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 June 30, 2001 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
_____________________ to _____________________
Commission file number 2-18868
KNAPE & VOGT MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)
Michigan 38-0722920
(State 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 $52,413,823 as of August 24, 2001.
Number of shares outstanding of each class of common stock as of August 24,
2001: 2,287,117 shares of Common Stock, par value $2.00 per share, and 2,330,841
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 12, 2001,
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 functional hardware, storage-related components and ergo nomic 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.
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 and drawer slides. 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. In
addition, 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, floating mousepads and
office lights.
In fiscal 2001, approximately 23% of the Company's sales were to the
consumer market, 73% of the Company's sales were to original equipment
manufacturers and specialty distributors, and 4% 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 2002 will decrease from the $9.3 million spent in
fiscal 2001 to an amount, which approximates the level of depreciation. The
fiscal 2002 spending will reflect investments made primarily 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 the Company. The Company estimates that at present it has
over 1,400 active customers with approximately 30,000 outlets, of which the five
largest customers account for approximately 20% of sales and no one of which
accounts for more than 8% 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
2
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 $2,489,000 was spent in
fiscal 2001 in the development of new products and in the improvement of
existing products; approximately $1,835,000 was spent in fiscal 2000 and
$1,543,000 in fiscal 1999 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 June 30, 2001, the Company employed 846 persons. Collective
bargaining agents represent none of the Company's employees.
Item 1(d)--Information About Foreign Operations
The Company's Canadian operation accounted for approximately 8% 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 3 and 13 of the Notes to the
Company's Consolidated Financial Statements contained herein for the fiscal year
ended June 30, 2001, 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 June 30, 2001:
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 June
30, 2001, the Company spent approximately $32,000,000 for expansion,
modernization and improvements of its facilities and equipment.
3
ITEM 3--LEGAL PROCEEDINGS
In September 1998, 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. During fiscal 2000, the purchaser defaulted on the
lease agreement and the landlord 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 $947,000, 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 June 30, 2001.
ADDITIONAL ITEM--EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company were, at June 30, 2001, as follows:
Year First Elected
Name Age Positions and Offices Held an Executive Officer
William R. Dutmers 45 Chairman of the Board of Directors,
Chief Executive Officer and President 1998
Michael G. Van Rooy 49 Senior Vice President of Manufacturing 1993
James S. Dahlke 51 Vice President of Business Development 1999
Leslie J. Cummings 36 Vice President of Finance and Treasurer 2000
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.
Ms. Cummings was named the Vice President of Finance and Treasurer in July
2000. Ms. Cummings joined the Company in 1998 as the Assistant Treasurer. Prior
to that she was employed at Herman Miller, Inc. from 1992 to 1998.
All terms of office are on an annual basis and will expire on October 12,
2001.
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 24, 2001, there were approximately 3,100 shareholders
of the Company's Common Stock and Class B Common Stock.
Fiscal 2001 Fiscal 2000
-------------------------------------------------------------------------------
Quarter High Low High Low
- --------------------------------------------------------------------------------------------------------------------
First $15.438 $14.00 $16.02 $11.93
Second $15.00 $11.875 $15.80 $12.56
Third $14.25 $12.375 $16.36 $12.44
Fourth $13.875 $12.14 $16.00 $13.52
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 June 30, 2001 Common Stock Class B Common Stock
- ------------------------ ------------ --------------------
First Quarter $.165 $.15
Second Quarter $.165 $.15
Third Quarter $.165 $.15
Fourth Quarter $.165 $.15
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
On August 10, 2001, 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 7, 2001, to
shareholders of record on August 24, 2001.
5
ITEM 6--SELECTED FINANCIAL DATA
For the Year Ended 2001 2000 1999 1998 1997
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(a) (b) (c)
Summary of Operations
Net sales................................... $140,509,875 $149,836,870 $150,259,355 $181,632,570 $176,630,294
Sales growth %............................ (6.2)% (0.3)% (17.3)% 2.8% 8.4%
Gross profit................................ 38,029,038 40,961,356 36,092,104 42,299,900 43,548,529
Gross profit %............................ 27.1% 27.3% 24.0% 23.3% 24.7%
Selling and administrative.................. 27,258,034 26,400,042 25,721,924 29,152,388 28,436,330
Selling and administrative %.............. 19.4% 17.6% 17.1% 16.1% 16.1%
Operating income (loss)..................... 10,471,004 14,456,314 9,770,180 (2,644,764) 14,738,964
Operating income (loss) %................. 7.5% 9.6% 6.5% (1.5)% 8.3%
Income (loss) from continuing operations.... 5,615,065 8,423,730 6,161,769 (8,369,182) 8,325,228
Loss from discontinued operation............ - - - (1,368,278) (471,624)
Net income (loss)........................... 5,615,065 8,423,730 6,161,769 (9,737,460) 7,853,604
Common Stock Data
Diluted earnings per share from continuing
operations.................................. 1.22 1.80 1.13 (1.28) 1.28
Diluted earnings per share from discontinued
operation................................... - - - (0.21) (0.07)
Diluted earnings per share.................. 1.22 1.80 1.13 (1.49) 1.21
Weighted-average shares outstanding-diluted. 4,618,250 4,684,125 5,445,009 6,550,184 6,493,561
Dividends per share--common................. 0.66 0.615 0.600 0.600 0.600
Dividends per share--Class B common......... 0.60 0.559 0.545 0.545 0.545
Year-end stock price........................ 12.66 15.25 16.02 20.45 14.55
Year-end Financial Position
Total assets................................ 89,803,393 88,287,652 75,059,989 104,033,087 125,741,698
Working capital............................. 18,465,603 16,378,393 18,135,700 38,276,167 39,266,034
Current ratio............................... 2.0 1.7 2.0 2.5 4.2
Long-term debt.............................. 23,750,000 20,050,000 17,700,000 9,700,000 29,000,000
Long-term debt as a % of total capital...... 39.0% 36.6% 35.8% 13.6% 28.3%
Stockholders' equity........................ 37,132,697 34,706,630 31,758,785 61,756,674 73,460,498
Other Data/Key Ratios
Cash flow from operating activities......... 8,788,239 17,269,946 13,471,459 23,234,772 16,186,397
Capital expenditures........................ 9,282,239 9,112,810 4,786,263 4,228,552 7,763,482
Depreciation and amortization............... 6,340,647 5,862,588 5,914,739 7,966,383 7,728,603
Return on average assets.................... 6.3% 10.3% 6.9% (8.5)% 6.2%
Return on average equity.................... 15.6% 25.3% 13.2% (14.4)% 11.0%
Number of employees......................... 846 890 846 944 1,061
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(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.
