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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended July 1, 2000
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to ______
Commission file number 2-18868
KNAPE & VOGT MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)
Michigan 38-0722920
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2700 Oak Industrial Drive, N.E., Grand Rapids, MI 49505
(Address of principal executive offices) (Zip Code)
(616) 459-3311
(Registrant's telephone number, including area code)
Securities registered pursuant to 12(b) of the Act:
---------------------------------------------------
Title of each class Name of each exchange on which registered
None None
Securities Registered pursuant to Section 12(g) of the Act:
-----------------------------------------------------------
Common Stock, par value $2.00 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $70,383,493 as of August 25, 2000.
Number of shares outstanding of each class of common stock as of August 25,
2000: 2,227,216 shares of Common Stock, par value $2.00 per share, and 2,388,095
shares of Class B Common Stock, par value $2.00 per share.
Documents incorporated by reference. Certain portions of the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on October 13, 2000,
are incorporated by reference into Part III of this Report.
1
PART I
ITEM 1--BUSINESS
Item 1(a)--General Development of Business
The Company is engaged primarily in the design, manufacture, and marketing
of storage hardware and ergonomic products, which serve the consumer, contract
builder, hardware, and original equipment manufacturer markets. The Company was
incorporated in Michigan in 1906, reorganized in Delaware in 1961, and
reorganized in Michigan in 1985. The Company's main plant and corporate offices
are located at 2700 Oak Industrial Drive, N.E., Grand Rapids, Michigan 49505,
and its telephone number is (616) 459-3311. Unless otherwise noted or indicated
by the context, the term "Company" includes Knape & Vogt Manufacturing Company,
its predecessors and its subsidiaries.
The following significant events occurred in fiscal 2000:
- On October 1, 1999, the Company acquired the assets of Idea Industries,
Inc. Idea Industries designed, manufactured and marketed ergonomic
products including adjustable keyboard mechanisms, keyboard and mouse
platforms, wrist rests and CPU holders.
- On April 14, 2000, the Board of Directors of the Company authorized a
ten-percent stock dividend payable on May 19, 2000, to shareholders of
record on May 5, 2000. All per share data and weighted average shares
outstanding have been adjusted to reflect this dividend.
Item 1(b)--Financial Information About Industry Segments
The Company believes that a dominant portion of the Company's operations is
in a single industry segment -- the design, manufacture, and marketing of
storage hardware and ergonomic products. Accordingly, no separate industry
segment information is presented.
Item 1(c)--Narrative Description of Business
Products, Services, Markets and Methods of Distribution. The Company's
storage products include a complete line of decorative and utility wall-attached
shelving systems. Drawer slides manufactured by the Company include precision,
Euro-style and utility slides. Precision drawer slides use ball bearings, while
Euro-style and utility drawer slides use rollers. The Company's many different
hardware products include closet rods, kitchen storage products and various
fixtures. The Company's ergonomic products include adjustable keyboard trays,
gel wrists rests and floating mousepads.
Approximately 27% of the Company's sales were to the consumer market, 71%
of the Company's sales were to original equipment manufacturers and specialty
distributors, and 2% of the Company's sales were to the office furniture dealer
network. Most sales are made through independent sales representatives.
New Product and Capital Spending Information. Management believes that
capital spending in fiscal 2001 will remain consistent with the $9,112,810 spent
in fiscal 2000. The cost to complete the items classified as construction in
progress at July 1, 2000, was estimated to be approximately $4.5 million. The
fiscal 2001 spending will reflect investments made to improve manufacturing
technology and to bring new products and product enhancements to the Company's
customers.
Sources and Availability of Raw Materials. Most of the Company's storage
products are produced primarily from steel or wood. Historically, the Company
has not experienced difficulty in obtaining these raw materials and does not
anticipate any difficulty in the future, as the raw materials used are not
unique.
Patents, Licenses, Etc. Patents, trademarks and licenses play a part in the
Company's business, but the Company as a whole is not dependent to any material
extent upon any single patent.
Seasonal Nature of Business. The Company's business is not seasonal.
Working Capital Practices. The Company does not believe that it, or the
industry in general, has any special practices or special conditions affecting
working capital items that are significant for an understanding of the Company's
business.
Importance of Limited Number of Customers. The Company sells to both the
consumer market and to the OEM/specialty distributor market, as well as direct
sales to the dealer network. The consumer market is comprised of a broad base of
retail outlets. The OEM/specialty distributor market is more concentrated with a
fewer number of customers and is more closely tied to the office furniture
industry. The dealer network is also closely tied to the office furniture
industry. The Company does not believe that its business is dependent upon any
single or small number of customers, the loss of which would have a materially
adverse effect upon
2
the Company. The Company estimates that at present it has over 1,300 active
customers with approximately 35,000 outlets, of which the five largest customers
account for approximately 19% of sales and no one of which accounts for more
than 6% of sales.
Backlog of Orders. The Company typically has a short lead-time on its
orders and therefore does not believe that information concerning backlog is
material to an understanding of its business.
Government Contracts. The Company does not believe that any portion of its
business is subject to renegotiation of profits or termination of contracts or
subcontracts at the election of the government.
Competition. All aspects of the business in which the Company is engaged
are highly competitive. Competition is based upon price, service and quality. In
the various markets served by the Company, it competes with a number of
manufacturers that have significantly greater resources and sales, including
several conglomerate corporations, and with numerous smaller companies. While
the Company is not aware of any reliable statistics that are available to enable
the Company to accurately determine its relative position in the industry,
either overall or with respect to any particular product or market, the Company
believes that it is one of the three leading manufacturers of drawer slides in
North America.
Research, Design and Development. Approximately $1,690,000 was spent in
fiscal 2000 in the development of new products and in the improvement of
existing products; approximately $1,543,000 was spent in fiscal 1999 and
$1,225,000 in fiscal 1998 for the same purposes. The amount of research and
development expenditures was determined by specific identification of the costs,
which are expensed as incurred.
Environmental Matters. The Company does not believe that existing
environmental regulations will have any material effect upon the capital
expenditures, earnings and competitive position of the Company.
Employees. At July 1, 2000, the Company employed 890 persons. None of the
Company's employees are represented by collective bargaining agents.
Item 1(d)--Information About Foreign Operations
The Company's Canadian operation accounted for approximately 7% of
consolidated sales. Approximately 4% of consolidated net sales were derived from
export shipments from the Company's United States operations to customers in
other foreign countries. The Company does not know of any particular risks
attendant thereto, except that fluctuating exchange rates between the United
States and Canadian currencies and other factors beyond the control of the
Company, such as tariff and foreign economic policies, may affect future results
of such business. Reference is made to Notes 2, 3 and 13 of the Notes to the
Company's Consolidated Financial Statements contained herein for the fiscal year
ended July 1, 2000, for a presentation of additional information concerning the
Company's foreign operations.
ITEM 2--PROPERTIES
The Company owned or leased the following offices and manufacturing
facilities as of July 1, 2000:
Location Description Interest
Grand Rapids, Michigan Executive offices and manufacturing facilities; Owned
444,000 sq. ft. on 41 acres.
Sparks, Nevada Warehouse; 76,000 sq. ft. Leased
Muncie, Indiana Manufacturing facilities and office; Owned
98,000 sq. ft. on 12 acres.
Mississauga, Ontario Office; 1,900 sq. ft. Leased
The facilities indicated as owned are owned in fee by the Company and are
subject to no material encumbrances. The Company believes that its facilities
are generally adequate for its operations and are maintained in a state of good
repair. The Company believes it is in compliance with all applicable state and
federal air and water pollution control laws. During the five years ended July
1, 2000, the Company spent approximately $28,000,000 for expansion,
modernization and improvements of its facilities and equipment.
3
ITEM 3--LEGAL PROCEEDINGS
In September 1999, when the Company sold The Hirsh Company the purchaser
assumed the lease for the facility located in Skokie, Illinois. The Company
guaranteed all of the lease obligations to the landlord through the expiration
of the lease in August 2000. As of July 1, 2000, the purchaser is in default
under the lease agreement and the landlord has filed suit against the purchaser
and the Company as the guarantor. The claim is for payment of the unpaid rent,
unpaid property taxes, building repairs and legal costs.
A former employee in connection with benefits paid under an executive
retirement plan has also sued the Company. The initial ruling was in favor of
the former employee; however, the Company has filed an appeal in the case.
The Company is also subject to other legal proceedings and claims, which
arise in the ordinary course of its business.
In the opinion of management, based on the information presently known, the
ultimate liability for these matters, taking into account established accruals
of approximately $880,000, will not have a materially adverse effect on the
Company's financial position or the results of its operations.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended July 1, 2000.
ADDITIONAL ITEM--EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company were, at July 1, 2000, as follows:
Year First Elected
Name Age Positions and Offices Held an Executive Officer
- -----------------------------------------------------------------------------------------------------------
William R. Dutmers 44 Chairman of the Board of Directors,
Chief Executive Officer and President 1998
Michael G. Van Rooy 48 Senior Vice President of Manufacturing 1993
James S. Dahlke 50 Vice President of Business Development 1999
Mr. Dutmers was named Chairman of the Board of Directors in January 1998.
Mr. Dutmers has been a member of the Board of Directors since April 1996. He was
named Chief Executive Officer and President in May 1999. Mr. Dutmers was the
President of G & L, Inc., a business consulting firm, from 1991 to 1997.
Mr. Van Rooy has been the Senior Vice President of Manufacturing since
December 1993. Mr. Van Rooy joined the Company in 1985 in the engineering
department and has held a variety of management positions.
Mr. Dahlke was named the Vice President of Business Development in October
1999. Mr. Dahlke joined the Company in August 1999. Mr. Dahlke served as the
President and Chief Operating Officer of Harrow Industries from 1996 to 1999.
Prior to that he served as President and CEO of Medalist Industries.
All terms of office are on an annual basis and will expire on October 13,
2000.
4
PART II
ITEM 5--MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Market Price. The Company's Common Stock is traded on the NASDAQ National
Market under the ticker symbol KNAP. Stock price quotations can be found in
major daily newspapers (listed KnapeV) and in the Wall Street Journal (listed
KnapeVogt). As of August 25, 2000, there were approximately 3,100 shareholders
of the Company's Common Stock and Class B Common Stock.
Fiscal 2000 Fiscal 1999
-----------------------------------------------------------------------------
Quarter High Low High Low
- --------------------------------------------------------------------------------------------------------------------
First $16.02 $11.93 $20.68 $15.34
Second $15.80 $12.56 $18.64 $15.00
Third $16.36 $12.44 $16.36 $10.91
Fourth $16.00 $13.52 $16.25 $10.91
Dividends. The Company paid per share cash dividends on its shares of
Common Stock and Class B Common Stock in the following amounts during the last
two fiscal years.
