10-Q 1 kv10q_123105.htm Knape & Vogt Manufacturing Company Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED
December 31, 2005

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 000-01859

KNAPE & VOGT MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)

Michigan
(State of Incorporation)

2700 Oak Industrial Drive, NE
Grand Rapids, Michigan
(Address of principal executive offices) 		38-0722920
(IRS Employer Identification No.)


49505
(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 [____]

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES [____]      NO [   X   ]

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES [____]      NO [   X   ]

        As of December 31, 2005, Knape & Vogt Manufacturing Company had 2,603,219 shares of Common Stock outstanding and 1,907,286 shares of Class B Common Stock outstanding.

Forward-Looking Statements

        The matters discussed in this Quarterly Report on Form 10-Q include forward-looking statements about the plans, strategies, objectives, goals, estimates, projections, or expectations of the industry, economics, or the Company itself. Statements, including without limitation, those related to: future revenue, earnings, margins, growth, cash flows, operating measurements, tax rates and tax benefits; expected economic returns; projected operating results or dividend rates; future strength of the Company; future pension costs; future new product sales; future marketing investments; and market risk are forward-looking statements. In addition, forward-looking statements are identifiable by words or phrases indicating that Knape & Vogt or its management, “expects,” “anticipates,” “believes,” “estimates,” “forecasts”, “intends,” “is likely,” “projects,” “plans,” “forecasting,” “optimistic,” “confident,” “opinion”, or has “goals,” “objectives,” or “strategies,” that a particular occurrence or event “will,” “may,” “could,” “should,” or “will likely” result in the future, that a “trend” is toward a particular result or occurrence, or other stated expectations. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict with respect to timing, extent, and likelihood. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date of this Quarterly Report.

        Besides risks and uncertainties described in forward-looking statements contained in this Quarterly Report on Form 10-Q, Annual Report on Form 10-K for the year ended July 2, 2005 and other reports filed with the Securities and Exchange Commission, there are several important factors that may cause actual results to materially differ, including our ability to:

• Improve sales growth;
• Increase gross margin;
• Control the price of raw materials;
• Reduce operating costs;
• Maintain/implement foreign sourcing;
• Sell assets classified as held for sale on favorable terms;
• Continue to meet the terms of our debt covenants; and
• Achieve other plans, strategies, objectives, goals, or expectations described in this Quarterly Report.

  Our operating expenses may be affected by unexpected costs associated with, among other factors:
• Future business acquisitions;
• Business and asset divestures;
• Increased transportation or fuel costs;
• Changes in consumer preferences or spending patterns;
• Losses or financial difficulties of customers and suppliers;
• Changes in accounting policies, practices, or estimates;
• Changes in federal, state or local tax laws, regulations, and interpretations.

        Forecasted sales are subject to competition from many sources. Competitive pressures may result in unexpected reductions in sales volumes, product prices or service fees. The future costs for pension benefit costs may be adversely affected by changes in actuarial assumptions and methods, investment return and the group of participants covered. Our marking and merchandising programs may not generate the sales we anticipate. Our asset impairment and exit cost provisions are estimates and actual costs may be more or less than these estimates.

        This section is intended to provide meaningful cautionary statements for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Historical operating results are not necessarily indicative of the results that may be expected in the future. New risks emerge from time-to-time, that may cause actual results to differ materially from those contained in any forward-looking statements. This should not be construed as a complete list of all factors that could adversely affect our expected consolidated financial position, results of operations or liquidity. The Company undertakes no obligation to update or change forward-looking statements, whether as a result of new information, future events, or other information that we obtain after the date of this Quarterly Report.

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KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)
Dec. 31, 2005		 July 2, 2005
Assets            
   
Current assets  
     Cash and equivalents   $ 9,607,229   $ 6,349,702  
     Accounts receivable, net    19,564,979    19,944,781  
     Inventories, including consignment inventory (Note 5)    25,848,744    24,362,073  
     Prepaid expenses and other current assets    1,286,062    934,711  
     Assets held for sale    833,975    1,281,213  
Total current assets    57,140,989    52,872,480  
   
Property, plant and equipment    82,940,628    81,274,015  
Less accumulated depreciation    61,715,187    59,153,091  
Net property, plant and equipment    21,225,441    22,120,924  
   
Goodwill    4,772,837    4,772,837  
Prepaid pension cost    11,942,295    12,194,574  
Other assets    454,846    427,823  
   
    $ 95,536,408   $ 92,388,638  

See accompanying notes to condensed consolidated financial statements.

3

KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)

(Unaudited)
Dec. 31, 2005		 July 2, 2005
Liabilities and Stockholders' Equity            
   
Current liabilities  
     Accounts payable   $ 11,093,343   $ 11,085,322  
     Accrued income taxes    613,763    978,801  
     Accrued compensation    2,771,163    2,781,447  
     Accrued customer rebates and cooperative advertising    2,513,590    2,149,025  
     Other    4,798,465    4,638,464  
Total current liabilities    21,790,324    21,633,059  
   
Other retirement benefits    3,230,500    4,930,626  
Long-term debt and capital leases    24,516,890    22,524,129  
Deferred income taxes    4,841,000    4,707,000  
Interest rate swap and other long-term liabilities    209,701    485,947  
Total liabilities    54,588,415    54,280,761  
   
Stockholders' Equity  
Common stock (Common - 2,603,219 and 2,482,663 shares  
       issued and outstanding, Class B common - 1,907,286   
       and 2,027,842 shares issued and outstanding)    9,021,010    9,021,010  
Preferred stock -unissued    -    -  
Additional paid-in capital    7,471,697    7,471,697  
Accumulated other comprehensive loss    (151,306 )  (758,471 )
Retained earnings    24,606,592    22,373,641  
Total stockholders' equity    40,947,993    38,107,877  
   
$95,536,408   $ 92,388,638  

See accompanying notes to condensed consolidated financial statements.