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 recorded revenues of $140.5 million for fiscal 2001, compared
to $149.8 million in the prior year. The overall slowdown in the U.S. economy
negatively impacted the Company's two key markets: office furniture and home
storage products. Net income was $5.6 million or $1.22 per diluted share in
fiscal 2001 compared to $8.4 million or $1.80 per diluted share in fiscal 2000.
Despite the downturn in the Company's key markets in fiscal 2001, the
Company remains committed to introducing new and innovative products to the
market along with containing its costs through the principles of lean
manufacturing. During fiscal 2001, the Company introduced 20 new products and
has several additional products, which will be introduced during fiscal 2002.
Results of Operations
The table below shows certain items in the Consolidated Statements of
Operations as a percentage of net sales:
June 30, July 1, June 30,
Year ended 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Net sales.................................. 100.0% 100.0% 100.0%
Cost of sales.............................. 72.9 72.7 76.0
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Gross margin............................. 27.1 27.3 24.0
Selling and administrative expenses........ 19.4 17.6 17.1
Restructuring and impairment of assets..... .2 .1 .4
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Operating income......................... 7.5 9.6 6.5
Interest expense........................... 1.2 1.0 .5
Other expense (income)..................... .2 - (.2)
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Income before income taxes................. 6.1 8.6 6.2
Income taxes............................... 2.1 3.1 2.1
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Net income................................. 4.0% 5.5% 4.1%
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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. 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:
June 30, July 1, June 30,
Year ended 2001 % 2000 % 1999 %
- -----------------------------------------------------------------------------------------------------------------------------
Shelving systems $ 38.6 27.5% $ 49.3 32.9% $ 55.5 37.0%
Drawer slides 64.7 46.0% 70.0 46.7% 70.8 47.1%
Hardware/Other 37.2 26.5% 30.5 20.4% 24.0 15.9%
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 140.5 100% $ 149.8 100% $ 150.3 100%
- -----------------------------------------------------------------------------------------------------------------------------
Net sales in fiscal 2001 were $140.5 million. This represented a 6.2%
decline from the prior year. The overall weakness in the U.S. economy,
especially during the second half of the fiscal year, was the primary reason for
the decline. Despite the softness in the overall office furniture and
storage-related markets, the Company's ergonomic product line grew
substantially, more than doubling the sales volume from the prior year. The
Company successfully launched several new products, including an ergonomic
lighting line and several next-generation products in both drawer slides and
kitchen and bath accessories. Most of these products were introduced to the
market during the fourth quarter of fiscal 2001, so the impact on net sales was
modest.
7
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.
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 that were either unprofitable or provided only a minimal
return. Specifically, the Company opted to redeploy 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 Margin
Gross margin, as a percentage of net sales, was 27.1% in fiscal 2001,
compared to 27.3% in fiscal 2000 and 24.0% in fiscal 1999. Despite the decrease
in sales volume in fiscal 2001, the gross profit margin only declined 20 basis
points. The increase in gross margins in fiscals 2001 and 2000 compared to
fiscal 1999 was attributable to cost improvement savings realized from the
ongoing lean manufacturing initiatives in all of the Company's locations and
from the higher mix of ergonomic products in the sales mix.
Selling and Administrative
Selling and administrative expenses, as a percent of net sales, were 19.4%
in fiscal 2001, compared to 17.6% in fiscal 2000 and 17.1% in fiscal 1999. The
increase in 2001 from the prior year reflects the fact that the ergonomic
product line has a higher level of selling costs associated with it than the
Company's other product lines. In addition, the Company incurred severance costs
of approximately $350,000 in the third quarter of fiscal 2001 associated with
the layoffs, which took place in January 2001.
The increase in fiscal 2000 compared to fiscal 1999 represents costs
incurred to launch several new products and costs, such as royalties and
goodwill, associated with the Idea acquisition.
Restructuring/Impairment
In the third quarter of fiscal 2001, the Company recorded a pre-tax
impairment loss on the assets held for sale of $.3 million in accordance with
Financial Accounting Standard No. 121. The loss reflected new information, which
lowered the Company's estimate of the fair market value of the properties listed
for sale. In fiscal 2000, the Company had recorded a loss of $.1 million, which
was its best estimate at that time of the loss to be incurred on the sale of the
Company's former powder coat facility
In the second quarter of fiscal 1999, as a result of the decision to
redeploy certain utility slide production assets, the Company recorded an
impairment loss of $.6 million pre-tax to write down the related tooling assets
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.
Other Expenses/(Income) and Income Taxes
Interest expense was $1.6 million in fiscal 2001, compared to $1.4 million
and $.8 million, respectively, in fiscal years 2000 and 1999. The increase in
interest expense during fiscal 2001 and fiscal 2000 reflects the higher level of
borrowings needed to support the Idea acquisition, capital expenditures and
share repurchases.
Other miscellaneous expense was $.3 million in fiscal 2001, compared to
$2,345 in fiscal 2000 and other income of $.4 million in fiscal 1999. The
increase in fiscal 2001 compared to fiscal 2000 reflects losses incurred on the
disposal of fixed assets. 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 34.6% in fiscal 2001, compared to 35.4% in
fiscal 2000 and 33.9% in fiscal 1999. See Note 10 to the Consolidated Financial
Statements for a reconciliation of the effective tax rate.
Net Income
Net income was $5.6 million, or $1.22 per diluted share, in fiscal 2001
compared to $8.4 million, or $1.80 per diluted share, in fiscal 2000 and $6.2
million, or $1.13 per diluted share in fiscal 1999. The decline in fiscal 2001
was primarily due to the decrease in overall sales volume. The fiscal 2000
increase over fiscal 1999 reflected the gross profit improvement achieved during
fiscal 2000.
