,791 $2,176,589 Other comprehensive income: Foreign currency translation adjustment (138,257) 30,363 (111,615) (6,973) Derivative adjustment (541,067) - (323,475) - Minimum SERP liability adjustment 2,336 (620) 1,845 142 ------------------- ------------------ ------------------- ------------------ Comprehensive income $3,682,270 $6,381,487 $129,546 $2,169,758 =================== ================== =================== ==================
6 Note 6 - Assets Held for Sale During fiscal 2000, the Company offered its former powder coat facility for sale. As a result of this decision, the related assets of $1,779,405 were transferred to the category "Net Assets Held for Sale" and a loss of $105,000 was recorded in the fourth quarter of fiscal 2000 based upon the buy/sell agreement. The purchaser was unable to close the transaction and the building remains listed with a real estate broker. In addition, the Company has listed a former facility in Muncie, Indiana for sale. Based upon new information obtained during the third quarter of fiscal 2001 regarding the current fair market value of the facilities held for sale, the Company recorded an additional impairment loss of $300,000 pre-tax. Note 7 - 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 provided for additional consideration to be paid if Idea's sales exceeded certain targeted levels. The maximum amount of contingent consideration was $550,000 payable through 2001. In calendar year 1999, the additional consideration payment was $44,255 and in calendar year 2000 the remaining contingent consideration was earned. All additional consideration paid was recorded as goodwill. The results of the acquisition were not material to the Company's consolidated operating results, therefore pro forma financial statements have not been prepared. Note 8 - Restricted Stock and Performance-Option Plan On February 1, 2000, William Dutmers, Chairman of the Board, President and Chief Executive Officer of Knape & Vogt, 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. Note 9 - Stock Repurchase 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 each of the January 22, 1999, and the August 20, 1999, Board of Directors meetings, the Board approved an a dditional 440,000 shares for the stock repurchase program. Utilizing these Board authorizations, the Company has purchased 635,150 shares through the third quarter of fiscal 2001 for approximately $9.3 million with the price per share ranging from approximately $12 to $17. 7 KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain matters discussed in this section include forward-looking statements involving risks and uncertainties. When used in this document, the words "believes," "expects," "anticipates," "goal," "think," "forecast," "project," "estimates," "likely," and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements concerning future revenue and net income growth. Such statements are subject to certain risks and uncertainties, which would cause actual results to differ materially from those expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on those forward-looking statements that speak only as of the date of this report. RESULTS OF OPERATIONS Net Sales The following table indicates the Company's net sales (in millions) and percentage of total sales by product category for the six-month and three-month periods ended March 31, 2001 and April 1, 2000: Nine Months Ended Three Months Ended ----------------- ------------------ Mar. 31, Apr. 1, Mar. 31, Apr. 1, 2001 % 2000 % 2001 % 2000 % ---------------------- ------------------------- ------------------------ ------------------------- Shelving systems $29.3 27.6% $37.9 34.4% $9.3 27.7% $13.3 34.4% Drawer slides 49.2 46.4% 51.1 46.4% 15.4 45.8% 17.5 45.1% Hardware/ Ergonomic 27.7 26.0% 21.2 19.2% 8.9 26.5% 7.9 20.5% ---------------------- ------------------------- ------------------------ ------------------------- Total $106.2 100.0% $110.2 100.0% $33.6 100.0% $38.7 100.0% ====================== ========================= ======================== =========================
Net sales for both the third quarter and the first nine months of fiscal 2001 were lower than the prior year. During the third quarter, only the ergonomic product line showed growth over the prior year and of the Company's sales channels only the dealer channel grew compared to the prior year. The majority of the decline represented the overall downturn in economic conditions. This was clearly reflected when BIFMA, the furniture manufacturing association, lowered its estimated growth for the office furniture industry from 5.0% to just 2.8% for calendar 2001. The Company's sales were especially soft in the month of January and have steadily increased through the end of the third quarter. The Company, however, estimates that same product sales for the remainder of the fiscal year will most likely remain relatively flat when compared to the prior year. The Company anticipates being able to offset some of the slowdown in the market with introduction of new products. During the first week of April 2001, the Company launched an ergonomic lighting line, which will broaden its offering of ergonomic products to the office furniture industry. Gross Profit Gross profit, as a percentage of net sales, was 25.1% for the third quarter and 26.9% for the first nine months of fiscal 2001 compared to 27.2% and 27.1%, respectively, for the same periods in the prior year. The lower sales volumes during the third quarter of fiscal 2001 made it difficult for the Company to effectively leverage its fixed overhead costs. In addition, the decline in the Canadian exchange rate continued to negatively impact the margins of the Company's wholly owned Canadian subsidiary. 