4

KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

Six Months Ended Three Months Ended
Dec. 31, 2005 Jan. 1, 2005 Dec. 31, 2005 Jan. 1, 2005
Net sales     $ 81,676,019   $ 75,868,426   $ 40,869,336   $ 37,496,247  
   
Cost of sales    64,587,725    62,104,569    31,551,166    30,537,166  
Gross profit    17,088,294    13,763,857    9,318,170    6,959,081  
   
Selling, general and administrative expenses    10,768,001    11,367,449    5,242,857    5,532,198  
   
Restructuring and impairment expenses    44,477    1,778,447    -    1,778,447  
Operating income (loss)    6,275,816    617,961    4,075,313    (351,564 )
   
Other (income) expense, net    (158,942 )  (77,779 )  (56,601 )  9,649  
   
Interest expense    846,400    796,124    420,842    401,538  
Income (loss) before income taxes    5,588,358    (100,384 )  3,711,072    (762,751 )
   
Income taxes    1,925,934    31,920    1,205,777    (239,936 )
Net income (loss)   $ 3,662,424   $ (132,304 ) $ 2,505,295   $ (522,815 )
Basic earnings per share:  
Net income per share   $ 0.81   $ (0.03 ) $ 0.56   $ (0.12 )
Weighted average shares outstanding    4,510,505    4,516,893    4,510,505    4,517,105  
   
Dilutive earnings per share:  
Net income per share   $ 0.81   $ (0.03 ) $ 0.56   $ (0.12 )
Weighted average shares outstanding    4,510,701    4,516,893    4,510,897    4,517,105  
   
Cash dividend - common stock   $ .33   $ .33   $ .165   $ .165  
   
Cash dividend - Class B common stock   $ .30   $ .30   $ .15   $ .15  

See accompanying notes to condensedconsolidated financial statements.

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KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)

Common stock Additional paid-in capital Accumulated other comprehensive income (loss) Retained earnings Total
Balance, July 2, 2005     $ 9,021,010   $ 7,471,697   $ (758,471 ) $ 22,373,641   $ 38,107,877  
   
Comprehensive income  
  Net income    -    -    -    3,662,424    3,662,424  
  Foreign currency translation
    adjustment		    -    -    412,364    -  
  Gain on derivative instrument    -    -    194,801    -  
  Other comprehensive income    -    -    607,165    -    607,165  
Comprehensive income    4,269,589  
   
Cash dividends    -    -    -    (1,429,473 )  (1,429,473 )
   
Balance, December 31, 2005   $ 9,021,010   $ 7,471,697   $ (151,306 ) $ 24,606,592   $ 40,947,993  

See accompanying notes to condensed consolidated financial statements.

6

KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Six Months Ended
Dec. 31,
2005		 Jan. 1,
2005
Operating Activities:            
     Net income (loss)   $ 3,662,424   $ (132,304 )
     Non-cash items:  
         Depreciation and amortization    2,496,385    3,327,143  
         Deferred income taxes    30,000    (1,204,142 )
         Change in retirement plan cost    (1,447,627 )  132,373  
         Impairment expenses    -    1,778,447  
         Other    37,233    12,393  
         Changes in operating assets and liabilities:  
                  Accounts receivable    495,943    886,090  
                  Inventories    (1,486,671 )  (196,466 )
                  Other current assets    (347,985 )  162,411  
                  Accounts payable and accrued expenses    192,517    (992,114 )
     Net cash provided by operating activities    3,632,219    3,773,831  
Investing Activities:  
     Additions to property, plant and equipment    (1,493,139 )  (1,578,918 )
     Other    183,575    (11,617 )
     Net cash used for investing activities    (1,309,564 )  (1,590,535 )
Financing Activities:  
     Dividends paid    (1,429,473 )  (1,426,156 )
     Borrowings on long-term debt    15,753,222    21,743,931  
     Payments on long-term debt and capital leases    (13,760,461 )  (21,750,682 )
     Net cash provided by (used for) financing activities    563,288    (1,432,907 )
Effect of Exchange Rate Changes on Cash    371,584    427,587  
Net Increase in Cash and Equivalents    3,257,527    1,177,976  
   
Cash and equivalents, beginning of year    6,349,702    5,278,869  
   
Cash and equivalents, end of period   $ 9,607,229   $ 6,456,845  
Cash Paid During the Period:
    - interest     $827,823   $553,871  
    - income taxes     2,250,000   2,056,700  

See accompanying notes to condensed consolidated financial statements.

7

KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 – Summary of Significant Accounting Policies

        The condensed consolidated financial statements have been prepared by Knape & Vogt Manufacturing Company (the “Company” or “KV”), without audit, in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Management believes that the disclosures made in this document are adequate so as not to make the information presented misleading. Operating results for the six-month and three-month periods ended December 31, 2005, are not necessarily indicative of the results that may be expected for the fiscal year ending July 1, 2006. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the year ended July 2, 2005.

        The Company utilizes a 52- or 53-week fiscal year, which ends on the Saturday nearest the end of June. The fiscal year ending July 1, 2006 and July 2, 2005 contain 52 weeks. Both six-month periods ended on December 31, 2005 and January 1, 2005 contained 26 weeks.

Foreign Currency

        The functional currency for the Company’s foreign subsidiaries is the local currency. The accounts of the foreign subsidiaries are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52. Current assets and liabilities are translated at end of period exchange rates, while long-term assets and liabilities are translated at historical month-end 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. Gains and losses from foreign currency transactions, such as those resulting from the settlement of foreign receivables or payables are included in the consolidated statements of operations. Foreign currency exchange net losses were $23,198 and $40,329 for the six months ended December 31, 2005 and January 1, 2005, respectively. For the three months ended December 31, 2005, foreign currency exchange net gains were $1,165 compared to net losses of $34,176 for the three months ended January 1, 2005.