Per Share Cash Dividends
------------------------
Year Ended July 1, 2000 Common Stock Class B Common Stock
- ----------------------- ------------ --------------------
First Quarter $.15 $.136
Second Quarter $.15 $.136
Third Quarter $.15 $.136
Fourth Quarter $.165 $.15
Per Share Cash Dividends
------------------------
Year Ended June 30, 1999 Common Stock Class B Common Stock
- ------------------------ ------------ --------------------
First Quarter $.15 $.136
Second Quarter $.15 $.136
Third Quarter $.15 $.136
Fourth Quarter $.15 $.136
On August 4, 2000, the Board of Directors declared a $.165 per share cash
dividend on shares of the Company's common stock and $.15 per share cash
dividend on shares of its Class B common stock, payable September 8, 2000, to
shareholders of record on August 25, 2000.
5
ITEM 6--SELECTED FINANCIAL DATA
For the Year Ended 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
Summary of Operations
Net sales................................ $149,836,870 $150,259,355 $181,632,570 $176,630,294 $163,012,030
Sales growth %......................... (0.3)% (17.3)% 2.8% 8.4% (3.1)%
Gross profit............................. 40,961,356 36,092,104 42,299,900 43,548,529 38,603,382
Gross profit %......................... 27.3% 24.0% 23.3% 24.7% 23.7%
Selling and administrative............... 26,400,042 25,721,924 29,152,388 28,436,330 27,438,017
Selling and administrative %........... 17.6% 17.1% 16.1% 16.1% 16.8%
Operating income (loss).................. 14,456,314 9,770,180 (2,644,764) 14,738,964 7,669,365
Operating income (loss) %.............. 9.6% 6.5% (1.5)% 8.3% 4.7%
Income (loss) from continuing
operations............................ 8,423,730 6,161,769 (8,369,182) 8,325,228 3,103,058
Loss from discontinued operation......... - - (1,368,278) (471,624) (3,037,926)
Net income (loss)........................ 8,423,730 6,161,769 (9,737,460) 7,853,604 65,132
Common Stock Data
Diluted earnings per share from
continuing operations............... 1.80 1.13 (1.28) 1.28 0.48
Diluted earnings per share from
discontinued operation.............. - - (0.21) (0.07) (0.47)
Diluted earnings per share............... 1.80 1.13 (1.49) 1.21 0.01
Weighted-average shares
outstanding-diluted................. 4,684,125 5,445,009 6,550,184 6,493,561 6,486,961
Dividends per share--common.............. 0.615 0.600 0.600 0.600 0.600
Dividends per share--Class B common...... 0.559 0.545 0.545 0.545 0.545
Year-end stock price..................... 15.25 16.02 20.45 14.55 14.32
Year-end Financial Position
Total assets............................. 88,287,652 75,059,989 104,033,087 125,741,698 129,225,159
Working capital.......................... 16,378,393 18,135,700 38,276,167 39,266,034 39,535,991
Current ratio............................ 1.7 2.0 2.5 4.2 4.0
Long-term debt........................... 20,050,000 17,700,000 9,700,000 29,000,000 35,000,000
Long-term debt as a % of total capital... 36.6% 35.8% 13.6% 28.3% 33.6%
Stockholders' equity..................... 34,706,630 31,758,785 61,756,674 73,460,498 69,173,750
Other Data/Key Ratios
Cash flow from operating activities...... 17,269,946 13,471,459 23,234,772 16,186,397 13,485,377
Capital expenditures..................... 9,112,810 4,786,263 4,228,552 7,763,482 8,032,779
Depreciation and amortization............ 5,862,588 5,914,739 7,966,383 7,728,603 7,345,353
Return on average assets................. 10.3% 6.9% (8.5)% 6.2% 0.0%
Return on average equity................. 25.3% 13.2% (14.4)% 11.0% 0.1%
Number of employees...................... 890 846 944 1,061 1,084
- ------------------------------------------------------------------------------------------------------------------------------------
(a) 1999 figures include an impairment charge of $600,000 pre-tax and an
inventory write-off of $400,000 pre-tax recorded for the
discontinuance of certain utility slides. This resulted in an
after-tax reduction of $650,000, or $0.12 per diluted share.
(b) 1998 figures include 1) an adjustment to the inventory obsolescence
reserve of $910,000 recorded in cost of sales; 2) a restructuring
charge for the reorganization of KV Canada of $3,992,276 recorded in
operating expenses, and an income tax benefit of $600,000, for an
after-tax effect of $3,392,276, or $0.52 per diluted share; 3) an
impairment charge for the sale of Hirsh of $11,800,000 recorded in
operating expenses, and an income tax expense of $1,000,000, for an
after-tax effect of $12,800,000, or $1.96 per diluted share; 4) a
$448,284 write-off of idle equipment; and 5) an after-tax charge of
$937,268 or $0.15 per diluted share to record the sale of Roll-it, a
discontinued operation.
(c) 1997 figures include an after-tax charge of $246,235 or $0.04 per
diluted share to record the March 1997 sale of Modar.
(d) 1996 figures include an inventory liquidation of $863,000 recorded in
cost of sales, a restructuring charge of $3,496,000 recorded in
operating expenses, and an income tax benefit of $1,534,000, for an
after-tax effect of $2,825,000, or $0.44 per diluted share. The 1996
figures also include an after-tax charge of $2,700,000 to recognize
the estimated loss on the sale of Roll-it, the Company's discontinued
store fixture operation.
6
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
financial condition and results of operations. The discussion should be read in
conjunction with the consolidated financial statements and footnotes.
Overview
The Company increased consolidated net income to $8.4 million, or $1.80 per
diluted share in fiscal 2000, from $6.2 million, or $1.13 per diluted share in
the prior year. Overall, the net income increase reflects the Company's emphasis
on continuous improvement in all aspects of its business. Specifically, the
implementation of lean manufacturing techniques reduced production costs,
improving the Company's gross margins and profitability. In addition, the
Company has accomplished the following key items during fiscal 2000:
- On October 1, 1999, the Company acquired the assets of Idea Industries,
Inc. Idea Industries designed, manufactured and marketed ergonomic
products including adjustable keyboard mechanisms, keyboard and mouse
platforms, wrist rests and CPU holders. This acquisition expanded the
Company's ergonomic offering and provided another distribution channel,
the office furniture dealers.
- On April 14, 2000, the Board of Directors of the Company authorized a
ten-percent stock dividend payable on May 19, 2000, to shareholders of
record on May 5, 2000. All per share data and weighted average shares
outstanding have been adjusted to reflect this dividend.
Results of Operations
The table below shows certain items in the Consolidated Statements of
Operations from continuing operations as a percentage of net sales:
July 1, June 30, June 30,
Year ended 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Net sales......................................... 100.0% 100.0% 100.0%
Cost of sales..................................... 72.7 76.0 76.7
-------------------------------------------------------
Gross profit 27.3 24.0 23.3
Selling and administrative expenses............... 17.6 17.1 16.1
Restructuring and impairment of assets............ .1 .4 8.7
-------------------------------------------------------
Operating income (loss)......................... 9.6 6.5 (1.5)
Interest expense.................................. 1.0 .5 .6
Other expense (income)............................ - (.2) .3
-------------------------------------------------------
Income (loss) from continuing operations
before income taxes............................ 8.6 6.2 (2.4)
Income taxes - continuing operations.............. 3.1 2.1 2.2
-------------------------------------------------------
Income (loss) from continuing operations.......... 5.5% 4.1% (4.6)%
- ---------------------------------------------------------------------------------------------------------------
Sales
In accordance with Statement of Financial Accounting Standards No. 131,
Disclosure about Segments of an Enterprise and Related Information, the Company
operates as a single reportable segment, storage products. While the Company
does not maintain its sales records by product category, management believes the
table below (unaudited) approximates total net sales (in millions) for each of
the product categories:
7
July 1, June 30, June 30,
Year ended 2000 % 1999 % 1998 %
- -----------------------------------------------------------------------------------------------------------------------
Shelving systems $ 49.3 32.9% $ 55.5 37.0% $ 83.0 45.7%
Drawer slides 70.0 46.7% 70.8 47.1% 69.8 38.4%
Hardware/Other 30.5 20.4% 24.0 15.9% 28.8 15.9%
- -----------------------------------------------------------------------------------------------------------------------
Total $ 149.8 100% $ 150.3 100% $ 181.6 100%
- -----------------------------------------------------------------------------------------------------------------------
Net sales in fiscal 2000 were $149.8 million. This was a slight decline
from fiscal 1999 and was due exclusively to the impact of Hirsh sales in fiscal
1999. Excluding the impact of The Hirsh Company, which was sold in September
1998, fiscal 1999 net sales were $142.8 million. Accordingly, on like sales,
fiscal 2000 net sales actually increased approximately $7.0 million or 4.9%. The
growth resulted from the ergonomic products introduced as a result of the
acquisition of Idea Industries and strong sales of the Company's precision
drawer slides. The Company continues to successfully target the OEM office
furniture market with its products, however, the retail market remains highly
competitive and price sensitive. As a result, management must evaluate
opportunities in this market on a customer by customer basis.
Net sales in fiscal 1999 declined $31.4 million, or 17.3% to $150.3
million. The most significant decline was in shelving systems and was primarily
due to the sales contribution of Hirsh. In addition, the Company performed a
profitability review of its current product offerings and decided to discontinue
certain product lines which were either unprofitable or provided only a minimal
return. Specifically, the Company opted to re-deploy production assets, which
were utilized to produce certain utility slides to the production of the more
profitable precision drawer slides. While this decision improved the bottom
line, it did result in lower net sales for fiscal 1999.
Gross Profit
Gross profit, as a percentage of net sales, was 27.3% in fiscal 2000,
compared to 24.0% in fiscal 1999, and 23.3% in fiscal 1998. The significant
improvement in the fiscal 2000 margins compared to fiscal 1999 can be attributed
to the introduction of more profitable products resulting in a more favorable
product mix. In addition, the emphasis on lean manufacturing continues to
identify and eliminate non-value-added operations from the business, thus,
reducing costs.
The improvement in gross profit in fiscal 1999 from fiscal 1998 reflects
the sale of Hirsh and the discontinuance of other low-margin product lines,
which resulted in a more favorable product mix. In the third quarter of fiscal
1999, the Company started to realize some of the benefits from the
implementation of lean manufacturing techniques, which not only resulted in
reduced manufacturing costs, but also allowed the Company to improve its service
to its customers. These improvements were partially offset by the $.4 million
inventory write-off incurred with product line discontinuance.
During fiscal 2001, the Company expects its margins to benefit from the
introduction of new products and the utilization of continuous improvement
techniques in its manufacturing operations.
Selling and Administrative
Selling and administrative expenses, as a percent of net sales, were 17.6%
in fiscal 2000, compared to 17.1% in fiscal 1999 and 16.1% in fiscal 1998. The
increase in fiscal 2000 represents costs incurred to launch several new products
and costs, such as royalties and goodwill, associated with the Idea acquisition.
The increase in fiscal 1999 compared to fiscal 1998 reflects severance and
strategic planning costs incurred during the year. These increases were only
partially offset by reductions in costs, which are variable with performance,
such as incentive programs and commissions.
Restructuring/Impairment
In fiscal 2000, the Company recorded a loss of $105,000 in accordance with
Financial Accounting Standard No. 121. The loss reflected management's best
estimate of the loss to be incurred on the sale of the Company's former powder
coat facility. Following the fiscal 2000 year-end, management signed a buy/sell
agreement on the facility with a third party and anticipates closing the sale
during the first quarter of fiscal 2001.