8 KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Operating Expenses Selling and administrative expenses, as a percentage of net sales, were 20.3% for the third quarter and 19.1% for the first nine months of fiscal 2001 compared to 17.5% and 17.2%, respectively, for the same periods in the prior year. The increase was primarily attributable to the fact that the ergonomic product line has a higher level of selling costs associated with it than the Company's other product lines. In addition, the Company incurred severance costs of approximately $350,000 in the third quarter of fiscal 2001 associated with the layoffs, which took place in January 2001. During the third quarter of fiscal 2001, the Company recorded a pre-tax impairment loss on the assets held for sale of $300,000 or $.04 per diluted share. The loss reflected new information, which lowered the Company's estimate of the fair market value of the properties listed for sale. Other Expenses Interest expense was $415,609 for the quarter and $1,204,536 for the nine months ended March 31, 2001, compared with $362,932 and $1,051,793, respectively, for the same periods in the prior year. The increase in interest expense was attributable to the higher level of borrowings during fiscal 2001. Income Taxes The effective tax rates for the quarter and nine months ended March 31, 2001, were 34.5% and 35.0% compared with the rates of 35.5% and 35.4%, respectively, for the same periods in the prior year. Net Income For the quarter ended March 31, 2001, net income was $562,791 or $0.12 per diluted share compared to $2,176,589 or $0.47 per diluted share for the third quarter of last year. Net income of $4,359,258, or $0.94 per diluted share was recorded for the first nine months of fiscal 2001 compared with $6,351,744, or $1.35 per diluted share for the same period in the prior year. Liquidity and Capital Resources Net cash from operating activities for the first nine months of fiscal 2001 provided net cash of $5,506,945 compared with $11,946,880 for the first n ine months of fiscal 2000. The decrease was attributable to lower net income of approximately $2,000,000 combined with higher inventory levels of imported product and a decrease in accounts payable and other accrued liabilities. The decrease in accounts payable was due to lower purchasing levels. The decrease in other accrued liabilities reflects the impact of incentive plans, which are variable with the Company's performance, specifically the EVA bonuses. Capital expenditures totaled $6,993,220 for the nine months ended March 31, 2001, compared to $5,401,009 for the nine months ended April 1, 2000. The increased capital spending reflected investments in manufacturing technology, the completion of the new facility at the Indiana subsidiary and tooling for new products. There were no significant capital expenditure commitments at March 31, 2001. Quarterly capital expenditures during the fourth quarter of fiscal 2001 are anticipated to be approximately the same level as incurred during each of the first three quarters of the fiscal year. 9 KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) On October 1, 1999, the Company acquired substantially all of the assets of Idea Industries, Inc. (Idea). 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 provided for additional consideration to be paid if Idea's sales exceeded certain targeted levels. The maximum amount of contingent consideration was $550,000 payable through 2001. In calendar year 1999, the additional consideration payment was $44,255 and in calendar year 2000 the remaining contingent consideration was earned. All additional consideration paid was recorded as goodwill. 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 each of the January 22, 1999, and the August 20, 1999, Board of Directors meetings, the Board approved an additional 440,000 shares for the stock repurchase program. Utilizing these Board authorizations, the Company has purchased 635,150 shares through the second quarter of fiscal 2001 for approximately $9.3 million with the price per share ranging from approximately $12 to $17. Since the beginning of the stock repurchase program in fiscal 1999, the Company has purchased 1,989,012 shares for approximately $35.7 million. The long-term debt balance increased to $24,280,000 at March 31, 2001 compared with $20,050,000 at July 1, 2000, and $20,000,000 at April 1, 2000. The increase reflects funds utilized for capital expenditures. Anticipated cash flows from operations and available balances on the revolving credit line are expected to be adequate to fund working capital, capital expenditures and dividend payments. 10 KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks, which include changes in the foreign currency exchange rate as measured against the U.S. dollar and changes in U.S. interest rates. The Company holds a derivative instrument in the form of an interest rate swap, which is viewed as a risk management tool and is not used for trading or speculative purposes. The intent of the interest rate swap is to effectively fix the interest rate on part of the borrowings under the Company's variable rate revolving credit agreement. Quantitative disclosures relating to financial instruments and debt are included in the tables below. The following table provides information on the Company's fixed maturity investments as of March 31, 2001, 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 5.1038% plus weighted average credit spread of .5% Amounts in excess of $20,000,000 have an interest rate of approximately 5.0% Interest Rate Swap Notional amount $20 million June 1, 2006 Pay fixed/Receive variable - 5.10375% 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 through working capital management. The Company does not hedge its exposure to translation gains and losses relating to foreign currency net asset exposures. 11 KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits There were no exhibits for the three months ended March 31, 2001. (b) Reports on Form 8-K There were no reports on Form 8-K filed for the three months ended March 31, 2001. 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Knape & Vogt Manufacturing Company (Registrant) Date: May 4, 2001 /s/ William R. Dutmers William R. Dutmers Chairman, President and Chief Executive Officer /s/ Leslie J. Cummings Leslie J. Cummings Vice President of Finance and Treasurer 13