Revenue Recognition

        The Company records revenue when title to the product and risk of ownership passes to the buyer. Sales are shown net of returns, discounts and any other form of sales incentive, including cooperative advertising, rebates and merchandising displays. In certain circumstances, the Company provides buyback programs and markdown allowances to its customers. These amounts are fixed at the start of the contract period with the customer and accounted for in accordance with Statement of Position No. 93-7, “Reporting on Advertising Costs” and Emerging Issues Task Force Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer”. The cost of these programs are either expensed at the time of the initial shipment of the goods or are expensed on a prorated basis over the sales of the contract, if the Company has a written commitment from the customer.

8

KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Stock Based Compensation

        Effective July 3, 2005, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, Share-Based Payment. The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, with such cost recognized over the applicable vesting period. No options or other share-based payment have been granted this quarter. In addition, all options issued in prior years are vested. Therefore, the Company has incurred no expense for share-based payment during the six-month period ending December 31, 2005. Prior to July 3, 2005, the Company accounted for its stock option plans in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees.

Note 2 – New Accounting Standards

        In March 2005, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143” (FIN 47). Under the Interpretation, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Any uncertainty about the amount and/or timing of future liability should be factored into the calculation of the liability when sufficient information is available. FIN 47 further clarifies when an entity would have sufficient information to reasonably estimate the fair value. The Company must be in compliance no later than the end of the fiscal year ending after December 15, 2005, although early adoption is encouraged. The Company is required to adopt FIN 47 by the end of fiscal 2006 and is currently evaluating the impact of FIN 47 on its consolidated financial statements.

Note 3 – Derivative Instrument

        The Company has entered into 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 the interest-rate-swap counter-party are recorded in interest expense in the period in which they accrue. The derivative, which has a notional amount of $20,000,000, was recognized as a liability on the balance sheet at its fair value of $135,962 at December 31, 2005 and $434,763 at July 2, 2005.

        Neither the Company nor the counter-party, which is a major U.S. bank, is required to collateralize its obligation under the swap. The Company is exposed to loss if the counter-party should default. At December 31, 2005, 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 material adverse effect on the financial position, results of operations or cash flows of the Company.

9

KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 4 — Common Stock and Per Share Information

        The Company has 6,000,000 shares of common stock and 4,000,000 shares of Class B common stock authorized. All of the stock is $2 par/share.

        The following are the numerators and denominators used in the calculations of basic and diluted earnings per share (EPS) for each of the periods presented:

Six Months Ended Three Months Ended
Dec. 31, 2005 Jan. 1, 2005 Dec. 31, 2005 Jan. 1, 2005
Numerator for both basic and                    
diluted EPS, net income (loss)   $ 3,662,424   $ (132,304 ) $ 2,505,295   $ (522,815 )
Denominator for basic EPS,  
  weighted-average  
  common shares outstanding    4,510,505    4,516,893    4,510,505    4,517,105  
Denominator for diluted EPS,  
  weighted-average  
  common shares outstanding    4,510,701    4,516,893    4,510,897    4,517,105  

        Diluted EPS excludes stock options where the exercise price exceeded the average market price of the Company’s common stock, since the effect would be anti-dilutive. The options shown below for January 1, 2005 met this criteria and were excluded.

Dec. 31, 2005 Jan. 1, 2005
Exercise Price        
    $13.64    5,500    6,050  
    $14.09    7,150    7,700  
    $18.18    -    5,500  
    $18.48    -    206,183  

Note 5 — Inventories

        Inventories are valued at the lower of FIFO (first-in, first-out) cost or market. Inventories are summarized as follows:

Dec. 31, 2005 July 2, 2005
Finished products     $ 16,685,473   $ 15,038,354  
Consignment inventory    3,182,459    3,485,891  
Work in process    1,952,473    2,154,142  
Raw materials    4,028,339    3,683,686  
Total   $ 25,848,744   $ 24,362,073  

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KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 6 – Restructure and Impairment Expenses

        During the quarter ended January 1, 2005, the Company recognized asset impairment charges of $115,088 pre-tax and accelerated depreciation of $304,116 pre-tax on certain manufacturing equipment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

        In January 2005, the Board of Directors approved a restructuring plan to close its Muncie, Indiana facility and relocate its operations into existing available space in the Grand Rapids, Michigan facility. In accordance with SFAS No. 144, the Company recorded pre-tax impairment charges of $1,663,359, in the second quarter of fiscal 2005, consisting of the write down of the long-lived assets; including real estate, fixed assets and manufacturing equipment located in the Muncie facility to the lower of their carrying values or their estimated fair values, less the disposition costs. The closure of the facility and relocation of the operations was completed in June 2005.

        In addition, the Company incurred certain qualifying exit costs in connection with the closure of the Muncie facility, including severance and the relocation of certain equipment and inventory. All of the charges were recorded in the Manufacturing division of the Company and were expensed as incurred.

        In July 2005, the Company determined certain assets previously classified as assets held for sale would be used in production. Accordingly, the values of these assets were written up by approximately $75,000 to their original net book value and were reclassified from assets held for sale to property, plant, and equipment and depreciated. Additionally, the Company re-listed the building held for sale with a new broker. The new broker re-evaluated the market conditions and reduced the listing price. KV reduced the assets held for sale for the building by approximately $75,000. Management believes that the carrying value of the remaining assets held for sale is representative of the amounts that will be received upon future sale, based upon currently available information.

        The following summarizes the restructuring expenses that were incurred and paid in the six months ended December 31, 2005. There was no activity for the three months ended December 31, 2005.

December 31,
2005
Severance & stay-on bonuses     $ 6,817  
Facility exit costs & other    37,660  
Total   $ 44,477  

        The following summarizes the restructuring accrual activity for the period ended December 31, 2005.