In the second quarter of fiscal 1999, as a result of the decision to
re-deploy certain utility slide production assets, the Company recorded an
impairment loss of $.6 million pre-tax to write the related tooling assets down
to their estimated fair value. In addition, excess inventory of $.4 million
pre-tax related to the discontinued product lines was charged directly to cost
of sales.
8
In September 1998, the Company sold Hirsh, a wholly-owned subsidiary. The
sale of Hirsh reflected the Company's desire to enhance its corporate margins
and profitability and remain focused on its core products. The sale resulted in
a pre-tax loss of $11.8 million, which was included in the June 30, 1998,
financial results. The loss included the write-off of the unamortized balance of
goodwill recorded in connection with the purchase of Hirsh. In connection with
the sale, the Company recognized an additional tax cost of $1.0 million,
resulting in a total loss related to the sale of Hirsh of $12.8 million.
A pre-tax restructuring charge of $4.0 million was recorded in the third
quarter of fiscal 1998 for Knape & Vogt Canada. In March 1998, Knape & Vogt
announced its plans to reorganize its Canadian operation, including the sale of
the Company's manufacturing facility and equipment in the Toronto area. The sale
was completed in May of 1998. The Company continues to sell and distribute its
products in Canada and maintains a sales office in the Toronto area.
Other Expenses/(Income) and Income Taxes
Interest expense was $1.4 million in fiscal 2000, compared to $.8 million
and $1.2 million, respectively, in fiscal years 1999 and 1998. The increase in
interest expense during fiscal 2000 reflects the higher level of borrowings
needed to support the Idea acquisition, capital expenditures and share
repurchases. The lower interest expense incurred in fiscal 1999 reflected the
lower average borrowing levels resulting from proceeds received from the sale of
Hirsh, along with improved cash flow from operating activities.
Other miscellaneous expense was $2,345 in fiscal 2000 compared to income of
$.4 million in fiscal 1999. Fiscal 1999 included interest received on Michigan
Single Business Tax refunds and two patent infringement settlements, partially
offset by losses incurred on the disposal of fixed assets.
The effective tax rate was 35.4% in fiscal 2000, compared to 33.9% in
fiscal 1999. See Note 10 to the Consolidated Financial Statements for a
reconciliation of the effective tax rate.
Net Income
Income from continuing operations in fiscal 2000 was $8.4 million, or $1.80
per diluted share compared to $6.2 million or $1.13 per diluted share in fiscal
1999 and a net loss of $8.4 million, or $1.28 per diluted share in fiscal 1998.
The loss recorded in fiscal 1998 was primarily due to the losses incurred on the
sale of Hirsh and the restructuring of Knape & Vogt Canada.
The results of operations of Roll-it, net of income taxes, were presented
as a discontinued operation in fiscal 1998. On March 27, 1998, the Company
signed an agreement to sell Roll-it which resulted in an additional loss of $.9
million, due to the difference between the original estimate and the actual loss
from the sale of Roll-it.
Net income was $8.4 million or $1.80 per diluted share in fiscal 2000
compared to $6.2 million, or $1.13 per diluted share in fiscal 1999 and a loss
of $9.7 million, or $1.49 per diluted share in fiscal 1998. The increase over
fiscal 1999 reflected the gross profit improvement achieved during fiscal 2000.
The improvement in fiscal 1999 compared to fiscal 1998 was due to the $12.8
million after-tax charge recorded for the sale of Hirsh, the $3.4 million
restructuring charge for Knape & Vogt Canada and the additional loss of $.9
million on the sale of Roll-it, all in fiscal 1998. Without these charges, net
income would have been $7.4 million, or $1.14 per diluted share in fiscal 1998.
Liquidity And Capital Resources
Cash flows from operating activities generated $17.3 million in fiscal 2000
compared to $13.5 million in fiscal 1999 and $23.2 million in fiscal 1998. The
improvement in fiscal 2000 compared to fiscal 1999 reflected the higher net
income earned during the year and improved working capital performance. In
fiscal 1999, the cash flows from the change in accounts payable were
substantially lower than in fiscal 1998, due to two factors. First, in fiscal
1998, the Company adopted a more aggressive payment policy with its vendors,
which resulted in a higher accounts payable balance and a significant one-time
increase in cash flows. Second, even though the Company was still utilizing the
more aggressive payment policy with its vendors in fiscal 1999, payables
decreased due to the sale of Hirsh.
Cash flows used in investing activities were $14.1 million in fiscal 2000.
During fiscal 2000, the Company incurred $9.1 million of capital expenditures,
compared to $4.8 million and $4.2 million, respectively, in fiscal 1999 and
1998. The expenditures in fiscal 2000 were primarily for improvements in the
Company's manufacturing process, including the completion of the new powder coat
paint line and the new facility at the Company's Indiana subsidiary and tooling
for new products. Management believes that capital expenditures will remain at
approximately the same level in fiscal 2001, as investments are made to improve
manufacturing technology and to bring new products and product enhancements to
the Company's customers. The cost to complete the items classified as
construction in progress at July 1, 2000, was estimated to be approximately $4.5
million. Investing activities in fiscal 2000 also included the net cash paid for
the acquisition of Idea Industries, Inc.
On October 1, 1999, the Company acquired substantially all of the assets of
Idea Industries, Inc. (Idea). Idea designed, manufactured and marketed ergonomic
products, including adjustable keyboard mechanisms, keyboard and computer mouse
9
platforms, wrist rests and CPU holders. The acquisition was recorded using the
purchase method of accounting. Accordingly, the purchase price was allocated to
the assets acquired and liabilities assumed, based on the estimated fair values
at the date of the acquisition. The cost of the acquisition in excess of net
identifiable assets acquired has been recorded as goodwill and is being
amortized on a straight-line basis over 15 years.
The terms of the Idea acquisition agreement provide for additional
consideration to be paid if Idea's sales exceed certain targeted levels. The
maximum amount of contingent consideration is $550,000 payable through 2001. In
calendar year 1999, the additional consideration payment was $41,797, which has
been included in goodwill. Any additional consideration paid will be recorded as
goodwill when payment is made.
The results of the Idea acquisition were not material to the Company's
consolidated operating results, therefore pro forma financial statements have
not been prepared.
Following the financial strategy announced in fiscal 1998, the Company
completed a Dutch Auction early in the second quarter of fiscal 1999. This
resulted in the repurchase of 1,353,862 shares of the Company's stock at a price
of $19.09 per share. In addition, the Company repurchased an additional 633,810
shares at prices ranging from approximately $12 to $17 per share through July 1,
2000. In total, the cost of the repurchased shares was $35.7 million.
At the August 20, 1999, Board of Directors meeting, the Board approved an
additional 440,000 shares for the stock repurchase program. At July 1, 2000, the
Company has remaining authorization to repurchase an additional 375,791 shares.
On April 14, 2000, the Board of Directors declared a 10% stock dividend of
the Company's common stock and Class B common stock. On May 19, 2000,
shareholders received one additional share of stock for each ten shares held.
All per share data and weighted average shares outstanding have been restated to
reflect the 10% stock dividend.
During fiscal 1999, the Company renegotiated its revolving credit facility.
The new facility allows for borrowings up to $45 million and expires on November
1, 2004. In addition, the Company entered into an interest rate swap agreement
in order to fix the interest rate on a portion of the borrowings under the
revolving credit facility. The swap agreement, which expires on June 1, 2006,
fixed the interest on $17 million of borrowings through August 31, 1999, and
increased to $20 million on September 1, 1999. The swap agreement fixed the rate
at 6.25% plus the Company's credit spread on the revolving credit agreement.
On October 29, 1999, the revolving credit facility was amended to modify
certain covenants. At July 1, 2000, the Company was in compliance with all of
the covenants.
The Company's outstanding debt at July 1, 2000, was $20.1 million, compared
to $17.7 million in fiscal 1999. The debt to total capital ratio increased to
36.6% at July 1, 2000, from 35.8% at June 30, 1999. The Company continues to
manage its debt levels in an effort to reach its targeted capital structure. The
Company believes that cash flows from operations and funds available under the
credit facility will be sufficient to fund working capital requirements and
capital expenditures in fiscal 2001.
Legal Contingencies
In September 1999, when the Company sold The Hirsh Company the purchaser
assumed the lease for the facility located in Skokie, Illinois. The Company
guaranteed all of the lease obligations to the landlord through the expiration
of the lease in August 2000. As of July 1, 2000, the purchaser is in default on
the lease agreement and the landlord has filed suit against the purchaser and
the Company as the guarantor. The claim is for payment of the unpaid rent,
unpaid property taxes, building repairs and legal costs.
A former employee in connection with benefits paid under an executive
retirement plan has also sued the Company. The initial ruling was in favor of
the former employee; however, the Company has filed an appeal in the case.
The Company is also subject to other legal proceedings and claims, which
arise in the ordinary course of its business.
In the opinion of management, based on the information presently known, the
ultimate liability for these matters, taking into account established accruals
of approximately $880,000, will not have a materially adverse effect on the
Company's financial position or the results of its operations.
Inflation
Inflation has not had a significant effect on the Company over the past
three years nor is it expected to have a significant effect in the foreseeable
future. The Company continuously attempts to minimize the effect of inflation
through cost reductions and improved productivity.
10
Year 2000 Readiness Disclosure
As of the date of this report, the Company has not experienced any Year
2000 issues arising from its systems or those of its material vendors and
suppliers. To the extent that there may be any ongoing Year 2000 issues that
might arise at a later date, the Company has contingency plans in place to
address such issues.
Forward-Looking Statements
This report contains certain forward-looking statements, which involve
risks and uncertainties. When used in this report, the words "believe,"
"anticipate," "think," "intend," "goal," "forecast," "expect" and similar
expressions identify forward-looking statements. Forward-looking statements
include, but are not limited to, statements concerning new product
introductions, future revenue growth and gross margin improvement. Such
statements are subject to certain risks and uncertainties, which could cause
actual results to differ materially from those expressed or implied by such
forward-looking statements. Readers are cautioned not to place undue reliance on
those forward-looking statements, which speak only as of the date of this
report.
11
ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to market risks, which include changes in the
foreign currency exchange rate as measured against the U.S. dollar and changes
in U.S. interest rates. The Company holds a derivative instrument in the form of
an interest rate swap, which is viewed as a risk management tool and is not used
for trading or speculative purposes. The intent of the interest rate swap is to
effectively fix the interest rate on part of the borrowings on the Company's
variable rate revolving credit agreement.
A discussion of the Company's accounting policies for derivative financial
instruments is included in the Summary of Significant Accounting Policies in the
Notes to Consolidated Financial Statements. Additional information relating to
financial instruments and debt is included in Note 5 - Long-Term Debt and Note 7
- - Derivative Financial Instruments. Quantitative disclosures relating to
financial instruments and debt are included in the tables below.
The following table provides information on the Company's fixed maturity
investments as of July 1, 2000, that are sensitive to changes in interest rates.
