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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

(Mark One)

Commission file number 000-01859

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

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:

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. ____

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes____ No  X  

The aggregate market value of voting stock held by nonaffiliates of the registrant was $53,970,371 as of December 27, 2003.

Number of shares outstanding of each class of common stock as of August 27, 2004: 2,339,617 shares of Common Stock, par value $2.00 per share, and 2,177,488 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 15, 2004, are incorporated by reference into Part III of this Report.

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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 ergonomic products that serve the consumer, contract builder, hardware, and original equipment manufacturer (“OEM”) markets. The Company was incorporated in Michigan in 1906, reorganized in Delaware in 1961, and reorganized in Michigan in 1985. 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

        During the fourth quarter of fiscal 2004, management further defined the business divisions into market channels and began making business decisions and reviewing financial information by market channel rather than by the previous Office Products and Home & Commercial Products divisions.

        The Office Products division was segregated into two market channels: OEM and dealer. The OEM market channel sells precision drawer slides, hardware and ergonomic products to original equipment office furniture manufacturers and in fiscal 2004 accounted for approximately 25% of consolidated net sales. The dealer market channel sells ergonomic products to independent office furniture dealers and in fiscal 2004 accounted for approximately 6% of consolidated net sales. These dealers purchase product from office furniture manufacturers and resell the furniture along with design and installation services to the end customer. These markets sell the KV® brand of hardware including drawer slides. Drawer slides include precision, Euro-style and utility slides. Precision drawer slides use ball bearings, while Euro-style and utility drawer slides use rollers. In addition, these two markets also sell the idea@WORK™ brand of ergonomic products. The ergonomic products include adjustable keyboard trays, gel wrist rests, floating mousepads, flat-screen monitor arms, office lights, height adjustable tables and organization tools.

        These markets develop, market, and distribute primarily in the United States and Canada. They compete with several large producers of ergonomic support systems and precision drawer slides, and many smaller domestic and foreign manufacturers that compete primarily on the basis of product quality, features, and price.

        The Home & Commercial Products division was segregated into two market channels: consumer and distribution/other. The consumer market channel sells a majority of the Company’s product lines to retailers and in fiscal 2004 accounted for approximately 26% of consolidated net sales. The distribution/other market channel sells many of the Company’s product lines to kitchen and bath OEM manufacturers and full line woodworking distributors and in fiscal 2004 accounted for approximately 43% of consolidated net sales. These markets sell the KV brand of products that include a complete line of decorative and wall-attached shelving systems, builders’ hardware and drawer slides. In addition, these markets also sell the Real Solutions for Real Life™ brand of kitchen and bath storage products.

        These markets develop, market and distribute primarily in the United States and Canada. The markets are highly competitive. The Company competes primarily on the basis of product design, product quality, price, on-time delivery, and customer service. The precision slide market consists of one large manufacturer, a number of smaller domestic manufacturers, and an increasing number of foreign manufacturers that compete primarily on the basis of product quality and price.

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. 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 wrist rests, floating mousepads, flat-screen monitor arms, office lights and height adjustable tables.

        The Company primarily employs a direct sales force that calls on most of the customers in the consumer, distribution and OEM markets, while most of the office furniture dealers are served through independent sales representatives.

        New Product and Capital Spending Information. Management believes that capital spending in fiscal 2005 will be approximately $4.0 million. The fiscal 2005 spending will reflect investments made primarily to bring new products and product enhancements to the Company’s customers.

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        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.

        During the last half of fiscal 2004, the Company began to realize increased steel costs for the domestic production of many of its products. The uncertainty in the steel market makes it difficult for management to predict whether steel prices will continue to rise. This issue is more fully addressed in the Management, Discussion and Analysis section of this report.

        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 the consumer, OEM and specialty distributor markets, as well as direct sales to the dealer network. The consumer market is comprised of a broad base of retail outlets. The specialty distributor market is more concentrated with fewer customers and is more closely tied to the construction industry. The OEM market is comprised of sales to kitchen and bath cabinet manufacturers and sales to the office furniture industry. The dealer network is also closely tied to the office furniture industry. The Company estimates that at present it has over 1,500 active customers with approximately 30,000 outlets, of which the five largest customers account for approximately 29% of gross sales and only the Company’s largest customer accounts for approximately 12% of gross sales.

        Backlog of Orders. As of July 3, 2004, the Company’s backlog of unfilled orders was $4.5 million. At June 28, 2003, the Company’s backlog totaled $4.0 million. It is expected that substantially all the orders forming the backlog at July 3, 2004, will be filled during the current fiscal year. Accordingly, the amount of the backlog at any particular time is not necessarily indicative of the level of net sales for a particular succeeding period.

        Government Contracts. While the Company does have two contracts with the General Services Administration (“GSA”) for certain of its ergonomic products, the sales volume under these contracts does not result in a significant risk if the government were to terminate these contracts. These contracts contain standard price reduction provisions.