Severance &
stay-on bonuses
Accrual balance, July 2, 2005     $ 49,685  
Cash payments    (49,685 )
Accrual balance December 31, 2005   $ -  


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KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 7 – Warranty Disclosure

        The Company provides a limited lifetime warranty on most products sold. Depending on the product and based on historical experience, the lifetime warranty is generally defined in a range of three to fifteen years. The Company does not sell or otherwise issue warranties or warranty extensions as stand alone products. The warranty provides replacement of the product as the resolution for any warranty claims. Reserves have been established for the various costs associated with the Company’s warranty program. General warranty reserves are based on historical claims experience and other currently available information and are periodically adjusted for business levels and other factors. Specific reserves are established if an issue is identified with the amounts for such reserves based on the estimated cost to correct the problem. The actual warranty expense could differ from the estimates made by the Company based on product performance. The following table presents the changes in the Company’s product warranty liability:

Six Months Ended Three Months Ended
Dec. 31, 2005 Jan. 1, 2005 Dec. 31, 2005 Jan. 1, 2005
Accrued warranty costs at beginning of period   $ 394,000   $ 287,250   $ 348,500   $ 289,021  
Payments made for warranty costs    (312,413 )  (135,915 )  (94,712 )  (88,684 )
Accrual for product warranty    232,013    144,683    59,812    95,681  
Accrued warranty costs at end of period   $ 313,600   $ 296,018   $ 313,600   $ 296,018  

Note 8 — Comprehensive Income

        Comprehensive income represents net income and other revenues, expenses, gains and losses that are excluded from net income and recognized directly as a component of stockholders’ equity.

Comprehensive income and its components consist of the following:

Six Months Ended Three Months Ended
Dec. 31, 2005 Jan. 1, 2005 Dec. 31, 2005 Jan. 1, 2005
Net income (loss)     $ 3,662,424   $ (132,304 ) $ 2,505,295   $ (522,815 )
Other comprehensive income (net of tax):  
  Foreign currency translation adjustment    412,364    492,294    8,038    266,787  
  Gain on derivative instrument    194,801    304,435    81,500    211,054  
Comprehensive income (loss)   $ 4,269,589   $ 664,425   $ 2,594,833   $ (44,974 )

Other comprehensive income related to the interest rate swap agreement consisted of the following components:

Six Months Ended Three Months Ended
Dec. 31, 2005 Jan. 1, 2005 Dec. 31, 2005 Jan. 1, 2005
Pre-Tax After-Tax Pre-Tax After-Tax Pre-Tax After-Tax Pre-Tax After-Tax
Change in fair value of interest rate swap   $ 545,801   $ 355,351   $ 920,269   $ 598,128   $ 235,500   $ 153,000   $ 537,888   $ 349,396  
Settlement to interest expense    (247,000 )  (160,550 )  (451,834 )  (293,693 )  (110,000 )  (71,500 )  (212,834 )  (138,342 )
Other comprehensive income   $ 298,801   $ 194,801   $ 468,435   $ 304,435   $ 125,500   $ 81,500   $ 325,054   $ 211,054  

12

KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 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 also has a nonqualified defined benefit supplemental retirement program (“SERP”) for certain designated former officers of the Company and one active executive in Canada which includes death and disability benefits. The plan is funded from the general assets of the Company.

        Effective June 30, 2005, the Company established a non-qualified deferred compensation plan for certain executives. This plan replaced the profit sharing plan contributions for these individuals. This deferred compensation plan is a defined contribution plan and is unfunded.

        The Company has a postretirement health-care plan that covers substantially all employees. During the second quarter of fiscal 2006, the Board of Directors approved a resolution to eliminate all Company contributions to the retiree healthcare plan. This resulted in settlement accounting for the Company’s outstanding obligation. Accordingly, the Company recognized a $1.5 million pre-tax gain in the second quarter of fiscal 2006 associated with this settlement. The Company recorded the settlement gain as a reduction of $1.2 million as an offset to cost of sales and $.3 million to operating expenses.

Components of Net Periodic Benefit Costs:

Three months ended:

Pension Benefits SERP Benefits Postretirement
Health-Care Benefits
Dec. 31, 2005 Jan. 1, 2005 Dec. 31, 2005 Jan. 1, 2005 Dec. 31, 2005 Jan. 1, 2005
Service cost     $ 103,416   $ 107,419   $ 1,767   $ 1,984   $ 24,455   $ 20,500  
Interest cost    298,086    276,951    49,293    45,085    27,417    32,500  
Expected return on plan assets    (448,207 )  (433,439 )  -    -    -    -  
Net amortization    153,339    162,447    27,220    33,008    (5,315 )  (3,000 )
Net periodic pension cost   $ 106,634   $ 113,378   $ 78,280   $ 80,077   $ 46,557   $ 50,000  

Six months ended:

Pension Benefits SERP Benefits Postretirement
Health-Care Benefits
Dec. 31, 2005 Jan. 1, 2005 Dec. 31, 2005 Jan. 1, 2005 Dec. 31, 2005 Jan. 1, 2005
Service cost     $ 206,838   $ 214,838   $ 3,535   $ 3,968   $ 48,909   $ 41,000  
Interest cost    596,194    553,902    98,591    90,170    54,833    65,000  
Expected return on plan assets    (896,441 )  (866,878 )  -    -    -    -  
Net amortization    306,684    324,894    54,443    66,016    (10,629 )  (6,000 )
Net periodic pension cost   $ 213,275   $ 226,756   $ 156,569   $ 160,154   $ 93,113   $ 100,000  

Employer Contributions

The Company has contributed $131,139 for the quarter and $264,815 for the six months ended December 31, 2005 to fund its retirement plans compared to $171,379 and $339,657 respectively for the same periods in the prior year. The Company anticipates contributing approximately an additional $270,000 to fund its retirement plans in fiscal 2006 for an estimated total of $535,000.

13

KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 10 – Segment Information

        The Company manages the business and reviews financial information by market channels. Management has limited its review of the channels to net sales to external customers and operating profit before administrative costs as shown below. In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, only those measures prepared on an ongoing basis and reviewed by the chief operating decision maker are disclosed.