The table also presents the corresponding interest rate swap on this debt. Since
the interest rate swap effectively fixes the interest rate on the notional
amount of debt, changes in interest rates have no current effect on the interest
expense recorded by the Company on the portion of the debt covered by the
interest rate swap.
Liability Amount Maturity Date
- --------- ------- -------------
Variable rate revolving credit
agreement $45 million November 1, 2004
First $20,000,000 at an interest rate of 6.84%
plus weighted average credit spread of .5%
Amounts in excess of $20,000,000 had an interest rate
ranging from 5.39% to 7.51% in 2000
Interest Rate Swaps
Notional amount $17 million August 31, 1999
Increased to $20 million June 1, 2006
Pay fixed/Receive variable - 6.84%
Pay fixed interest rate - 6.25%
The Company has a sales office located in Canada. Sales are typically
denominated in Canadian dollars, thereby creating exposures to changes in
exchange rates. The changes in the Canadian/U.S. exchange rate may positively or
negatively affect the Company's sales, gross margins and retained earnings. The
Company attempts to minimize currency exposure risk through working capital
management. The Company does not hedge its exposure to translation gains and
losses relating to foreign currency net asset exposures.
12
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Immediately following are the consolidated balance sheets of the Company
and its subsidiaries as of July 1, 2000, and the related consolidated statements
of income, stockholders' equity and cash flows for each of the three years in
the period ended July 1, 2000, the notes thereto, summary of accounting
policies, and the independent auditors' report.
13
Knape & Vogt Manufacturing Company and Subsidiaries
Consolidated Statements of Operations
- ------------------------------------------------------------------------------------------------------------------------
Year ended July 1, 2000 June 30, 1999 June 30, 1998
- ------------------------------------------------------------------------------------------------------------------------
Net Sales $ 149,836,870 $ 150,259,355 $ 181,632,570
Cost of Sales 108,875,514 114,167,251 139,332,670
---------------------------------------------------------------------------------------------------------------------
Gross Profit 40,961,356 36,092,104 42,299,900
---------------------------------------------------------------------------------------------------------------------
Expenses
Selling and shipping 20,891,588 19,953,864 22,594,546
Administrative and general 5,508,454 5,768,060 6,557,842
Restructuring and impairment of assets 105,000 600,000 15,792,276
---------------------------------------------------------------------------------------------------------------------
Total Expenses 26,505,042 26,321,924 44,944,664
---------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 14,456,314 9,770,180 (2,644,764)
---------------------------------------------------------------------------------------------------------------------
Other Expenses (Income)
Interest 1,407,239 802,202 1,224,394
Other, net 2,345 (355,791) 569,024
---------------------------------------------------------------------------------------------------------------------
Total Other Expenses 1,409,584 446,411 1,793,418
---------------------------------------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations Before
Income Taxes 13,046,730 9,323,769 (4,438,182)
Income Taxes - Continuing Operations 4,623,000 3,162,000 3,931,000
---------------------------------------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations 8,423,730 6,161,769 (8,369,182)
---------------------------------------------------------------------------------------------------------------------
Discontinued Operation, Net of Income Taxes
Loss from operations - - (431,010)
Estimated loss on sale - - (937,268)
---------------------------------------------------------------------------------------------------------------------
Total Discontinued Operation, Net of
Income Taxes - - (1,368,278)
---------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 8,423,730 $ 6,161,769 $ (9,737,460)
---------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Income (loss) from continuing operations $ 1.80 $ 1.13 $ (1.29)
Loss from discontinued operation - - (0.21)
---------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Per Share $ 1.80 $ 1.13 $ (1.50)
---------------------------------------------------------------------------------------------------------------------
Weighted Average Shares Outstanding 4,679,918 5,432,192 6,512,418
---------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share
Income (loss) from continuing operations $ 1.80 $ 1.13 $ (1.28)
Loss from discontinued operation - - (0.21)
---------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Per Share $ 1.80 $ 1.13 $ (1.49)
---------------------------------------------------------------------------------------------------------------------
Weighted Average Shares Outstanding 4,684,125 5,445,009 6,550,184
---------------------------------------------------------------------------------------------------------------------
Dividends Per Share
Common stock $ .615 $ .600 $ .600
Class B common stock $ .559 $ .545 $ .545
---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
14
Knape & Vogt Manufacturing Company and Subsidiaries
Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------------------------------
July 1, 2000 June 30, 1999
- ------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash $ 2,351,622 $ 1,621,002
Accounts receivable, less allowances of $556,000 and $389,000,
respectively 20,631,951 18,930,039
Refundable income taxes 140,086 140,708
Inventories 15,092,393 13,149,649
Prepaid expenses 1,213,607 1,868,101
Net assets held for sale 1,779,405 -
- ------------------------------------------------------------------------------------------------------------------
Total Current Assets 41,209,064 35,709,499
- ------------------------------------------------------------------------------------------------------------------
Property and Equipment
Land and improvements 1,156,531 1,815,127
Buildings 14,489,756 14,436,028
Machinery and equipment 53,349,222 48,180,990
Construction in progress 4,636,979 2,224,266
- ------------------------------------------------------------------------------------------------------------------
73,632,488 66,656,411
Less accumulated depreciation 35,270,625 31,357,471
- ------------------------------------------------------------------------------------------------------------------
Net Property and Equipment 38,361,863 35,298,940
- ------------------------------------------------------------------------------------------------------------------
Goodwill, net 4,978,420 575,433
- ------------------------------------------------------------------------------------------------------------------
Other Assets 3,738,305 3,476,117
- ------------------------------------------------------------------------------------------------------------------
$ 88,287,652 $ 75,059,989
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
15
Knape & Vogt Manufacturing Company and Subsidiaries
Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------------------------------
July 1, 2000 June 30, 1999
- ------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 12,833,665 $ 9,129,514
Accruals:
Income taxes 1,317,297 732,344
Taxes other than income 560,809 864,734
Compensation 4,689,373 3,055,717
Restructuring costs 252,241 377,515
Miscellaneous 5,177,286 3,413,975
- ------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 24,830,671 17,573,799
Supplemental Retirement Benefits 4,488,351 3,155,405
Long-Term Debt 20,050,000 17,700,000
Deferred Income Taxes 4,212,000 4,872,000
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities 53,581,022 43,301,204
- ------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Stock:
Common, $2 par - 6,000,000 shares authorized; 2,222,852 and
2,073,148 issued 4,445,704 4,146,296
Class B common, $2 par - 4,000,000 shares authorized; 2,392,853
and 2,238,227 issued 4,785,706 4,476,454
Preferred - 2,000,000 shares authorized and unissued - -
Additional paid-in capital 8,482,908 4,409,415
Unearned stock grant (94,500) -
Accumulated other comprehensive income (loss) (1,169,577) (478,606)
Retained earnings 18,256,389 19,205,226
- ------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 34,706,630 31,758,785
- ------------------------------------------------------------------------------------------------------------------
$ 88,287,652 $ 75,059,989
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
16
Knape & Vogt Manufacturing Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Restricted other
Common paid-in stock comprehensive Retained
stock capital grants income (loss) earnings Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, July 1, 1997 $ 11,807,658 $ 33,340,541 $ - $ (1,345,978) $ 29,658,277 $ 73,460,498
Net loss for 1998 - - - - (9,737,460) (9,737,460)
Cash dividends - - - - (3,760,383) (3,760,383)
Stock issued under stock option plan 63,592 384,449 - - - 448,041
Foreign currency translation - - - (259,327) - (259,327)
adjustment
Sale of Knape & Vogt Canada assets - - - 1,605,305 - 1,605,305
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 11,871,250 33,724,990 - - 16,160,434 61,756,674
Net income for 1999 - - - - 6,161,769 6,161,769
Cash dividends - - - - (3,116,977) (3,116,977)
Stock issued under stock option plan 75,986 472,431 - - - 548,417
Tax benefit from exercise
of stock options - 69,133 - - - 69,133
Stock grants issued 21,000 215,250 (236,250) - - -
Stock grants earned - - 236,250 - - 236,250
Repurchase and retirement of
shares of common stock (3,345,486) (30,072,389) - - - (33,417,875)
Foreign currency translation - - - (29,983) - (29,983)
adjustment
Minimum SERP adjustment, net of tax
benefit of $263,901 - - - (448,623) - (448,623)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 8,622,750 4,409,415 - (478,606) 19,205,226 31,758,785
Net income for 2000 - - - - 8,423,730 8,423,730
Cash dividends - - - - (2,741,146) (2,741,146)
10% stock dividend 841,308 5,783,992 - - (6,631,421) (6,121)
Stock issued under stock option plan 26,610 173,623 - - - 200,233
Tax benefit from exercise
of stock options - 8,671 - - - 8,671
Stock grants issued 12,000 82,500 (94,500) - - -
Repurchase and retirement of
shares of common stock (271,258) (1,975,293) - - - (2,246,551)
Foreign currency translation - - - (9,019) - (9,019)
adjustment
Minimum SERP adjustment, net of tax
benefit of $353,000 - - - (681,952) - (681,952)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, July 1, 2000 $ 9,231,410 $ 8,482,908 $ (94,500) $ (1,169,577) $ 18,256,389 $ 34,706,630
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
17
Knape & Vogt Manufacturing Company and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------------------------------------------------
July 1, June 30, June 30,
Year ended 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ 8,423,730 $ 6,161,769 $ (9,737,460)
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depreciation of fixed assets 5,027,282 5,123,290 6,604,799
Amortization of other assets 835,306 791,449 1,361,584
Decrease in deferred income taxes (308,000) (810,856) (752,000)
Increase in supplemental retirement benefits 299,101 605,313 264,957
Increase in prepaid pensions (1,175,341) - -
Decrease in deferred lease costs - (93,248) (556,992)
Loss on sale of the discontinued operation - - 937,268
Write-off of foreign currency translation adjustment - - 1,605,305
Loss on sale of The Hirsh Company - - 12,800,000
Impairment loss 105,000 600,000 -
Loss on disposal of property and equipment 37,855 593,431 -
Stock grants earned - 236,250 -
Changes in operating assets and liabilities
(net of acquisition):
Decrease (increase) in:
Accounts receivable (1,045,595) 6,717,542 (809,180)
Refundable income taxes - 33,961 1,157,735
Inventories (1,692,041) (341,117) 1,903,218
Net assets of discontinued operation - - (995,000)
Net assets held for sale - 490,116 -
Prepaid expenses 683,326 882,696 384,903
Increase (decrease) in:
Accounts payable 2,515,619 (8,631,246) 8,776,835
Accrued restructuring costs (123,512) (436,172) 672,004
Accruals 3,687,216 1,548,281 (383,204)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 17,269,946 13,471,459 23,234,772
- ------------------------------------------------------------------------------------------------------------------------
Investing Activities
Additions to property and equipment (9,112,810) (4,786,263) (4,228,552)
Proceeds from sales of property and equipment 4,330 20,250 2,564,744
Net cash paid for acquisition (5,309,674) - -
Proceeds from the sale of The Hirsh Company - 18,157,884 -
Disposition of discontinued operation - - 2,045,364
Other, net 328,332 (312,330) 803,530
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (14,089,822) 13,079,541 1,185,086
- ------------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of common stock 200,233 548,417 448,041
Repurchase and retirement of common stock (2,246,551) (33,417,875) -
Cash dividends declared (2,747,267) (3,116,977) (3,760,383)
Borrowings (payments) on long-term debt 2,350,000 8,000,000 (19,300,000)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (2,443,585) (27,986,435) (22,612,342)
- ------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (5,919) (721) 103,096
- ------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash 730,620 (1,436,156) 1,910,612
Cash, beginning of year 1,621,002 3,057,158 1,146,546
- ------------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 2,351,622 $ 1,621,002 $ 3,057,158
- ------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
18
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant
Accounting
Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Knape & Vogt
Manufacturing Company and its wholly-owned subsidiaries (the Company). All
material intercompany balances, transactions and stockholdings have been
eliminated in consolidation.