8
Liquidity And Capital Resources
Cash flows from operating activities generated $8.8 million in fiscal 2001,
compared to $17.3 million in fiscal 2000 and $13.5 million in fiscal 1999. The
decline in fiscal 2001 resulted in part from a decrease in net income, lower
accounts payable levels due to a decrease in overall purchases and a decrease in
payroll-related accruals, which were variable with the Company's performance.
The improvement in fiscal 2000 compared to fiscal 1999 reflected the higher net
income earned during the year and improved working capital performance.
Cash flows used in investing activities were $9.8 million in fiscal 2001.
During fiscal 2001, the Company incurred $9.3 million of capital expenditures,
compared to $9.1 million and $4.8 million, respectively, in fiscal 2000 and
1999. The expenditures in fiscal 2001 and fiscal 2000 were primarily for
improvements in the Company's manufacturing processes and tooling for new
products. Management believes that capital expenditures will approximate the
level of depreciation in fiscal 2002, as investments will be focused on bringing
new products and product enhancements to the Company's customers. The cost to
complete the items classified as construction in progress at June 30, 2001 was
estimated to be approximately $2.1 million. Investing activities in fiscals 2001
and 2000 also included the net cash paid for the acquisition of Idea Industries,
Inc (Idea).
On October 1, 1999, the Company acquired substantially all of the assets of
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 their estimated fair values at the date of the
acquisition. The cost of the acquisition in excess of net identifiable assets
acquired has been recorded as goodwill and is being amortized on a straight-line
basis over 15 years.
The terms of the Idea acquisition agreement provided for additional
consideration to be paid if Idea' s sales exceeded certain targeted levels. The
maximum amount of contingent consideration was $550,000 payable through 2001. In
calendar year 1999, the additional consideration payment was $44,255, and in
calendar year 2000, the remaining contingent consideration was earned and paid.
All additional consideration paid was recorded as goodwill.
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 Board 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. At each of the January 22, 1999 and the August 20, 1999, meetings of
the Board of Directors, the Board approved an additional 440,000 shares for the
stock repurchase program. Utilizing these Board authorizations, the Company has
purchased an additional 635,150 shares through the end of the fiscal 2001 with
the price per share ranging from approximately $12 to $17. In total, the Company
spent approximately $35.7 million on share repurchases. At June 30, 2001, the
Company has remaining authorization to repurchase an additional 375,988 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 10 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 June 30, 2001, the Company was in compliance with all of
the covenants.
The Company's outstanding debt at June 30, 2001, was $23.8 million,
compared to $20.1 million in fiscal 2000. The debt to total capital ratio
increased to 39.0% at June 30, 2001, from 36.6% at July 1, 2000. 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 2002.
9
Legal Contingencies
In September 1998 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. During fiscal 2000, the purchaser defaulted on the
lease agreement and the landlord 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 $947,000 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.
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.
10
ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to market risks, which include changes in foreign
currency exchange rates as measured against the U.S. dollar and changes in U.S.
interest rates. The Company holds a derivative instrument in the form of an
interest rate swap, which is viewed as a risk management tool and is not used
for trading or speculative purposes. The intent of the interest rate swap is to
effectively fix the interest rate on part of the borrowings 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 6 - Long-Term Debt and Note 8
- - 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 June 30, 2001, that are sensitive to changes in interest
rates. The table also presents the corresponding interest rate swap on this
debt. Since the interest rate swap effectively fixes the interest rate on the
notional amount of debt, changes in interest rates have no current effect on the
interest expense recorded by the Company on the portion of the debt covered by
the interest rate swap.
Liability Amount Maturity Date
- -----------------------------------------------------------------------------------------------------
Variable rate revolving credit
agreement $45 million November 1, 2004
First $20,000,000 at an interest rate of 4.00%
plus weighted average credit spread of .625%
Amounts in excess of $20,000,000 had an interest rate
ranging from 4.455% to 7.68% in 2001
Interest Rate Swaps
Notional amount $17 million August 31, 1999
Increased to $20 million June 1, 2006
Pay fixed/Receive variable - 4.00%
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.
11
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Immediately following are the consolidated balance sheets of the Company
and its subsidiaries as of June 30, 2001 and 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 June 30, 2001, the notes thereto, summary
of accounting policies, and the independent auditors' report.