        The Business Products division is comprised of two market channels: OEM and Idea. The OEM market channel sells precision drawer slides, hardware and ergonomic products to original equipment office furniture manufacturers. The Idea market channel sells ergonomic products to independent office furniture dealers. These dealers purchase product from office furniture manufacturers and resell the furniture along with design and installation services to the end customer.

        The Home & Commercial Products division is comprised of two market channels: consumer and distribution/other. The consumer market channel sells a majority of the Company’s product lines to retailers. The distribution/other market channel sells many of the Company’s product lines to kitchen and bath OEM manufacturers and full line woodworking distributors.

        The Manufacturing division manufactures or sources all products and sells them to the four market channels. The selling price to the market channels is equal to the standard cost of the product. Manufacturing cost variances from standard result in an operating profit or loss for the Manufacturing division.

        The accounting policies of the business segments are the same as those described in the summary of significant accounting policies in the 2005 Annual Report on Form 10-K.

Three Months Ended: Business Products OEM Business Products Idea Consumer Distribution and Other Manu-facturing Corporate and Other Consolidated Total
December 31, 2005:                                
  Net sales to external  
     customers   $ 12,341,231   $ 2,264,930   $ 7,430,609   $ 18,911,064   $ (78,498 ) $ -   $ 40,869,336  
  Operating profit (loss)  
     before administrative  
     costs, other expenses and  
     income taxes    843,241    208,343    686,426    3,841,992    (479,690 )  -    5,100,312  
  Administrative costs,  
     other expenses    -    -    -    -    -    1,389,240    1,389,240  
  Income tax expense    -    -    -    -    -    1,205,777    1,205,777  
  Net income (loss)   $ 843,241   $ 208,343   $ 686,426   $ 3,841,992   $ (479,690 ) $ (2,595,017 ) $ 2,505,295  

January 1, 2005:		  
  Net sales to external  
     customers   $ 10,223,620   $ 2,351,052   $ 7,944,172   $ 16,989,761   $ (12,358 ) $ -   $ 37,496,247  
  Operating profit (loss)  
     before administrative  
     costs, other expenses and  
     income taxes    630,730    293,514    338,228    2,716,680    (1,382,135 )  -    2,597,017  
  Administrative costs,  
     Restructure/impairment
     other expenses		    -    -    -    -    1,778,447    1,581,321    3,359,768  
  Income tax expense    -    -    -    -    -    (239,936 )  (239,936 )
  Net income (loss)   $ 630,730   $ 293,514   $ 338,228   $ 2,716,680   $ (3,160,582 ) $ (1,341,385 ) $ (522,815 )

14

KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Six Months Ended: Business Products OEM Business Products Idea Consumer Distribution and Other Manu-facturing Corporate and Other Consolidated Total
December 31, 2005:                                
  Net sales to external  
     customers   $ 24,751,471   $ 4,655,679   $ 14,907,351   $ 37,528,068   $ (166,550 ) $ -   $ 81,676,019  
  Operating profit (loss)  
     before administrative  
     costs, other expenses and  
     income taxes    1,759,675    450,945    1,318,808    7,437,781    (2,335,041 )  -    8,632,168  
  Administrative costs,  
     Restructure/impairment  
     other expenses    -    -    -    -    44,477    2,999,333    3,043,810  
  Income tax expense    -    -    -    -    -    1,925,934    1,925,934  
  Net income (loss)   $ 1,759,675   $ 450,945   $ 1,318,808   $ 7,437,781   $ (2,379,518 ) $ (4,925,267 ) $ 3,662,424  
   
January 1, 2005:  
  Net sales to external  
     customers   $ 20,425,762   $ 4,780,867   $ 15,440,156   $ 35,247,590   $ (25,949 ) $ -   $ 75,868,426  
  Operating profit (loss)  
     before administrative  
     costs, other expenses and  
     income taxes    1,193,196    683,753    (9,090 )  5,112,062    (2,442,602 )  -    4,537,319  
  Administrative costs,  
     Restructure/impairment  
     other expenses    -    -    -    -    1,778,447    2,859,256    4,637,703  
  Income tax expense    -    -    -    -    -    31,920    31,920  
  Net income (loss)   $ 1,193,196   $ 683,753   $ (9,090 ) $ 5,112,062   $ (4,221,049 ) $ (2,891,176 ) $ (132,304 )

Note 11 – Legal Contingencies

        Two pending legal matters are described in Note 15 – Legal Contingencies in the 2005 Annual Report on Form 10-K. There has been no change in the Canada Customs and Revenue Agency matter.

        During the second quarter of fiscal 2005, a competitor filed a suit in the U.S. District Court of the Central District of California alleging that the Company infringes two of the competitor’s U.S. patents. The competitor was seeking monetary damages and injunctive relief. The Company received an opinion from its outside patent counsel that the Company’s products do not infringe the competitor’s patents. The Company denied any liability. However, in an effort to resolve this matter, the Company agreed to a settlement with the plaintiff. The settlement includes an amount payable for past sales of the product and a royalty of 5% on all future sales of this product until the product is redesigned.

        KV is also subject to other legal proceedings and claims, which arise in the ordinary course of business.

        In the opinion of management, based on the information presently known and taking into account established accruals of approximately $469,000 at December 31, 2005, the ultimate liability for these matters will not have a material adverse effect on KV’s financial position or the results of its operations.

15

KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Net Sales

        Net sales for the second quarter of fiscal 2006 were $40.9 million compared to $37.5 million for the same period in the prior year. Net sales for the first six months of fiscal 2006 were $81.7 million compared to $75.9 million for the same period in the prior year. In total, the Company had new product sales of $8.1 million and $16.5 million for the quarter and six months ended December 31, 2005. This compared to new product sales of $7.3 million and $15.3 million for the same periods respectively in fiscal 2005. New product introductions have allowed the Company to expand its product offering and successfully target new markets, including the automotive industry and the medical field. The Company consistently defines new product sales, including product extensions, as those products sold within a three-year period from the date of introduction.