Year End
Effective July 1, 1999, the Company adopted a 52- or 53-week fiscal year,
changing the year-end date from June 30 to the Saturday nearest the end of
June. The year ended July 1, 2000, contained 52 weeks.
Description of Business, Revenue Recognition and Concentration of Credit
Risk
The Company designs, manufactures and distributes storage products
including decorative and utility wall-attached shelving systems, drawer
slides, kitchen and closet storage products, ergonomic products and cabinet
hardware. On August 20, 1996, the Company announced its decision to sell
its store fixture operation and this portion of the business was shown as a
discontinued operation. The sale of Roll-it was completed in March 1998.
The Company primarily sells its products to hardware chains, home centers,
specialty distributors and original equipment manufacturers and recognizes
revenue upon shipment of products to customers. No single customer accounts
for more than 10% of consolidated sales. The Company performs ongoing
credit evaluations and maintains reserves for potential credit losses.
Foreign Currency Translation
The accounts of the foreign subsidiary are translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards (SFAS) No. 52.
Assets and liabilities are translated at year-end exchange rates. Income
and expense accounts are translated at average exchange rates in effect
during the year. Translation adjustments resulting from fluctuations in the
exchange rates are recorded in accumulated other comprehensive income, a
separate component of stockholders' equity.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which consist
of cash, receivables, bank revolving credit agreement and accounts payable,
approximate their fair values. The fair market value of the interest rate
swap agreement at July 1, 2000, was approximately $798,000 based on
information received from the issuing financial institution.
Cash Equivalents
From time to time, the Company holds short-term investments with a maturity
of three months or less when purchased which are considered cash
equivalents.
Inventories
Inventories are stated at the lower of FIFO (first-in, first-out) cost or
market.
19
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
Property, Equipment and Depreciation
Property and equipment are stated at cost and depreciated, for financial
reporting purposes, using the straight-line method over the estimated
useful lives of the assets. For income tax purposes, accelerated
depreciation methods and shorter useful lives are used. Management
estimates that the cost to complete the items classified in construction in
progress at July 1, 2000, was approximately $4.5 million.
Accounting for the Impairment of Long-Lived Assets
In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets, the Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
Goodwill
Goodwill represents the amount by which the cost of businesses purchased
exceeds the fair value of the net assets acquired. Goodwill is amortized
over periods of 15 to 40 years using the straight-line method. Accumulated
amortization of goodwill was $388,095 and $138,285 at July 1, 2000, and
June 30, 1999, respectively. The Company periodically reviews goodwill for
impairment based upon undiscounted operating income over the remaining life
of the goodwill. While the estimates are based on management's historical
experience and assumptions regarding future operations, the amounts the
Company will ultimately realize could differ from those used in the fiscal
2000 SFAS No. 121 analysis.
Income Taxes
The Company accounts for certain income and expenses in different periods
for financial reporting and income tax purposes. The Company utilizes the
liability method to account for deferred income taxes by applying statutory
tax rates in effect at the balance sheet date to differences between the
financial reporting and tax bases of assets and liabilities. The resulting
deferred tax liabilities or assets are adjusted to reflect changes in tax
laws or rates by means of charges or credits to income tax expense.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Advertising
Costs incurred for advertising, including costs incurred under cooperative
advertising programs with customers, are expensed as incurred. Advertising
expense was $1,038,000 in 2000, $799,000 in 1999, and $636,000 in 1998.
20
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
Earnings Per Share
During fiscal 1998, the Company adopted SFAS No. 128, Earnings per Share.
SFAS No. 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes the dilutive effects
of options, warrants and convertible securities. Diluted earnings per share
is very similar to the previously reported fully diluted earnings per
share. SFAS No. 128 requires that earnings per share amounts for all prior
periods presented be restated to give effect to the provisions of the
statement. SFAS No. 128 did not materially impact earnings per share
information previously reported. For the periods presented, the numerators
remained the same in both the basic and diluted earnings per share
calculations. The denominator was increased in the diluted computation due
to the recognition of stock options as common stock equivalents.
The following table reconciles the numerators and denominators used in the
calculations of basic and diluted EPS for each of the last three years:
2000 1999 1998
- ---------------------------------------------------------------------------------------
Numerators:
Numerator for both basic and
diluted EPS, net income (loss) $8,423,730 $6,161,769 $(9,737,460)
- ---------------------------------------------------------------------------------------
Denominators:
Denominator for basic EPS,
weighted-average common
shares outstanding 4,679,918 5,432,192 6,512,418
Potentially dilutive shares
resulting from stock option
plans 4,207 12,817 37,766
- ---------------------------------------------------------------------------------------
Denominator for diluted EPS 4,684,125 5,445,009 6,550,184
- ---------------------------------------------------------------------------------------
The following exercisable stock options were not included in the
computation of diluted EPS because the option prices were greater than
average quarterly market prices.
2000 1999 1998
------------------------------------------------------------------------
Exercise Price
$16.74 11,192 15,125 -
$18.18 10,725 14,850 -
Derivative Financial Instruments
The Company uses an interest rate swap agreement to modify a portion of the
variable rate revolving line of credit to a fixed rate obligation, thereby
reducing the exposure to market rate fluctuations. The interest rate swap
agreement is designated as a hedge and effectiveness is determined by
matching the principal balance and terms with that specific obligation.
Amounts currently due to or from interest rate swap counter parties are
recorded in interest expense in the period in which they accrue.
21
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
requires companies to recognize all derivatives on the balance sheet at
fair value and establishes accounting rules for changes in fair value that
result from hedging activities. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. Based on management's evaluation of its
derivative instrument, it does not believe that adoption of the standard
will have a material effect on its financial position or results of
operations.
Reclassifications
Certain prior year information has been reclassified to conform to the
current year presentation.
2. Restructuring and
Impairment of Assets
A restructuring charge of $3,392,276, or $0.52 per diluted share was
recorded in the third quarter of fiscal 1998 for Knape & Vogt Canada. In
March 1998, Knape & Vogt announced its plans to reorganize its Canadian
operation, including the sale of the Company's manufacturing facility and
equipment in the Toronto area. The sale was completed in May of 1998. The
Company continues to sell and distribute its products in Canada and
maintain a sales office in the Toronto area.
In September 1998, the Company sold The Hirsh Company, a wholly-owned
subsidiary. Hirsh manufactured free-standing shelving, wood storage
products and workshop accessories. The sale resulted in a loss of
$12,800,000, which was included in the restructuring and impairment of
assets line of the fiscal 1998 consolidated statement of operations. The
loss included the write-off of the unamortized balance of goodwill recorded
in connection with the purchase of Hirsh.
In connection with its restructuring activities, the Company has recorded
reserves for various costs to be incurred. Amounts paid or charged against
these reserves were as follows:
Fiscal 1998 Costs Paid June 30, Costs Paid June 30, Costs Paid July 1,
Additions or Charged 1998 or Charged 1999 or Charged 2000
-----------------------------------------------------------------------------------------------------------
Facilities and
equipment $1,076,453 $(1,063,232) $13,221 $(13,221) $ - $ - $ -
Severance 994,698 (575,269) 419,429 (358,095) 61,334 (61,334) -
Settlement cost 681,300 (303,037) 378,263 (80,101) 298,162 (45,921) 252,241
Other exit costs 340,650 (322,631) 18,019 - 18,019 (18,019) -
-----------------------------------------------------------------------------------------------------------
Total $3,093,101 $(2,264,169) $828,932 $(451,417) $377,515 $(125,274) $252,241
-----------------------------------------------------------------------------------------------------------
22
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
Summary operating results for Hirsh (in thousands) were as follows:
Year ended June 30, 1998
----------------------------------------------------
Revenues $ 35,634
Costs and expenses 47,880
----------------------------------------------------
Loss before taxes (12,246)
Income tax expense 998
----------------------------------------------------
Net loss $ (13,244)
----------------------------------------------------
During the second quarter of fiscal 1999, the Company decided to re-deploy
certain drawer slide production assets to product lines considered to have
higher growth potential. This resulted in the write-down of the tooling
($.6 million pre-tax) and excess inventory ($.4 million pre-tax, charged
directly to cost of sales) related to the discontinued product lines.
During fiscal 2000, the Company offered its former powder coat facility for
sale. As a result of this decision, the related assets were transferred to
the category "Net Assets Held for Sale" and a loss of $105,000 was
recorded. In July 2000, management entered into a Buy/Sell agreement for
the facility and anticipates closing the sale during fiscal 2001. The loss
was determined based upon this Buy/Sell agreement. This transaction was
treated as a non-cash item for cash flow purposes.
3. Discontinued Operation
On August 20, 1996, the Company announced its decision to sell the Roll-it
division of Knape & Vogt Canada Inc., the Company's store fixture
operation. Accordingly, Roll-it was reported as a discontinued operation,
and the consolidated financial statements were reclassified to segregate
the net assets and operating results of the business. During fiscal 1996,
the Company recorded an estimated loss of $3.9 million pre-tax or $2.7
million after-tax on the sale of Roll-it.
During the third quarter of fiscal 1997, the Company recorded an additional
after-tax loss of $471,624, which was an adjustment to the estimated
provision for operating loss of Roll-it through fiscal 1997. Income or loss
attributable to Roll-it's operations beyond fiscal year 1997 through the
date of the sale were reflected as incurred in the appropriate periods.
On March 27, 1998, the Company signed an agreement to sell Roll-it which
resulted in an additional loss of $937,268, which represented the
difference between the original estimate and the actual loss from the sale
of Roll-it.
Summary operating results of the discontinued operation (in thousands) were
as follows:
Year ended June 30, 1998
-------------------------------------------------------
Revenues $ 11,865
Costs and expenses 12,519
-------------------------------------------------------
Loss before taxes (654)
Income tax benefit (223)
-------------------------------------------------------
Net loss $ (431)
-------------------------------------------------------
23
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
4. Acquisition
On October 1, 1999, the Company acquired substantially all of the assets of
Idea Industries, Inc. (Idea). Idea designed, manufactured and marketed
ergonomic products, including adjustable keyboard mechanisms, keyboard and
computer mouse platforms, wrist rests and CPU holders. The acquisition was
recorded using the purchase method of accounting. Accordingly, the purchase
price was allocated to the assets acquired and liabilities assumed, based
on the estimated fair values at the date of the acquisition. The cost of
the acquisition in excess of net identifiable assets acquired has been
recorded as goodwill and is being amortized on a straight-line basis over
15 years.