12
Knape & Vogt Manufacturing Company and Subsidiaries
Consolidated Statements of Operations
- ---------------------------------------------------------------------------------------------------------------------------
Year ended June 30, 2001 July 1, 2000 June 30, 1999
------------------------------------------------------------------------------------------------------------------------
Net Sales $ 140,509,875 $ 149,836,870 $ 150,259,355
Cost of Sales 102,480,837 108,875,514 114,167,251
------------------------------------------------------------------------------------------------------------------------
Gross Profit 38,029,038 40,961,356 36,092,104
------------------------------------------------------------------------------------------------------------------------
Expenses
Selling and shipping 22,199,834 20,891,588 19,953,864
Administrative and general 5,058,200 5,508,454 5,768,060
Restructuring and impairment of assets 300,000 105,000 600,000
------------------------------------------------------------------------------------------------------------------------
Total Expenses 27,558,034 26,505,042 26,321,924
------------------------------------------------------------------------------------------------------------------------
Operating Income 10,471,004 14,456,314 9,770,180
------------------------------------------------------------------------------------------------------------------------
Other Expenses (Income)
Interest 1,611,942 1,407,239 802,202
Other, net 276,997 2,345 (355,791)
------------------------------------------------------------------------------------------------------------------------
Total Other Expenses 1,888,939 1,409,584 446,411
------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 8,582,065 13,046,730 9,323,769
Income Taxes 2,967,000 4,623,000 3,162,000
------------------------------------------------------------------------------------------------------------------------
Net Income $ 5,615,065 $ 8,423,730 $ 6,161,769
------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 1.22 $ 1.80 $ 1.13
------------------------------------------------------------------------------------------------------------------------
Basic Weighted Average Shares Outstanding 4,616,881 4,679,918 5,432,192
------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share $ 1.22 $ 1.80 $ 1.13
------------------------------------------------------------------------------------------------------------------------
Diluted Weighted Average Shares Outstanding 4,618,250 4,684,125 5,445,009
------------------------------------------------------------------------------------------------------------------------
Dividends Per Share
Common stock $ .660 $ .615 $ .600
Class B common stock $ .600 $ .559 $ .545
------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
13
Knape & Vogt Manufacturing Company and Subsidiaries
Consolidated Balance Sheets
- --------------------------------------------------------------------------------------------------------------------
June 30, 2001 July 1, 2000
- --------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash $ 2,113,940 $ 2,351,622
Accounts receivable, less allowances of $561,000 and $556,000,
respectively 17,822,214 20,631,951
Refundable income taxes 136,832 140,086
Inventories 14,290,096 15,092,393
Prepaid expenses 1,436,107 1,213,607
Net assets held for sale 1,698,521 1,779,405
- --------------------------------------------------------------------------------------------------------------------
Total Current Assets 37,497,710 41,209,064
- --------------------------------------------------------------------------------------------------------------------
Property and Equipment
Land and improvements 1,175,115 1,156,531
Buildings 16,041,892 14,489,756
Machinery and equipment 60,288,479 53,349,222
Construction in progress 2,044,247 4,636,979
- --------------------------------------------------------------------------------------------------------------------
79,549,733 73,632,488
Less accumulated depreciation 38,524,582 35,270,625
- --------------------------------------------------------------------------------------------------------------------
Net Property and Equipment 41,025,151 38,361,863
- --------------------------------------------------------------------------------------------------------------------
Goodwill, net 5,137,697 4,978,420
- --------------------------------------------------------------------------------------------------------------------
Other Assets 6,142,835 3,738,305
- --------------------------------------------------------------------------------------------------------------------
$ 89,803,393 $ 88,287,652
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
14
Knape & Vogt Manufacturing Company and Subsidiaries
Consolidated Balance Sheets
- --------------------------------------------------------------------------------------------------------------------
June 30, 2001 July 1, 2000
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 10,366,596 $ 12,833,665
Accruals:
Income taxes - 1,317,297
Taxes other than income 600,814 560,809
Compensation 2,063,900 4,689,373
Restructuring costs 225,713 252,241
Miscellaneous 5,775,084 5,177,286
- --------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 19,032,107 24,830,671
Supplemental Retirement Benefits 4,560,288 4,488,351
Long-Term Debt 23,750,000 20,050,000
Deferred Income Taxes 4,785,000 4,212,000
Other Long-Term Liabilities 543,301 -
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities 52,670,696 53,581,022
- --------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Stock:
Common, $2 par - 6,000,000 shares authorized; 2,272,921
and 2,222,852 issued 4,545,842 4,445,704
Class B common, $2 par - 4,000,000 shares authorized;
2,339,920 and 2,392,853 issued 4,679,840 4,785,706
Preferred - 2,000,000 shares authorized and unissued - -
Additional paid-in capital 8,502,727 8,482,908
Unearned stock grant (94,500) (94,500)
Accumulated other comprehensive loss (1,476,092) (1,169,577)
Retained earnings 20,964,880 18,256,389
- --------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 37,132,697 34,706,630
- --------------------------------------------------------------------------------------------------------------------
$ 89,803,393 $ 88,287,652
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
15
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, 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
adjustment - - - (29,983) - (29,983)
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
adjustment - - - (9,019) - (9,019)
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
Net income for 2001 5,615,065 5,615,065
Cash dividends (2,906,574) (2,906,574)
Restricted stock issued 3,296 21,787 25,083
Stock issued under stock option plan 3,656 12,266 15,922
Tax benefit from exercise
of stock options 3,623 3,623
Repurchase and retirement of
shares of common stock (2,680) (17,857) (20,537)
Foreign currency translation
adjustment (47,557) (47,557)
Derivative adjustment, net of tax
benefit of $190,000 (353,301) (353,301)
Minimum SERP adjustment, net of tax
benefit of $53,000 94,343 94,343
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 $ 9,235,682 $ 8,502,727 $ (94,500) $ (1,476,092) $ 20,964,880 $ 37,132,697
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
16
Knape & Vogt Manufacturing Company and Subsidiaries
Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------------------------------------------------
June 30, July 1, June 30,
Year ended 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 5,615,065 $ 8,423,730 $ 6,161,769
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of fixed assets 5,758,085 5,027,282 5,123,290
Amortization of other assets 582,562 835,306 791,449
Increase (decrease) in deferred income taxes 700,000 (308,000) (810,856)
Increase in supplemental retirement benefits 224,150 299,101 605,313
Increase in prepaid pensions (2,629,211) (1,175,341) -
Decrease in deferred lease costs - - (93,248)
Impairment loss 300,000 105,000 600,000
Loss on disposal of property and equipment 352,978 37,855 593,431
Stock grants earned - - 236,250
Changes in operating assets and liabilities (net
of acquisition):
Decrease (increase) in:
Accounts receivable 2,773,260 (1,045,595) 6,717,542
Refundable income taxes - - 33,961
Inventories 802,297 (1,692,041) (341,117)
Net assets held for sale - - 490,116
Prepaid expenses (222,605) 683,326 882,696
Increase (decrease) in:
Accounts payable (2,182,455) 2,515,619 (8,631,246)
Accrued restructuring costs (16,761) (123,512) (436,172)
Accruals (3,269,126) 3,687,216 1,548,281
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,788,239 17,269,946 13,471,459
- -------------------------------------------------------------------------------------------------------------------------
Investing Activities
Additions to property and equipment (9,282,239) (9,112,810) (4,786,263)
Proceeds from sales of property and equipment 7,301 4,330 20,250
Net cash paid for acquisition (505,745) (5,309,674) -
Proceeds from the sale of The Hirsh Company - - 18,157,884
Other, net (11,228) 328,332 (312,330)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (9,791,911) (14,089,822 ) 13,079,541
- -------------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of common stock 15,922 200,233 548,417
Repurchase and retirement of common stock (20,537) (2,246,551) (33,417,875)
Cash dividends declared (2,906,574) (2,747,267) (3,116,977)
Borrowings on long-term debt 3,700,000 2,350,000 8,000,000
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 788,811 (2,443,585) (27,986,435)
- -------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (22,821) (5,919) (721)
- -------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash (237,682) 730,620 (1,436,156)
Cash , beginning of year 2,351,622 1,621,002 3,057,158
- -------------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 2,113,940 $ 2,351,622 $ 1,621,002
- -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
17
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Knape & Vogt Manufacturing Company and its wholly owned
Operations subsidiaries (the Company) design, manufacture and
distribute functional hardware, storage-related components,
and ergonomic products for original equipment manufacturers,
specialty distributors, hardware chains and major home
centers. Based on the nature of its products, the Company
considers its business to be a single operating segment.