        The Distribution and Other segment net sales of $18.9 million for the second quarter and $37.5 million for the first six months of fiscal 2006 represented growth of 11.3% and 6.5%, respectively, over the same periods in the prior year. The growth resulted primarily from the addition of several new products. These include the Virtu™ line of upscale kitchen, bath, and closet accessories, several new wood and wire storage accessory products and the expanded line of precision ball bearing drawer slides, including the Precision Built™ family of slides.

        The Consumer segment net sales of $7.4 million for the second quarter and $14.9 million for the first six months of fiscal 2006, represented a decline of 6.5% and 3.5%, respectively, over the same periods in the prior year. Last year, the Company launched a number of new products to several key customers during the first six months and filled the initial stocking orders during this same period resulting in higher than normal sales. During the second quarter of fiscal 2005, the Company performed an in depth review of its top 50 customers in this channel and developed a strategy for improving the profitability of these customers. As a result of this process, it eliminated a number of the promotional programs that had been utilized during the past few years and discontinued sales to certain smaller customers. While this rationalization process reduced sales in this segment, it has resulted in improved channel profitability.

        The Business Products Original Equipment Manufacturer (“OEM”) segment net sales of $12.3 million for the second quarter and $24.8 million for the first six months of fiscal 2006 represented growth of 20.7% and 21.2%, respectively, over the same periods in the prior year. The Business and Institutional Furniture Manufacturers’ Association (BIFMA) results for the five months ended November 2005, reported increased shipments of 10.0% for the industry compared to the same period in the prior year. The Company has been successful in growing sales to the Business Product OEM’s with the addition of new products, in particular the addition of a number of customer specific versions of KV’s precision ball bearing slides and several new ergonomic accessory products, including the updated line of height adjustable tables. Further, sales have grown as a result of the addition of new customers in both existing markets and in new markets to the Company, such as the automotive industry.

        The Idea segment net sales were $2.3 million for the second quarter and $4.7 million for the first six months of fiscal 2006. Net sales decreased 3.7% for the second quarter and 2.6% for the six months ended December 31, 2005. Late in fiscal 2005, management began converting to a direct sales force to call on the customers served in this market. While this change created some disruption in the segment, management believes it is now better positioned for future sales growth. There are a number of new products in this channel and utilizing a direct sales force will promote sales growth in this important channel of the business. These products include the ProLiftix™ line of height adjustable tables, the Polaris™ lever free adjustable keyboard system and the Proxi™ line of office organization tools.

16

KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

        The Company offers a consignment inventory program for certain customers. Under this program, the customers are not invoiced for product until the Company receives notice that the customer has utilized the inventory at their location. At December 31, 2005 and July 2, 2005, the inventory program totaled $3.2 million and $3.5 million at cost, respectively.

Gross Profit

        Gross profit, as a percentage of net sales, was 22.8% for the second quarter and 20.9% for the first six months of fiscal 2006 compared to 18.6% and 18.1%, respectively, for the same periods in the prior year. During the second quarter of fiscal 2006, KV recorded a gain of $1.2 million pre-tax in cost of sales for the settlement of its retiree health plan. See note 9 for more information on the settlement. Excluding this gain, gross profit, as a percentage of net sales, was 19.9% for the second quarter and 19.5% for the first six months of fiscal 2006. Fiscal 2006 gross profit improved due to lower steel costs and reduced costs as a result of the consolidation of the wire operations. This was partially offset by higher labor costs incurred during the first quarter of fiscal 2006, due to certain drawer slides manufactured in the United States instead of being sourced from overseas and the continued integration of wire production into the Grand Rapids facility.

        Asian producers of both utility and precision drawer slides continue to pose a competitive threat, particularly from a pricing perspective. In response, KV has established solid vendor relationships with three key producers of these slides in Asia and has been utilizing product sourced from these manufacturers to successfully address pricing pressures. In addition, KV is establishing its own manufacturing entity in Vietnam. It has received the business license for this entity, leased a facility, purchased manufacturing equipment, and anticipates the startup of production during calendar 2006. The total initial investment is anticipated to be approximately $1.0 million. Management believes that utilizing these low-cost production resources will help KV remain competitive in the U.S. marketplace and will allow it to improve the profitability and competitiveness of its OEM market.

        To date, all of the slides produced in Asia have represented incremental sales to KV and have not reduced volume being produced in the United States. KV’s domestic production capabilities are being focused on manufacturing the new, more complex products, which typically represent higher margin products.

        During the second quarter of fiscal 2005, the Company recorded additional depreciation expense of $304,116 in cost of goods sold related to certain equipment that it had been utilizing for backup production of precision drawer slide products. Those products are now being partially sourced from overseas rather than manufactured in house, so the extra capacity is no longer required. The useful life of the equipment identified for disposal was adjusted accordingly for depreciation purposes.

Operating Expenses

        Operating expenses, as a percentage of net sales, were 12.8% for the second quarter and 13.2% for the first six months of fiscal 2006 compared to 14.8% and 15.0%, respectively, for the same periods in the prior year. During the second quarter of fiscal 2006, KV recorded a pre-tax gain of $324,452 in operating expense for the settlement of its retiree health plan. See note 9 for more information on the settlement. Excluding this gain, operating expenses, as a percentage of net sales, were 13.6% for the second quarter and the first six months of fiscal 2006. KV continues to be successful in leveraging its operating expense as sales increase, while still having sufficient spending to ensure its ongoing ability to develop and introduce new products to the market and have the appropriate advertising materials available to introduce those products.