The terms of the Idea acquisition agreement provide for additional
consideration to be paid if Idea's sales exceed certain targeted levels.
The maximum amount of contingent consideration is $550,000 payable through
2001. In calendar year 1999, the additional consideration payment was
$41,797, which has been included in goodwill. Any additional consideration
paid will be recorded as goodwill when payment is made.
The results of the acquisition were not material to the Company's
consolidated operating results, therefore pro forma financial statements
have not been prepared.
5. Inventories
Inventories are summarized as follows:
July 1, 2000 June 30, 1999
----------------------------------------------------------------------------
Finished products $ 8,778,556 $ 8,523,866
Work in process 2,339,958 1,634,904
Raw materials and supplies 3,973,879 2,990,879
----------------------------------------------------------------------------
$ 15,092,393 $ 13,149,649
----------------------------------------------------------------------------
6. Long-Term Debt
On June 1, 1999, the Company replaced its prior credit facility with a new
revolving credit agreement that provides for up to $45,000,000 in
borrowings through November 1, 2004. At July 1, 2000, there was a
$20,050,000 balance outstanding under this agreement. The interest rate on
the first $20,000,000 of the outstanding balance was 7.34%, which was the
90-day LIBOR rate plus an additional 50 basis points credit spread. The
interest rate on the remaining $50,000 was based on the federal funds rate
and averaged 7.2% for the month of June 2000. The interest rate is adjusted
to market rates at the end of each interest period and is based on the
LIBOR rate, or, at the Company's option, several other common indices. The
agreement requires the Company to pay a non-use fee on amounts not
outstanding under the credit facility. At July 1, 2000, the non-use fee was
.125%. Both the interest rate and the non-use fees on this agreement
fluctuate according to the ratio of the Company's funded debt to EBITDA
(earnings before interest, income taxes, depreciation and amortization).
Compensating balances are not required by this agreement. The Company is
required under this agreement as amended to maintain certain financial
ratios, and at July 1, 2000, was in compliance with these covenants.
The Company entered into a seven-year interest rate swap agreement with a
notional amount of $17,000,000 through August 31, 1999, and increasing to
$20,000,000 thereafter, which converts a corresponding amount of the
revolving credit agreement into a fixed-rate obligation with an effective
interest rate of 6.25% plus the Company's credit spread on the revolving
credit agreement. The swap agreement will terminate on June 1, 2006.
24
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
7. Lease Commitments
The Company leases certain real property and equipment under operating
lease agreements which expire at various dates through fiscal 2005.
Annual minimum rental payments required under all noncancelable operating
leases are as follows: 2001-$397,518; 2002-$402,046; 2003-$404,626;
2004-$227,695; 2005-$45,057. Rent expense under all operating leases was
approximately $629,000, $553,000, and $1,848,000 in fiscal 2000, 1999, and
1998, respectively.
The signed agreement for the sale of the assets of Hirsh (see Note 2)
included the assumption of the lease for the Hirsh building by the buyer of
the assets of Hirsh. The Company continues to guarantee to the landlord all
lease obligations through the expiration of this lease in August 2000.
Monthly lease payments are $108,731.
8. Derivative Financial
Instruments
The Company has entered into an interest rate swap agreement designated as
a partial hedge of the Company's variable rate revolving credit agreement.
The purpose of this swap is to fix the interest rate on the variable rate
debt and reduce the exposure to interest rate fluctuations. At July 1,
2000, the Company had an interest rate swap with a notional amount of
$20,000,000. Under this agreement, the Company will pay the counterparty
interest at a fixed rate of 6.25%, and the counterparty will pay the
Company interest at a variable rate equal to LIBOR. The LIBOR rate on this
agreement was 6.84% at July 1, 2000. The notional amount does not represent
an amount exchanged by the parties, and thus is not a measure of exposure
of the Company. The variable rate is subject to change over time as LIBOR
fluctuates.
Neither the Company nor the counterparty, which is a prominent bank
institution, is required to collateralize the respective obligation under
the swap. The Company is exposed to loss if the counterparty should
default. At July 1, 2000, the Company had no exposure to credit loss on the
interest rate swap. The Company does not believe that any reasonably likely
change in interest rates would have a materially adverse effect on the
financial position, the results of operations or cash flows of the Company.
9. Retirement Plans
The Company has several noncontributory defined benefit pension plans and
defined contribution plans covering substantially all of its employees. The
defined benefit plans provide benefits based on the participants' years of
service. The Company's funding policy for defined benefit plans is to make
annual contributions, which equal or exceed regulatory requirements. The
Company's Board of Directors annually approves contributions to defined
contribution plans. The assets of the defined benefit plans consist
primarily of equity securities, debt securities and cash equivalents. The
pension and profit-sharing plans at July 1, 2000, and June 30, 1999, hold a
combined total of 284,637 shares of the Company's Class B common stock.
The defined postretirement plan covers substantially all employees and
provides certain health care benefits. The plan is unfunded and
contributory.
25
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
Pension Benefits Postretirement Benefits
----------------------------------------------------------------------------------------
2000 1999 2000 1999
----------------------------------------------------------------------------------------
Change in benefit obligations
Benefit obligations at
beginning of year $13,149,390 $12,292,838 $2,106,167 $2,093,739
Service cost 298,385 307,112 127,919 97,320
Interest cost 908,750 915,727 189,623 146,127
Actuarial (gains)/losses 502,596 651,301 598,931 (56,649)
Benefits paid (1,290,191) (1,013,125) (129,414) (174,370)
Other 1,068 (4,463) - -
----------------------------------------------------------------------------------------
Benefit obligation at end of
year $13,569,998 $13,149,390 $2,893,226 $2,106,167
----------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets
at beginning of year $13,833,561 $13,389,253 $ - $ -
Actual return on plan assets 253,090 706,224 - -
Employer contributions 1,340,651 762,036 129,414 174,370
Benefits paid (1,290,191) (1,013,125) (129,414) (174,370)
Other 62,652 (10,827) - -
----------------------------------------------------------------------------------------
Fair value of plan assets at
end of year $14,199,763 $13,833,561 $ - $ -
----------------------------------------------------------------------------------------
Funded status $415,310 $684,171 $(2,893,226) $(2,106,167)
Unrecognized transition amount (184,900) (239,300) 576,450 624,487
Unrecognized net actuarial
loss 2,017,212 643,546 1,146,629 602,271
Unrecognized prior service cost 1,019,232 1,153,202 - -
----------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $3,266,854 $2,241,619 $(1,170,147) $( 879,409)
----------------------------------------------------------------------------------------
Weighted -average assumptions
Discount rate 7.5% 7.25% 7.5% 7.25%
Expected return on plan assets 8.5% 8.5% N/A N/A
----------------------------------------------------------------------------------------
The net periodic benefit cost related to the defined benefit pension plans
is made up of the following components:
Pension Benefits Post Retirement Benefits
----------------------------------------------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
----------------------------------------------------------------------------------------------------------
Service cost $298,385 $307,112 $ 267,092 $127,919 $ 97,320 $ 85,042
Interest cost 908,750 915,727 885,949 189,623 146,127 156,507
Expected return on
plan assets (1,080,874) (841,093) (2,102,398) - - -
Net amortization 189,155 276,217 1,282,412 102,610 68,497 75,651
----------------------------------------------------------------------------------------------------------
Net periodic pension cost $315,416 $657,963 $ 333,055 $420,152 $311,944 $317,200
----------------------------------------------------------------------------------------------------------
The health care cost trend rate used to determine the postretirement
benefit obligation was 6.31% for 2000. This rate decreases gradually to
5.25% in 2002, and remains at that level thereafter. The trend rate is a
significant factor in determining the amounts reported. A
one-percentage-point change in these assumed health care cost trend rates
would have the following effect:
26
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
One-Percentage Point Increase Decrease
---------------------------------------------------------------------------------------
Effect on total of service and interest
cost components $ 50,085 $ (41,307)
Effect on postretirement benefit obligation 366,314 (309,707)
The Company also has a non-qualified supplemental retirement program for
designated officers of the Company which includes death and disability
benefits. The plan is funded from the general assets of the Company. The
pension benefit obligation and pension expense under this plan are as
follows:
2000 1999 1998
-----------------------------------------------------------------------------
Pension benefit obligation $3,318,204 $2,275,996 $1,365,232
Pension expense 343,131 435,226 320,534
Expense for the discretionary profit sharing plan amounted to $673,344,
$744,511 and $758,055 in fiscal 2000, 1999 and 1998, respectively.
The Company also provides a 401(k) plan for all of its employees. Employees
may contribute up to 15 percent of their pay. For all hourly employees, the
Company will match 25 percent of the first 4 percent that an employee
contributes. The amount expensed for the Company match provision of the
plan was $143,791, $195,483, and $172,550 in fiscal 2000, 1999 and 1998,
respectively.
10. Income Taxes
The components of income (loss) from continuing operations before income
taxes consists of:
July 1, June 30, June 30,
Year ended 2000 1999 1998
--------------------------------------------------------------------------------
United States $ 12,056,990 $ 9,098,594 $ (919,274)
Foreign 989,740 225,175 (3,518,908)
--------------------------------------------------------------------------------
Income (loss) from
continuing operations
before income taxes $ 13,046,730 $ 9,323,769 $ (4,438,182)
--------------------------------------------------------------------------------
Income tax expense from continuing operations consists of:
July 1, June 30, June 30,
Year ended 2000 1999 1998
--------------------------------------------------------------------------------
Current:
United States $ 4,557,000 $ 3,950,000 $ 3,740,000
Foreign - - 541,000
State and local 331,000 326,000 368,000
--------------------------------------------------------------------------------
Total current 4,888,000 4,276,000 4,649,000
--------------------------------------------------------------------------------
Deferred:
United States (680,000) (1,133,000) 377,000
Foreign 427,000 97,000 (955,000)
State and local (12,000) (78,000) (140,000)
--------------------------------------------------------------------------------
Total deferred (265,000) (1,114,000) (718,000)
--------------------------------------------------------------------------------
Income tax expense $ 4,623,000 $ 3,162,000 $ 3,931,000
--------------------------------------------------------------------------------
27
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
The difference between the federal statutory tax rate and the effective tax
rate on continuing operations was as follows:
July 1, June 30, June 30,
Year ended 2000 1999 1998
----------------------------------------------------------------------------
Income (loss) from
continuing operations $ 4,436,000 $ 3,170,000 $ (1,509,000)
Foreign earnings taxed at
different rate 99,000 20,000 237,000
Nondeductible losses-Hirsh Sale - - 5,012,000
Write-off of foreign currency
translation adjustment - - 546,000
State and local income taxes 104,000 102,000 530,000
Tax credits and other (16,000) (130,000) (885,000)
-------------------------------------------------------------------------------
Income tax expense $ 4,623,000 $ 3,162,000 $ 3,931,000
-------------------------------------------------------------------------------
The sources of the net deferred income tax liability were as follows:
July 1, 2000 June 30, 1999
------------------------------------------------------------------------------
Property and equipment $ 7,108,000 $ 6,978,000
Pension accrual 1,111,000 762,000
Net operating loss carryforward (369,000) (797,000)
Supplemental retirement plan (1,044,000) (693,000)
Benefit related accruals (996,000) -
Stock basis of Canadian subsidiary (1,436,000) (1,436,000)
Other (162,000) 58,000
------------------------------------------------------------------------------
$ 4,212,000 $ 4,872,000
------------------------------------------------------------------------------
For Canadian tax purposes, the Company has net operating losses expiring
through 2005 totaling approximately $1,800,000. The tax benefit reflected
above for these loss carryforwards is net of a valuation allowance of
$476,000.