Products are sold worldwide through the Company's own sales
personnel and through independent sales representatives. The
Company is headquartered in Grand Rapids, Michigan.
2. Summary of Principles of Consolidation
Significant
Accounting The consolidated financial statements include the accounts
Policies of Knape & Vogt Manufacturing Company and its wholly owned
domestic and foreign subsidiaries. All material intercompany
balances, transactions and stockholdings have been
eliminated in consolidation.
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 fiscal years ended
June 30, 2001 and July 1, 200 each contained 52 weeks.
Revenue Recognition and Concentration of Credit Risk
The Company recognizes revenue upon shipment of products to
customers. No single customer accounts for more than 10% of
consolidated sales. Freight costs are invoiced to customers
and the associated expenses are netted against revenues.
Freight costs approximated $5.8 million, $6.2 million and
$7.0 million for fiscal 2001, 2000 and 1999, respectively.
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.
Cash Equivalents
The Company considers all highly liquid investments with
maturity of three months or less when purchased to be cash
equivalents.
Inventories
Inventories are stated at the lower of FIFO (first-in,
first-out) cost or market.
18
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 June 30, 2001 was approximately $2.1 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 $734,563 and $388,095 at June
30, 2001 and July 1, 2000, 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 2001 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 $684,000 in
2001, $1,038,000 in 2000, and $799,000 in 1999.
19
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net
income by the weighted-average number of common shares
outstanding in each year. Diluted EPS is computed by
dividing net income by the weighted-average number of common
shares outstanding, plus all shares that would have been
outstanding if every potentially dilutive common share had
been issued. The following table reconciles the numerators
and denominators used in the calculations of basic and
diluted EPS for each of the last three years:
2001 2000 1999
----------------------------------------------------------------------------------
Numerators:
Numerator for both basic and
diluted EPS, net income $5,615,065 $8,423,730 $6,161,769
----------------------------------------------------------------------------------
Denominators:
Denominator for basic EPS,
weighted-average common
shares outstanding 4,616,881 4,679,918 5,432,192
Potentially dilutive shares
resulting from stock option
plans 1,369 4,207 12,817
----------------------------------------------------------------------------------
Denominator for diluted EPS 4,618,250 4,684,125 5,445,009
----------------------------------------------------------------------------------
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.
2001 2000 1999
----------------------------------------------------------------------------------
Exercise Price
$13.64 20,410 - -
$14.09 20,350 - -
$16.74 10,594 11,192 15,125
$18.18 9,625 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.
New Accounting Standards
During fiscal 2001, the Company adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS Nos. 137 and 138. These
statements establish accounting and reporting standards
requiring that every derivative instrument be recorded in
the balance sheet as an asset or liability measured at its
current fair value and that changes in a derivative's fair
value be recognized currently in the determination of net
income unless specific hedge accounting criteria are met.
Adoption of these statements is described in detail in Note
8.
20
Knape & Vogt Manufacturing Company an d Subsidiaries
Notes to Consolidated Financial Statements
In June 2001, the Financial Accounting Standards Board
finalized FASB Statements No. 141, Business Combinations
(SFAS 141), and No. 142, Goodwill and Other Intangible
Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the
pooling-of-interest method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also
requires that the Company recognize acquired intangible
assets apart from goodwill if the acquired intangible assets
meet certain criteria. SFAS 141 applies to all business
combinations initiated after June 30, 2001 and for purchase
business combinations completed on or after July 1, 2001. It
also requires, upon adoption of SFAS 142, that the Company
reclassify the carrying amounts of intangible assets and
goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no
longer amortize goodwill, but instead test goodwill for
impairment at least annually. In addition, SFAS 142 requires
that the Company identify reporting units for the purposes
of assessing potential future impairments of goodwill,
reassess the useful lives of other existing recognized
intangible assets, and cease amortization of intangible
assets with an indefinite useful life. An intangible asset
with an indefinite useful life should be tested for
impairment in accordance with the guidance in SFAS 142. SFAS
142 is required to be applied in fiscal years beginning
after December 15, 2001 to all goodwill and other intangible
assets recognized at that date, regardless of when those
assets were initially recognized. SFAS 142 requires the
Company to complete a transitional goodwill impairment test
six months from the date of adoption. The Company is also
required to reassess the useful lives of other intangible
assets within the first interim quarter after adoption of
SFAS 142.
The Company's previous business combinations were accounted
for using the purchase method. As of June 30, 2001, the net
carrying amount of goodwill is $5,137,697. Currently, the
Company is assessing but has not yet determined how the
adoption of SFAS 141 and SFAS 142 will impact its financial
position and results of operation.
Reclassifications
Certain prior year information has been reclassified to
conform to the current year presentation.
3. Restructuring In May 1998, the Company reorganized its Canadian operation,
and Impairment including the sale of the Company's manufacturing facility
of Assets and equipment in the Toronto area. The Company continues to
sell and distribute its products in Canada and maintain a
sales office in the Toronto area.
In 1998, the Company sold The Hirsh Company, a wholly owned
subsidiary, which manufactured free-standing shelving, wood
storage products and workshop accessories.