17

KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Restructuring and Impairment Expenses

        During the quarter ended January 1, 2005, the Company recognized asset impairment charges of $115,088 pre-tax and accelerated depreciation of $304,116 pre-tax on certain manufacturing equipment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

        In January 2005, the Board of Directors approved a restructuring plan to close its Muncie, Indiana facility and relocate its operations into existing available space in the Grand Rapids, Michigan facility. In accordance with SFAS No. 144, the Company recorded pre-tax impairment charges of $1,663,359, in the second quarter of fiscal 2005, consisting of the write down of the long-lived assets; including real estate, fixed assets and manufacturing equipment located in the Muncie facility to the lower of their carrying values or their estimated fair values, less the disposition costs. The closure of the facility and relocation of the operations was completed in June 2005.

        In addition, the Company incurred certain qualifying exit costs in connection with the closure of the Muncie facility, including severance and the relocation of certain equipment and inventory. All of the charges were recorded in the Manufacturing division of the Company and were expensed as incurred.

        In July 2005, the Company determined certain assets previously classified as assets held for sale would be used in production. Accordingly, the values of these assets were written up by approximately $75,000 to their original net book value and were reclassified from assets held for sale to property, plant, and equipment and depreciated. Additionally, the Company re-listed the building held for sale with a new broker. The new broker re-evaluated the market conditions and reduced the listing price. KV reduced the assets held for sale for the building by approximately $75,000. Management believes that the carrying value of the remaining assets held for sale is representative of the amounts that will be received upon future sale, based upon currently available information.

Interest and Other Expenses, net

        Interest expense was $420,842 and $846,400 for the quarter and six months ended December 31, 2005, compared to $401,538 and $796,124 for the same periods in the prior year, respectively. Interest expense increased in the first half of fiscal 2006 due to higher borrowings and an increase in the prime rate.

        Other income was $56,601 for the second quarter of fiscal 2006 compared to other expense of $9,649 for the same quarter in the prior year. For the first six months of fiscal 2006, other income was $158,942 compared to income of $77,779 for the same period in the prior year. The other income for the first six months of fiscal 2006 reflects interest received on previously filed amended tax returns. The other income shown in the prior year reflects a legal settlement received in connection with one of the Company’s patents, along with favorable exchange rate gains.

Income Taxes

        The effective tax rate was 32.5% for the second quarter of fiscal 2006 and 34.5% for the first six months of fiscal 2006. During the second quarter of fiscal 2006, the Company received a final settlement of certain Federal and provincial audits performed in Canada and recognized $221,000 in refunds. The effective rate for the second quarter of fiscal 2005 was lower than normal as the Feeny subsidiary had a net operating loss at the state level and was unable to record a deferred tax benefit on the impairment charge. The impairment charges recognized caused the Company to pay $31,920 in taxes for the first six months of fiscal 2005 on a pre-tax loss.

18

KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Net Income (Loss)

        Net income for the six months ended December 31, 2005 was $3.7 million or $.81 per diluted share and for the second quarter of fiscal 2006 was $2.5 million or $0.56 per diluted share. Net loss for the six months ended January 1, 2005 was $132,304 or $.03 per diluted share and for second quarter of fiscal 2005 was $522,815 or $0.12 per diluted share. During the second quarter of fiscal 2006, the Board of Directors approved a resolution to eliminate all Company contributions to its retiree health plan. This resulted in settlement accounting for the Company’s outstanding obligation. Accordingly, the Company recognized a gain of approximately $952,000 after-tax in the second quarter of fiscal 2006 associated with this settlement. Fiscal 2005’s loss included the impairment charges and additional depreciation of approximately $1.3 million after-tax related to the relocation of the Company’s wire production. The Company’s sales volume growth, improved gross profits and better leveraging of operating expenses, were the primary contributors to the net income improvement.

Liquidity and Capital Resources

        Net cash provided by operating activities for the first six months of fiscal 2006 was $3.6 million compared to $3.8 million for the first six months of fiscal 2005. Higher net income in fiscal 2006 was offset by lower depreciation and amortization expense, the decrease in retirement plan liability and an increase in inventory. Remaining working capital requirements were relatively constant between the two periods.

        Cash used for investing activities was $1.3 million for the first six months of fiscal 2006, compared to $1.6 million used in the same period in the prior year. Capital expenditures totaled $1.5 million for the six months ended December 31, 2005, compared to $1.6 million for the first six months of the prior year. The capital expenditures for the first six months of fiscal 2006 represented investments in tooling for new products and the set up of the Vietnam facility.

        There were capital expenditure commitments of approximately $936,131 for new product tooling and Asian production equipment at December 31, 2005. Capital expenditures for the fiscal year are anticipated to be approximately $3.0 million. The investments will be focused on bringing new products and product improvements to our customers, along with our investment in Asia.

        Cash provided by financing activities was $0.6 million for the first six months of fiscal 2006 as compared to cash used of $1.4 million in fiscal 2005. The expenditures represent the Company’s dividend payments to its shareholders.

        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 for the next year and the foreseeable future.

19

KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Legal Proceedings

        Two pending legal matters are described in Note 15 – Legal Contingencies in the 2005 Annual Report on Form 10-K. There has been no change in the Canada Customs and Revenue Agency matter.

        During the second quarter of fiscal 2005, a competitor filed a suit in the U.S. District Court of the Central District of California alleging that the Company infringes two of the competitor’s U.S. patents. The competitor was seeking monetary damages and injunctive relief. The Company received an opinion from its outside patent counsel that the Company’s products do not infringe the competitor’s patents. The Company denied any liability. However, in an effort to resolve this matter, the Company agreed to a settlement with the plaintiff. The settlement includes an amount payable for past sales of the product and a royalty of 5% on all future sales of this product until the product is redesigned.

        KV is also subject to other legal proceedings and claims, which arise in the ordinary course of business.

        In the opinion of management, based on the information presently known and taking into account established accruals of approximately $469,000 at December 31, 2005, the ultimate liability for these matters will not have a material adverse effect on KV’s financial position or the results of its operations.

New Accounting Standards

        See Note 2 to the Condensed Consolidated Financial Statements.