11. Stock Option Plans
The 1987 Stock Option Plan granted key employees of the Company options to
purchase shares of common stock. Options were granted at or above the
market price of the Company's common stock on the date of the grant, were
exercisable from that date and terminated ten years from the grant date.
The plan, as amended in October 1994 and in October 1991, authorized a
total of 300,000 shares to be available for issuance under the plan. Grants
can no longer be made under the 1987 Stock Option Plan.
28
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
Shareholders at the 1997 annual meeting approved the Company's 1997 Stock
Incentive Plan. Under this plan, up to 660,000 shares of the Company's
common stock are available for issuance. Issuance can be in the form of
stock options or restricted stock; however, no more than 55,000 shares can
be issued as restricted stock. Stock options can be granted as incentive
stock options or nonqualified stock options. The number of shares of common
stock subject to an option granted to a participant under this plan will be
determined based on the amount of the participant's election under the EVA
bonus plan. Each participant may elect to receive options by electing to
forego a portion of the cash bonus that may be earned by them, with the
option price determined in accordance with the plan. The exercise price per
share of common stock purchasable under an option shall be a single fixed
exercise price equal to 100% of the fair market value of the common stock
at the award date increased by a fixed percentage increase (based on U.S.
Treasury Securities plus 2% less a projected dividend yield) compounded
annually over the term of the option. In general, the options vest three
years after the date the option was granted and expire five years after the
grant date. During fiscal 2000 and 1999, 198,206 and 195,635 options were
granted to participants at an exercise price of $19.04 per share and $26.54
per share, respectively. Included in the 198,206 options are 27,500 options
granted to William Dutmers, Chairman, President and CEO, which are not part
of the 1997 Stock Incentive Plan (as explained below).
Transactions under the plans are as follows:
Weighted Weighted
average average
July 1, exercise June 30, exercise
Year ended 2000 price 1999 price
--------------------------------------------------------------------------------------
Options outstanding,
beginning of year 176,931 $18.41 147,445 $13.91
Granted 198,206 19.04 195,635 26.54
Exercised (14,637) 13.78 (38,416) 17.75
Forfeited (55,349) 20.32 (127,733) 26.54
--------------------------------------------------------------------------------------
Options outstanding and
exercisable, end of year 305,151 $18.64 176,931 $17.92
--------------------------------------------------------------------------------------
Options available for grant,
end of year 214,639 136,373
--------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year $2.84 $1.99
--------------------------------------------------------------------------------------
The Company accounts for its stock option plans in accordance with APB
Opinion 25, Accounting for Stock Issued to Employees. Since the exercise
price of the Company's employee stock options equals the market price of
the underlying stock on the date of the grant, no compensation cost is
recognized under APB Opinion 25. In accordance with SFAS No. 123,
Accounting for Stock-Based Compensation, the Company is required to provide
pro forma information regarding net income and earnings per share as if
compensation costs for the Company's stock option plan had been determined
using a fair value based estimate. The Company uses the Black-Scholes
option-pricing model to determine the fair value of each option at the
grant date with the following weighted average assumptions:
2000 1999
--------------------------------------------------------------------------------
Dividends per share $ 0.615 $ 0.600
Expected volatility 0.3241 0.3251
Risk-free interest rate 5.70% 5.45%
Expected lives 2.3 5.4
--------------------------------------------------------------------------------
29
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
Under the accounting provisions of SFAS No. 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
2000 1999
----------------------------------------------------------------------------------
Net income:
As reported $ 8,423,730 $ 6,161,769
Pro forma 7,860,825 5,772,277
Earnings per share:
As reported $ 1.80 $ 1.13
Pro forma 1.68 1.06
----------------------------------------------------------------------------------
Of the 660,000 shares available for issuance under the 1997 Stock Incentive
Plan, no more than 55,000 shares may be issued as restricted stock. The
Executive Compensation Committee shall, subject to the approval of the
Board of Directors, determine the eligible persons to whom, and the price
(if any) to be paid by the participant. The participant shall not be
permitted to sell, transfer, pledge, or assign the shares of the restricted
stock awarded under this Plan. Subject to these limits, the Committee has
sole discretion to set, accelerate or waive the restrictions of the stock.
Except as provided above, upon issuance of the restricted stock, the
participant will have all the rights of a shareholder with respect to the
shares, including the right to vote them and to receive all dividends and
other related distributions. If termination of employment occurs within the
restricted period, all shares of stock still subject to restriction will
vest or be forfeited in accordance with the terms and conditions
established by the Committee.
On July 1, 1998, Mr. Dutmers was granted 11,550 shares of common stock. The
stock was subject to restrictions on transfer for one year. The stock was
the principal compensation for one year's service by Mr. Dutmers to the
Company as Chairman of the Board of Directors. In addition, under the EVA
bonus plan, Mr. Dutmers was eligible to receive a target bonus of 65% times
the value of the above awarded shares which was determined by using the
average stock price in the 30-day period preceding the date of grant. Mr.
Dutmers elected to receive up to 50% of his fiscal 1999 target bonus in
leveraged stock options. The deferred compensation expense related to the
restricted stock grants was amortized to expense on a straight-line basis
over the one-year period.
On February 1, 2000, Mr. Dutmers was granted 6,600 shares of restricted
common stock and the option to purchase an additional 27,500 shares of the
Company's common stock at a price of $14.43 per share. The grant and the
options will vest if the Company achieves specific financial objectives
within a five-year performance period. During the performance period, the
grantee may vote and receive dividends on the restricted shares, but the
shares are subject to transfer restrictions and are forfeited if the
grantee terminates employment or the Company does not achieve its financial
objectives.
30
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
12. Stockholders' Equity
The Company has three classes of stock, common stock, Class B common stock
and unissued preferred stock. Each share of common stock entitles the
holder thereof to one vote on all matters submitted to the shareholders.
Each share of Class B common stock entitles the holder to ten votes on all
such matters, except that the holders of common stock are entitled to
elect, voting separately as a class, at least one quarter of the Company's
directors to be elected at each meeting held for the election of directors.
In all other instances, holders of common stock and Class B common stock
vote together, except for matters affecting the powers, preferences or
rights of the respective classes or as otherwise required under the
Michigan Corporation Act. With respect to dividend rights, each share of
common stock is entitled to cash dividends at least ten percent (10%)
higher than those payable on each share of Class B common stock. Class B
common stock is subject to certain restrictions on transfer, but is
convertible into common stock on a share-for-share basis at anytime.
On April 14, 2000, the Board of Directors declared a 10% stock dividend of
the Company's common stock and Class B common stock. On May 19, 2000,
shareholders received one additional share of stock for each ten shares
held. All per share data and weighted average shares outstanding have been
restated to reflect the 10% stock dividend.
On September 1, 1998, the Company announced its intention to purchase up to
1,320,000 shares of the Company's common stock pursuant to a Dutch Auction
self-tender offer at a price range of $17.27 to $20 per share. The Board of
Directors also approved the purchase in the open market or in privately
negotiated transactions, following the completion of the Dutch Auction, of
shares of common stock in an amount which when added to the number of
shares of common stock purchased in the Dutch Auction would equal
1,485,000. The Dutch Auction was concluded on October 7, 1998, with the
purchase of 1,353,862 shares at a price of $19.09 per share. At the January
22, 1999, Board of Directors meeting, the Board approved another 440,000
shares for the stock repurchase program. Utilizing both of the Board
authorizations, the Company has purchased an additional 633,810 shares
through the end of the fiscal 2000 with the price per share ranging from
approximately $12 to $17. In total, the Company spent approximately $35.7
million on share repurchases.
13. Business Segments
Effective for the year ended June 30, 1999, the Company adopted SFAS No.
131, Disclosure about Segments of an Enterprise and Related Information. In
accordance with SFAS No. 131, the Company operates on a worldwide basis
within a single reportable segment, storage products. The nature of the
products, production processes, types of customers and methods of
distribution are consistent across the Company and its subsidiaries and
therefore have been aggregated into one reported segment. The Company's
primary product categories include shelving systems, drawer slides and
builder's hardware.
Geographic information related to net sales and long-lived assets are
summarized between domestic and foreign locations as follows:
31
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
Year ended July 1, 2000 June 30, 1999 June 30, 1998
----------------------------------------------------------------------------------
Net sales:
United States $132,432,934 $133,805,266 $158,810,004
Canada 10,881,653 9,919,229 14,868,871
Other foreign 6,522,283 6,534,860 7,953,695
Long-lived assets:
United States 38,361,863 35,298,940 36,654,720
Canada - - -
Other foreign - - -
The Company does not believe that it is dependent upon any single customer,
since none account for more than 10% of consolidated net sales and
operating income.
14. Supplemental Cash Flow
Information
Total interest paid during the years ended July 1, 2000, June 30, 1999 and
1998, was $1,383,957, $754,166 and $1,310,066, respectively.
Total income taxes paid during the years ended July 1, 2000, June 30, 1999
and 1998, were $4,345,000, $3,912,773 and $3,686,753, respectively.
15. Quarterly Results
(Unaudited)
The table below sets forth summary unaudited information on a quarterly
basis for the Company.
Year ended July 1, 2000 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-----------------------------------------------------------------------------------
Net sales $35,687,624 $35,798,890 $38,704,961 $39,645,395
Gross profit 9,393,510 9,923,657 10,509,283 11,134,906
Net income 2,044,812 2,130,343 2,176,589 2,071,986
Earnings per share, net-
diluted 0.44 0.45 0.46 0.45
Cash dividend-common
stock 0.15 0.15 0.15 0.165
Cash dividend-Class B
common stock $ 0.136 $ 0.136 $ 0.136 $ 0.15
-----------------------------------------------------------------------------------
Year ended June 30, 1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-----------------------------------------------------------------------------------
Net sales $43,678,644 $36,359,076 $36,038,270 $34,183,365
Gross profit 9,893,904 8,653,296 8,945,301 8,599,603
Net income 2,521,982 1,025,172 1,565,117 1,049,498
Earnings per share, net-
diluted 0.38 0.19 0.31 0.22
Cash dividend-common
stock 0.15 0.15 0.15 0.15
Cash dividend-Class B
common stock $ 0.136 $ 0.136 $ 0.136 $ 0.136
-----------------------------------------------------------------------------------
32
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
Year ended June 30, 1998 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-----------------------------------------------------------------------------------
Net sales $44,658,302 $42,677,957 $49,469,554 $44,826,757
Gross profit 11,503,905 10,243,477 11,554,926 8,997,592
Income (loss) from
continuing operations 2,470,026 2,017,210 (1,056,822) (11,799,596)
Income (loss) from
discontinued operation 200,886 (294,525) (1,274,639) -
Net income (loss) 2,670,912 1,722,685 (2,331,461) (11,799,596)
Earnings (loss) per share
from continuing
operations-diluted 0.38 0.31 (0.16) (1.79)
Earnings (loss) per share
from discontinued
operation-diluted 0.03 (0.05) (0.19) -
Earnings (loss) per share,
net-diluted 0.41 0.26 (0.35) (1.79)
Cash dividend-common
stock 0.15 0.15 0.15 0.15
Cash dividend-Class B
common stock $ 0.136 $ 0.136 $ 0.136 $ 0.136
-----------------------------------------------------------------------------------
16. Commitments and
Contingencies
As described in Note 7, when the Company sold The Hirsh Company the
purchaser assumed the lease for the facility located in Skokie, Illinois.