In connection with its restructuring activities, the Company
recorded reserves for various costs to be incurred. Amounts
paid or charged against these reserves were as follows:
June 30, Costs Paid June 30, Costs Paid July 1, Costs Paid June 30,
1998 or Charged 1999 or Charged 2000 or Charged 2001
--------------------------------------------------------------------------------------------------
Facilities and
equipment $ 13,221 $ (13,221) $ - $ - $ - $ - $ -
Severance 419,429 (358,095) 61,334 (61,334) - -
Settlement cost 378,263 (80,101) 298,162 (45,921) 252,241 (26,528) 225,713
Other exit costs 18,019 - 18,019 (18,019) - -
--------------------------------------------------------------------------------------------------
Total $828,932 $(451,417) $377,515 $(125,274) $252,241 $(26,528) $225,713
--------------------------------------------------------------------------------------------------
21
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
During the second quarter of fiscal 1999, the Company
decided to redeploy certain drawer slide production assets
to product lines considered to have higher growth potential.
This resulted in the write-down of the tooling ($.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 $.1 million was recorded based
upon a buy/sell agreement. The purchaser was unable to close
the transaction and the building remains listed with a real
estate broker. In addition, the Company has listed a former
facility in Muncie, Indiana for sale. Based upon new
information, the Company recorded an additional impairment
loss of $.3 million pre-tax during the third quarter of
fiscal 2001.
4. Acquisition On October 1, 1999, the Company acquired substantially all
of the assets of 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 their estimated fair values at the date of
the acquisition. The cost of the acquisition in excess of
net identifiable assets acquired has been recorded as
goodwill and is being amortized on a straight-line basis
over 15 years.
The terms of the Idea acquisition agreement provided for
additional consideration to be paid if Idea's sales exceeded
certain targeted levels. The maximum amount of contingent
consideration was $550,000 payable through 2001. In calendar
year 1999, the additional consideration payment was $44,255
and in calendar year 2000, the remaining contingent
consideration was earned and paid. All additional
consideration paid was recorded as goodwill.
The results of the acquisition were not material to the
Company's consolidated operating results, therefore pro
forma financial statements have not been prepared.
5. Inventories Inventories are summarized as follows:
June 30, 2001 July 1, 2000
--------------------------------------------------------------------------------
Finished products $ 9,916,080 $ 8,778,556
Work in process 1,608,544 2,339,958
Raw materials and supplies 2,765,472 3,973,879
--------------------------------------------------------------------------------
$ 14,290,096 $ 15,092,393
--------------------------------------------------------------------------------
6. Long-Term On June 1, 1999, the Company replaced its prior credit
Debt facility with a new revolving credit agreement that provides
for up to $45,000,000 in borrowings through November 1,
2004. At June 30, 2001, there was a $23,750,000 balance
outstanding under this agreement. The interest rate on the
first $20,000,000 of the outstanding balance was 4.615%,
which was the 90-day LIBOR rate plus an additional 62.5
basis points credit spread. The interest rate on the
remaining $3,750,000 was based on the federal funds rate and
averaged 4.7% for the month of June 2001. 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 June 30, 2001, the non-use fee
was .150%. 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
22
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
under this agreement as amended to maintain certain
financial ratios and, at June 30, 2001 was in compliance
with these covenants.
The Company entered into a seven-year interest rate swap
agreement with a fixed 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.
7. Lease The Company leases certain real property and equipment under
Commitments operating lease agreements, which expire at various dates
through fiscal 2006.
Annual minimum rental payments required under all
noncancelable-operating leases are as follows:
2002-$421,000; 2003-$424,000; 2004-$247,000; 2005-$60,000;
2006-$15,000. Rent expense under all operating leases was
approximately $749,000, $629,000, and $553,000 in fiscal
2001, 2000 and 1999, respectively.
8. Derivative The Company has entered into an interest rate swap agreement
Financial designated as a partial hedge of the Company's variable rate
Instruments 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 June 30,
2001, 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 4.0% at June 30, 2001. 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 major
U.S. bank, is required to collateralize its obligation under
the swap. The Company is exposed to loss if the counterparty
should default. At June 30, 2001, 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.
The Company has recognized an after-tax loss of $353,301 in
other comprehensive income. The loss is made up of the
following components:
Pre-tax After-tax
Cumulative effect of a change in
accounting principle, as of July 1, 2000 $ 797,871 $ 518,616
Change in fair value of interest rate swap (1,311,839) (852,851)
Settlement to interest expense (29,333) (19,066)
Other Comprehensive loss $(543,301) $(353,301)
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 the 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 June
30, 2001 and July 1, 2000 held a combined total of 284,637
shares of the Company's Class B common stock.
23
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
The defined postretirement health-care plan covers
substantially all employees. The plan is unfunded and
contributory.
Postretirement
Pension Benefits Health-Care Benefits
------------------------------------------------------------------------------------
2001 2000 2001 2000
------------------------------------------------------------------------------------
Change in benefit obligations
Benefit obligations at
beginning of year $13,569,998 $13,149,390 $2,893,226 $2,106,167
Service cost 318,999 298,385 184,055 127,919
Interest cost 1,005,090 908,750 211,427 189,623
Actuarial losses 471,253 502,596 192,192 598,931
Benefits paid (777,180) (1,290,191) (281,954) (129,414)
Other (29,068) 1,068 - -
------------------------------------------------------------------------------------
Benefit obligation at end of
year $14,559,092 $13,569,998 $3,198,946 $2,893,226
------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets
at beginning of year $14,199,763 $13,833,561 $ - $ -
Actual return on plan assets (1,341,126) 253,090 - -
Employer contributions 2,867,811 1,340,651 281,954 129,414
Benefits paid (777,180) (1,290,191) (281,954) (129,414)
Other (246,534) 62,652 - -
------------------------------------------------------------------------------------
Fair value of plan assets at
end of year $14,702,734 $14,199,763 $ - $ -
------------------------------------------------------------------------------------
Funded status $ 143,642 $ 415,310 $(3,198,946) $(2,893,226)
Unrecognized transition amount (144,977) (184,900) 528,413 576,450
Unrecognized net actuarial
loss 4,946,945 2,017,212 1,279,527 1,146,629
Unrecognized prior service
cost 954,049 1,019,232 - -
------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $5,899,659 $ 3,266,854 $(1,391,006) $(1,170,147)
------------------------------------------------------------------------------------
Weighted -average assumptions
Discount rate 7.5% 7.5% 7.5% 7.5%
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:
Post retirement
Pension Benefits Health-Care Benefits
-----------------------------------------------------------------------------------------------
2001 2000 1999 2001 2000 1999
-----------------------------------------------------------------------------------------------
Service cost $318,999 $298,385 $307,112 $184,055 $127,919 $ 97,320
Interest cost 1,005,090 908,750 915,727 211,427 189,623 146,127
Expected return on
plan assets (1,193,512)(1,080,874) (841,093) - - -
Net amortization 104,630 189,155 276,217 107,331 102,610 68,497
-----------------------------------------------------------------------------------------------
Net periodic pension
cost $235,207 $315,416 $657,963 $502,813 $420,152 $311,944
-----------------------------------------------------------------------------------------------
The health care cost trend rate used to determine the
postretirement health-care benefit obligation was 5.78% for
2001. 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:
24
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 $ 64,248 $ (52,813)
Effect on postretirement health-care
benefit obligation 422,612 (355,583)
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:
2001 2000 1999
------------------------------------------------------------------------------
Pension benefit obligation $3,167,304 $3,318,204 $2,275,996
Pension expense 328,027 343,131 435,226
Expense for the discretionary profit-sharing plan amounted
to $768,590, $673,344 and $744,511 in fiscal 2001, 2000 and
1999, 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
50 percent of the first 4 percent that an employee
contributes. The amount expensed for the Company match
provision of the plan was $274,798, $143,791 and $195,483 in
fiscal 2001, 2000 and 1999, respectively.