Critical Accounting Policies

        This discussion and analysis of the Company’s financial condition and results of its operations is based upon its consolidated financial statements. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts. On an ongoing basis, management evaluates the estimates, including those related to bad debts, inventories, long-lived assets, income taxes, self-insurance reserves, retirement benefits and contingencies and litigation. Management bases the estimates on historical experience and on various other assumptions and factors that they believe to be reasonable under the circumstances. Based on management’s ongoing review, adjustments are made that are considered appropriate under the facts and circumstances. The accompanying condensed consolidated financial statements are prepared using the same critical accounting policies discussed in the 2005 Annual Report on Form 10-K.

Trends and Developments

        The Company announced October 13, 2005, that it has retained the investment-banking firm W.Y. Campbell & Company to act as a financial advisor in evaluating strategic alternatives, including a possible sale.

20

KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risks, which include changes in the Canadian dollar and the Vietnamese Dong foreign currency exchange rates 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. The derivative was recognized as a liability on the balance sheet at its fair value of $135,962 at December 31, 2005 and $434,763 at July 2, 2005.

        The following table provides information on the Company’s fixed maturity investments as of December 31, 2005 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   $ 24,500,000   November 1, 2009  
First $20,000,000 at an interest rate  
  of 4.42% (3 month LIBOR)  
  plus weighted average  
  credit spread of .75%;  
Next $4,500,000 at an interest rate of  
  4.29% (1 month LIBOR)  
  plus weighted average  
  credit spread of .75%;  
   
   
Interest Rate Swap  
Notional amount   $ 20,000,000   June 1, 2006  
  Receive variable  
     at 3 month LIBOR - 4.41%  
  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 is in the process of establishing a manufacturing facility in Vietnam. Purchasing and selling activities of this entity will be denominated in the Vietnamese Dong, thereby they will potentially create exchange rate exposure.

        The Company does not hedge its exposure to translation gains and losses relating to foreign currency.

21

KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES
CONTROLS AND PROCEDURES

Item 4. Controls and Procedures

  (a) Evaluation of Disclosure Controls and Procedures
  The Company’s Chief Executive Officer and the Vice President of Finance, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) as of the end of the period covered by this Form 10-Q Quarterly Report have concluded that the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company, particularly during the period in which this Form 10-Q Quarterly Report was being prepared.

  (b) Changes in Internal Controls
  During the period covered by this report, there have been no changes in the Company's internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

22

KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

        Two pending legal matters are described in Note 15 – Legal Contingencies in the 2005 Annual Report on Form 10-K. There has been no change in the Canada Customs and Revenue Agency matter.

        During the second quarter of fiscal 2005, a competitor filed a suit in the U.S. District Court of the Central District of California alleging that the Company infringes two of the competitor’s U.S. patents. The competitor was seeking monetary damages and injunctive relief. The Company received an opinion from its outside patent counsel that the Company’s products do not infringe the competitor’s patents. The Company denied any liability. However, in an effort to resolve this matter, the Company agreed to a settlement with the plaintiff. The settlement includes an amount payable for past sales of the product and a royalty of 5% on all future sales of this product until the product is redesigned.

        KV is also subject to other legal proceedings and claims, which arise in the ordinary course of business.

        In the opinion of management, based on the information presently known and taking into account established accruals of approximately $469,000 at December 31, 2005, the ultimate liability for these matters will not have a material adverse effect on KV’s financial position or the results of its operations.

Item 4. Submission of Matters to a Vote of Security Holders

  (a) Knape & Vogt Manufacturing Company’s Annual Meeting of Shareholders was held on October 21, 2005.

  (b) Proxies were distributed by Knape & Vogt Manufacturing Company pursuant to Regulation 14A under the Securities Exchange Act of 1934. There was no opposition to management’s nominees as listed in the proxy statement and all nominees were elected.

The vote on the nominees was:


Richard S. Knape
Michael J. Kregor
William R. Dutmers
(1) (2)
(1) (2)
(1) (3) 		For
15,458,563
15,472,116
 2,090,601 		Withheld
223,672
210,118
126,944

  (1) Term expires in 2008.
  (2) Elected by vote of holders of Common stock and Class B Common stock voting as a class.
  (3) Elected by vote of holders of Common stock voting as a class.

  Members of the Board of Directors whose terms have not yet expired are:
John E. Fallon and Gregory Lambert, terms expiring in 2006 and Thomas A. Hilborn, Robert J. Knape, and Christopher Norman, terms expiring in 2007.

23

KNAPE & VOGT MANUFACTURING COMPANY AND SUBSIDIARIES

PART II. OTHER INFORMATION
(Continued)

Item 6. Exhibits

  10(a) Loan amendment with Comerica Bank dated December 6, 2005 filed herewith.

  31.1 Certificate of the Chairman and Chief Executive Officer of Knape & Vogt Manufacturing Company pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  31.2 Certificate of the Vice President of Finance of Knape & Vogt Manufacturing Company pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  32.1 Certificate of the Chief Executive Officer of Knape & Vogt Manufacturing Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

  32.2 Certificate of the Vice President of Finance of Knape & Vogt Manufacturing Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

24

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.





Date:   January 24, 2006
          ——————————





Date:   January 24, 2006
          ——————————		 Knape & Vogt Manufacturing Company
(Registrant)


/s/ William R. Dutmers
——————————————
William R. Dutmers
Chairman of the Board and
Chief Executive Officer


/s/ Leslie J. Cummings
——————————————
Leslie J. Cummings
Vice President of Finance and
Treasurer



25

EXHIBIT INDEX

Exhibit Description

10(a) Loan amendment with Comerica Bank dated December 6, 2005 filed herewith.

31.1 Certificate of the Chairman and Chief Executive Officer of Knape & Vogt Manufacturing Company pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certificate of the Vice President of Finance of Knape & Vogt Manufacturing Company pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certificate of the Chief Executive Officer of Knape & Vogt Manufacturing Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certificate of the Vice President of Finance of Knape & Vogt Manufacturing Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

26