The Company guaranteed all of the lease obligations to the landlord through
the expiration of the lease in August 2000. As of July 1, 2000, the
purchaser is in default on the lease agreement and the landlord has filed
suit against the purchaser and the Company as the guarantor. The claim is
for unpaid rent, unpaid property taxes, building repairs and legal costs.
A former employee in connection with benefits paid under an executive
retirement plan has also sued the Company. The initial ruling was in favor
of the former employee; however, the Company has filed an appeal in the
case.
The Company is also subject to other legal proceedings and claims, which
arise in the ordinary course of its business.
In the opinion of management, based on the information presently known, the
ultimate liability for these matters, taking into account established
accruals of approximately $880,000, will not have a materially adverse
effect on the Company's financial position or the results of its
operations.
33
Independent Auditors' Report
Board of Directors
Knape & Vogt Manufacturing Company
Grand Rapids, Michigan
We have audited the accompanying consolidated balance sheets of Knape & Vogt
Manufacturing Company and subsidiaries as of July 1, 2000 and June 30, 1999, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended July 1, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Knape & Vogt
Manufacturing Company and subsidiaries at July 1, 2000 and June 30, 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended July 1, 2000, in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Grand Rapids, Michigan
July 28, 2000
34
ITEM 9--DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No changes in, or disagreements with, the Company's accountants occurred,
requiring disclosure under Item 304 of Regulation S-K.
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of Registrant. Information relating to directors and director
nominees of the Company, contained in the Company's definitive Proxy Statement
for its Annual Meeting of Shareholders to be held October 13, 2000, and filed
pursuant to Regulation 14A, is incorporated herein by reference.
Executive Officers of Registrant. Information relating to the executive
officers of the Company is included in Part I of this Form 10-K.
ITEM 11--EXECUTIVE COMPENSATION
The information under the captions "Summary Compensation Table," "Option
Grants in Last Fiscal Year," and "Aggregated Stock Option Exercises in Fiscal
2000 and Year End Option Values," is incorporated herein by reference from the
Company's definitive Proxy Statement for the Company's Annual Meeting of
Shareholders to be held October 13, 2000, filed pursuant to Regulation 14A.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the captions "Voting Securities and Principal
Shareholders" and "Directors and Nominees" is incorporated herein by reference
from the Company's definitive Proxy Statement for the Company's Annual Meeting
of Shareholders to be held October 13, 2000, filed pursuant to Regulation 14A.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Directors and Nominees" is incorporated
herein by reference from the Company's definitive Proxy Statement for the
Company's Annual Meeting of Shareholders to be held October 13, 2000, filed
pursuant to Regulation 14A.
35
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following financial statements and schedules, all of which are set
forth in Item 8, are filed as part of this report.
Page Number in
10-K Report
-----------
Consolidated Statements of Operations 14
Consolidated Balance Sheets 15
Consolidated Statements of Stockholders' Equity 17
Consolidated Statements of Cash Flows 18
Notes to Consolidated Financial Statements 19
Independent Auditors' Report 34
(2) Financial Statement Schedule
The following financial statement schedule and related Independent
Auditors' Report on such schedule are included in this Form 10-K on the
pages noted.
Page Number in
10-K Report
-----------
Independent Auditors' Report on Schedule 37
Schedule II -- Valuation and Qualifying Accounts and Reserves 38
All other schedules are not submitted because they are not applicable or
not required, or because the required information is included in the financial
statements or notes thereto.
(3) Exhibits
Reference is made to the Exhibit Index which is found on page 40 of
this Form 10-K Annual Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year
ended July 1, 2000.
36
Independent Auditors' Report on Schedule
Knape & Vogt Manufacturing Company
Grand Rapids, Michigan
The audits referred to in our report dated July 28, 2000, relating to the
consolidated financial statements of Knape & Vogt Manufacturing Company which is
contained in Item 8 of this Form 10-K, included the audit of the financial
statement schedule listed in the accompanying table of contents. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based upon our audits.
In our opinion, the financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Grand Rapids, Michigan
July 28, 2000
37
Knape & Vogt Manufacturing Company and Subsidiaries
Schedule II - Valuation and Qualifying Accounts and Reserves
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------
Balance Charged to Balance
beginning costs and end of
Description of period expenses(1) Deductions(1)(2) period
- ----------------------------------------------------------------------------------------------------------
Year ended July 1, 2000:
Allowances deducted from
assets:
Accounts receivable for:
Doubtful accounts $242,000 $187,000 $20,000 $409,000
Cash discounts 147,000 - - 147,000
- ----------------------------------------------------------------------------------------------------------
$389,000 $187,000 $20,000 $556,000
Year ended June 30, 1999:
Allowances deducted from
assets:
Accounts receivable for:
Doubtful accounts $ 177,000 $ 336,000 $ 271,000 $ 242,000
Cash discounts 175,000 - 28,000 147,000
- ----------------------------------------------------------------------------------------------------------
$ 352,000 $ 336,000 $ 299,000 $ 389,000
Year ended June 30, 1998:
Allowances deducted from
assets:
Accounts receivable for:
Doubtful accounts $ 268,000 $ 390,000 $ 481,000 $177,000
Cash discounts 257,000 - 82,000 175,000
- ----------------------------------------------------------------------------------------------------------
$525,000 $ 390,000 $ 563,000 $352,000
(1) Write-off of doubtful accounts and collections on accounts previously
written off, including reduction in allowance balance.
(2) Year ended June 30, 1998 balances include the reclassification of
allowances recorded for The Hirsh Company to net assets held for sale.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
By /s/ William R. Dutmers
William R. Dutmers, Chairman of the Board,
President and Chief Executive Officer
By /s/ Leslie J. Cummings
Leslie J. Cummings, Vice President of Finance
Date: September 15, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on September 15, 2000, by the following persons on
behalf of the registrant in the capacities indicated.
/s/ William R. Dutmers /s/ John E. Fallon
William R. Dutmers, Chairman of the Board, John E. Fallon, Director
Chief Executive Officer and President
/s/ Thomas A. Hilborn /s/ Michael J. Kregor
Thomas A. Hilborn, Director Michael J. Kregor, Director
/s/ Raymond E. Knape /s/ Richard S. Knape
Raymond E. Knape, Director Richard S. Knape, Director
/s/ Robert J. Knape /s/ Gregory Lambert
Robert J. Knape, Director Gregory Lambert, Director
39
KNAPE & VOGT MANUFACTURING COMPANY
ANNUAL REPORT - FORM 10-K
EXHIBIT INDEX
3(a) Certificate of Amendment to the Articles of Incorporation, and the
Restated Articles of Incorporation of the Company, which were filed as
Exhibit 3(a) of the Registrant's Form 10-K Annual Report for the fiscal
year ended June 30, 1987, are incorporated by reference.
3(b) Bylaws as amended April 23, 1999, filed as Exhibit 3.1 of the
Registrant's Form 10-Q Third Quarter Report for the fiscal year June
30, 1999, are incorporated by reference.
10(a) Supplemental Executive Retirement Plan, which was filed as Exhibit 10
of the Registrant's Form 10-K Annual Report for the fiscal year ended
June 30, 1981, is incorporated by reference.
10(b) Knape & Vogt Manufacturing Company 1987 Stock Option Plan, effective
October 16, 1987, which was filed as Exhibit I to Registrant's
definitive Proxy Statement dated September 23, 1987, is incorporated by
reference.
10(c) Knape & Vogt Manufacturing Company Employees' Retirement Savings Plan
(July 1, 1989 Restatement), as amended, which was filed as Exhibit 99
to Registrant's Registration Statement on Form S-8 (Reg. No. 33-88212),
is incorporated by reference.
10(d) Loan agreement with Old Kent Bank dated June 1, 1999, which was filed
as Exhibit 10(d) of the Registrant's Form 10-K Annual Report for the
fiscal year ended June 30, 1999, is incorporated by reference.
10(e) First amendment dated October 29, 1999, to Loan agreement with Old Kent
Bank, filed as Exhibit 10.1 of the Registrant's Form 10-Q Second
Quarter Report for the fiscal year July 1, 2000, is incorporated by
reference.
10(f) Interest swap agreement with Bank One dated June 1, 1999, which was
filed as Exhibit 10(e) of the Registrant's Form 10-K Annual Report for
the fiscal year ended June 30, 1999, is incorporated by reference.
10(g) Knape & Vogt Manufacturing Company 1997 Stock Incentive Plan, which was
filed as Appendix A to the Registrant's proxy statement dated September
17, 1997, is incorporated by reference.
10(h) Restricted Share Grant Agreement dated February 1, 2000, between Knape
& Vogt Manufacturing Company and William R. Dutmers, filed as Exhibit
10.1 of the Registrant's Form 10-Q Third Quarter Report for the fiscal
year July 1, 2000, is incorporated by reference.
10(i) Stock Option Agreement for Nonqualified Stock Option dated February 1,
2000, between Knape & Vogt Manufacturing Company and William R.
Dutmers, filed as Exhibit 10.2 of the Registrant's Form 10-Q Third
Quarter Report for the fiscal year July 1, 2000, is incorporated by
reference.
21 Subsidiaries of Registrant.
40
23 Consent of BDO Seidman, LLP, independent public accountants.
27 Financial Data Schedule.
41
EXHIBIT 21
SCHEDULE OF SUBSIDIARIES OF KNAPE & VOGT MANUFACTURING COMPANY
Knape & Vogt Canada, Inc. (organized under the laws of Ontario, Canada)
Feeny Manufacturing Company (organized under the laws of Michigan)
42
EXHIBIT 23
Consent of Independent Certified Public Accountants
We hereby consent to the incorporation by reference of our reports dated July
28, 2000, relating to the consolidated financial statements and schedule of
Knape & Vogt Manufacturing Company, appearing in that Corporation's annual
report on Form 10-K for the year ended July 1, 2000, in that corporation's
previously filed Form S-8 Registration Statements (file numbers 33-20227,
33-43704, 33-88206 and 33-88212).
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Grand Rapids, Michigan
September 15, 2000
43