10. Income Taxes The components of income before income taxes consists of:
June 30, July 1, June 30,
Year ended 2001 2000 1999
--------------------------------------------------------------------------------
United States $ 7,950,175 $ 12,056,990 $ 9,098,594
Foreign 631,890 989,740 225,175
--------------------------------------------------------------------------------
Income before income taxes $ 8,582,065 $ 13,046,730 $ 9,323,769
--------------------------------------------------------------------------------
Income tax expense consists of:
June 30, July 1, June 30,
Year ended 2001 2000 1999
--------------------------------------------------------------------------------
Current:
United States $ 2,208,000 $ 4,600,000 $ 3,950,000
State and local 59,000 331,000 326,000
--------------------------------------------------------------------------------
Total current 2,267,000 4,931,000 4,276,000
--------------------------------------------------------------------------------
Deferred:
United States 403,000 (723,000) (1,133,000)
Foreign 278,000 427,000 97,000
State and local 19,000 (12,000) (78,000)
--------------------------------------------------------------------------------
Total deferred 700,000 (308,000) (1,114,000)
--------------------------------------------------------------------------------
Income tax expense $ 2,967,000 $ 4,623,000 $ 3,162,000
--------------------------------------------------------------------------------
25
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:
June 30, July 1, June 30,
Year ended 2001 2000 1999
----------------------------------------------------------------------------
Federal income taxes at the
statutory rate $ 2,918,000 $ 4,436,000 $ 3,170,000
Foreign earnings taxed at
different rate 57,000 99,000 20,000
State and local income taxes 25,000 104,000 102,000
Tax credits and other (33,000) (16,000) (130,000)
-------------------------------------------------------------------------------
Income tax expense $ 2,967,000 $ 4,623,000 $ 3,162,000
-------------------------------------------------------------------------------
The sources of the net deferred income tax liability were as
follows:
June 30, 2001 July 1, 2000
--------------------------------------------------------------------------------
Property and equipment $ 6,971,000 $ 7,108,000
Pension accrual 1,990,000 1,111,000
Net operating loss carryforward (72,000) (369,000)
Supplemental retirement plan (999,000) (1,044,000)
Benefit related accruals (989,000) (996,000)
Stock basis of Canadian subsidiary (1,436,000) (1,436,000)
Other (680,000) (162,000)
--------------------------------------------------------------------------------
$ 4,785,000 $ 4,212,000
--------------------------------------------------------------------------------
For Canadian tax purposes, the Company has net operating
losses expiring through 2005 totaling approximately
$1,400,000. The tax benefit reflected above for these loss
carryforwards is net of a valuation allowance of $665,000.
11. Stock Option The 1987 Stock Option Plan granted key employees of the
Plans 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 1991 and in October 1994,
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.
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
26
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
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 2001 and 2000, 281,145 and 198,206
options were granted to participants at an exercise price of
$18.48 per share and $19.04 per share, respectively.
Included in the 198,206 options issued in 2000 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 Weighted
average average average
June 30, exercise July 1, exercise June 30, exercise
Year ended 2001 price 2000 price 1999 price
---------------------------------------------------------------------------------------------------------------
Options outstanding,
beginning of year 305,151 $18.64 176,931 $18.41 147,455 $13.91
Granted 281,145 18.48 198,206 19.04 195,635 26.54
Exercised (1,828) 14.45 (14,637) 13.78 (38,416) 17.75
Forfeited (21,254) 18.92 (55,349) 20.32 (127,733) 26.54
---------------------------------------------------------------------------------------------------------------
Options outstanding at end
of year 563,214 $18.73 305,151 $18.64 176,931 $17.92
---------------------------------------------------------------------------------------------------------------
Options exercisable at end
of year 65,974 $14.83 72,574 $14.73 96,219 $14.77
Options available for
grant, end of year 169,570 214,639 136,373
---------------------------------------------------------------------------------------------------------------
Weighted average fair
value of options
granted during the year $1.96 $2.84 $1.99
---------------------------------------------------------------------------------------------------------------
A summary of stock options outstanding at June 30, 2001
follows:
Outstanding Exercisable
Weighted
Average
Weighted Remaining
Average Contractual Weighted
Exercise Life Average
Price Ranges Shares Price (Years) Shares Exercise Price
---------------------------------------------------------------------------------------------
$12.50 - $14.50 73,255 $13.99 3.1 45,755 $13.72
$16.50 - $18.50 427,527 $18.41 3.8 20,219 $17.42
$26.50 - $28.50 62,432 $26.54 2 - -
--------------- --------------
563,214 $18.73 3.5 65,974 $14.83
--------------- --------------
27
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
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 or exceeds 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:
2001 2000 1999
------------------------------------------------------------------------------------------
Dividends per share $ 0.66 $ 0.615 $0.600
Expected volatility .2707 0.3241 0.3251
Risk-free interest rate 6.25% 5.81% 5.45%
Expected lives 4.0 4.1 5.4
------------------------------------------------------------------------------------------
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:
2001 2000 1999
-----------------------------------------------------------------------------------------
Net income:
As reported $ 5,615,065 $ 8,423,730 $ 6,161,769
Pro forma 5,064,021 7,670,547 5,772,277
Earnings per share:
As reported $ 1.22 $ 1.80 $ 1.13
Pro forma 1.10 1.64 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 were 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 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.
28
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
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.
12. Stockholders' The Company has three classes of stock: common stock, Class
Equity 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 10 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 Business Corporation
Act. With respect to dividend rights, each share of common
stock is entitled to cash dividends at least 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 any time.
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 10 sh ares 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 that, when added to the number of shares of
common stock purchased in the Dutch Auction, would equal
1,485,000. The Dutch Auction was concluded on October 7,
1998 with the purchase of 1,353,862 shares at a price of
$19.09 per share. At each of the January 22, 1999 and the
August 20, 1999 meetings of the Board of Directors, the
Board approved an additional 440,000 shares for the stock
repurchase program. Utilizing both of the Board
authorizations, the Company has purchased an additional
635,150 shares through the end of the fiscal 2001 with the
price per share ranging from approximately $12 to $17. In
total, the Company spent approximately $35.7 million on
share repurchases. At June 30, 2001, the Company has
remaining authorization to repurchase an additional 375,988
shares.
13. Business Effective for the year ended June 30, 1999, the Company
Segments 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. 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, builder's hardware
and ergonomic products.
29
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
Geographic information related to net sales and long-lived
assets are summarized between domestic and foreign locations
as follows:
Year ended June 30, 2001 July 1, 2000 June 30, 1999
----------------------------------------------------------------------------------
Net sales:
United States $123,737,818 $132,432,934 $133,805,266
Canada 10,558,130 10,881,653 9,919,229
Other foreign 6,213,927 6,522,283 6,534,860
Long-lived assets:
United States 41,025,151 38,361,863 35,298,940
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 Total interest paid during the years ended June 30, 2001,
Cash Flow July 1, 2000 and June 30, 1999 was $1,598,162, $1,383,957
Information and $754,166, respectively.
Total income taxes paid during the years ended June 30,
2001, July 1, 2000 and June 30, 1999 were $3,757,130,
$4,345,000 and $3,912,773, respectively.
15. Quarterly The table below sets forth summary unaudited information on
Results a quarterly basis for the Company.
(Unaudited)
Year ended June 30, 2001 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-----------------------------------------------------------------------------------
Net sales $36,957,550 $35,702,652 $33,569,582 $34,280,091
Gross profit 10,573,726 9,602,074 8,426,158 9,427,080
Operating income 3,807,580 2,899,316 1,316,959 2,447,149
Net income 2,180,895 1,615,572 562,791 1,255,807
Earnings per share-basis $ 0.47 $ 0.35 $ 0.12 $ 0.27
Earnings per share-diluted $ 0.47 $ 0.35 $ 0.12 $ 0.27
Cash dividend-common
stock $ 0.165 $ 0.165 $ 0.165 $ 0.165
Cash dividend-Class B
common stock $ 0.15 $ 0.15 $ 0.15 $ 0.15
-----------------------------------------------------------------------------------
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
Operating income 3,495,761 3,655,265 3,736,712 3,568,576
Net income 2,044,812 2,130,343 2,176,589 2,071,986
Earnings per share-basic $ 0.43 $ 0.45 $ 0.47 $ 0.45
Earnings per share-diluted $ 0.43 $ 0.45 $ 0.47 $ 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
-----------------------------------------------------------------------------------
30
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
16. Commitments In September 1998 when the Company sold The Hirsh Company,
and the purchaser assumed the lease for the facility located in
Contingencies Skokie, Illinois. The Company guaranteed all of the lease
obligations to the landlord through the expiration of the
lease in August 2000. During fiscal 2000, the purchaser
defaulted on the lease agreement and the landlord 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
$947,000 will not have a materially adverse effect on the
Company's financial position or the results of its
operations.
31
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 June 30, 2001 and July 1, 2000, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 2001. 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 auditing standards generally accepted
in the United States. 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 June 30, 2001 and July 1, 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 2001 in conformity with accounting principles
generally accepted in the United States.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Grand Rapids, Michigan
July 26, 2001
32
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 12, 2001, 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
2001 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 12, 2001, 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 12, 2001, 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 12, 2001, filed
pursuant to Regulation 14A.
33
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 13
Consolidated Balance Sheets 14-15
Consolidated Statements of Stockholders' Equity 16
Consolidated Statements of Cash Flows 17
Notes to Consolidated Financial Statements 18-31
Independent Auditors' Report 32
(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 35
Schedule II -- Valuation and Qualifying Accounts and Reserves 36
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 38 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 June 30, 2001 .
34
Independent Auditors' Report on Schedule
Knape & Vogt Manufacturing Company
Grand Rapids, Michigan
The audits referred to in our report dated July 26, 2001, 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.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Grand Rapids, Michigan
July 26, 2001
35
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) period
- ------------------------------------------------------------------------------------------------------
Year ended June 30, 2001:
Allowances deducted from
assets:
Accounts receivable for:
Doubtful accounts $409,000 $438,000 $400,000 $447,000
Cash discounts 147,000 - 33,000 114,000
- ------------------------------------------------------------------------------------------------------
$556,000 $438,000 $433,000 $561,000
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
(1) Write-off of doubtful accounts and collections on accounts previously
written off, including reduction in allowance balance.
36
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.
KNAPE & VOGT MANUFACTURING COMPANY
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 14, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on September 14, 2001, 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 John E. Fallon, Director
the Board, 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
37
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.
38
23 Consent of BDO Seidman, LLP, independent public accountants.
39
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)
40
EXHIBIT 23
Consent of Independent Certified Public Accountants
We hereby consent to the incorporation by reference of our reports dated July
26, 2001, 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 June 30, 2001, 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 14, 2001
41