        Competition. All aspects of the Company’s business are highly competitive. Competition is based upon price, service and quality. In the various markets served by the Company, it competes with a number of manufacturers that have significantly greater resources and sales, including several conglomerate corporations, and with numerous smaller companies. While the Company is not aware of any reliable statistics that are available to enable the Company to accurately determine its relative position in the industry, either overall or with respect to any particular product or market, the Company believes that it is one of the three leading manufacturers of drawer slides in North America.

        Research, Design and Development. Research, design and development efforts represent one of the Company’s core strengths. Through research, the Company seeks to define and clarify customer needs and problems and to design innovative products, which solve these customer needs and problems. Approximately $2,166,000 was spent in fiscal 2004 in the development of new products and in the improvement of existing products; approximately $2,031,000 was spent in fiscal 2003 and $1,977,000 in fiscal 2002 for the same purposes. In addition, royalties paid to designers of the Company’s products are variable based on sales volumes and are not included in research and development costs.

        Environmental Matters. The Company does not believe, based on current facts known to management, that existing environmental laws and regulations have had or will have any material effects upon the capital expenditures, earnings, or competitive position of the Company.

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        Employees. The Company considers one of its major competitive strengths to be its human resources. There have been no work stoppages or labor disputes in the Company’s history, and its relations with its employees are considered good. At July 3, 2004, the Company employed 806 persons. None of the Company’s employees are represented by collective bargaining agents. In addition to its employee work force, the Company uses purchased labor to meet uneven demand in its manufacturing operations.

Item 1(d) — Information About Foreign Operations

        The Company’s Canadian operations accounted for approximately 8% of consolidated net sales. Approximately 3% 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 Note 13 of the Notes to the Company’s Consolidated Financial Statements contained herein for the fiscal year ended July 3, 2004, for a presentation of additional information concerning the Company’s foreign operations.

ITEM 2 — PROPERTIES

        The Company owned or leased the following offices and manufacturing facilities as of July 3, 2004:

        The facilities indicated as owned, are owned in fee by the Company and are subject to no material encumbrances. The Company believes that its facilities are generally adequate for its operations and are maintained in a state of good repair. The Company believes it is in compliance with all applicable state and federal air and water pollution control laws. During the five years ended July 3, 2004, the Company spent approximately $27,000,000 for expansion, modernization and improvements of its facilities and equipment.

ITEM 3 — LEGAL PROCEEDINGS

        The Canada Customs and Revenue Agency (“CCRA”) has performed an audit of the Company’s sales to its wholly-owned subsidiary, Knape & Vogt Canada. Preliminary results from a joint review by the Company and its customs broker indicate that the Company may be liable for certain customs transactions, however, the amount of any such potential liability is unknown at this time. The Company is defending its position that Knape & Vogt Canada is the importer of record for all Knape & Vogt goods shipped into Canada and management believes, that based on the information available at this time, any liability owed to the CCRA will not have a material adverse effect on the Company’s earnings.

        The Company was sued in the Kent County, Michigan Circuit Court in 1997 by a former employee seeking additional benefits under an executive retirement plan. The Circuit Court ruled in favor of the plaintiff, but in June 2002, the Circuit Court was reversed on the Company’s appeal to the Michigan Court of Appeals. A delayed request for leave to appeal to the Michigan Supreme Court which the plaintiff filed was denied during the fourth quarter of fiscal 2003. In August 2002, the plaintiff filed a lawsuit seeking these retirement benefits in the Federal District Court for the Western District of Michigan. The Company moved to dismiss the federal litigation based on the statute of limitations. In September 2003, the Federal District Court dismissed the litigation. In October 2003, the plaintiff appealed the dismissal to the Sixth Circuit Court of Appeals. That appeal is pending. Management believes that any liability resulting from this case will not have a material adverse affect on the Company’s earnings.

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

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In the opinion of management, based on the information presently known and taking into account established accruals of approximately $455,000 at July 3, 2004, the ultimate liability for these matters will not have a material adverse effect on the Company’s financial position or the results of its operations.

ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended July 3, 2004.

ADDITIONAL ITEM — EXECUTIVE OFFICERS OF THE REGISTRANT

        The executive officers of the Company, at July 3, 2004, were as follows:

    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 in May 1999. Mr. Dutmers was the President of G & L, Inc., a business consulting firm, from 1991 to 1997.

    Ms. Cummings was named 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.

    Mr. Royal-Ferris was named Vice President of Business Development-Consumer in October 2002. Mr. Royal-Ferris joined the Company in 2001 as the Director of Business Development – Consumer. Before joining the Company, Mr. Royal –Ferris had been self-employed from September 2000 to July 2001. Prior to that, he served as the Vice President of Sales/Marketing for Keystone Manufacturing from April 2000 until August 2000; as the Vice President of Sales – Kitchen Division for Windmere Durable Holdings from January 1998 to March 2000; and as Vice President of Sales for The Rival Company from 1990 until January 1998.

    Mr. Watson was named President of Operations in March 2002. Before joining the Company, he had been employed at the Marmon Group from 1993 to 2002, most recently as the Vice President of Finance of Marmon Retail Services.

    All terms of office are on an annual basis and will expire on October 15, 2004.

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PART II

ITEM 5 — MARKET PRICE FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

        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 27, 2004, there were approximately 3,000 shareholders of the Company’s Common Stock and Class B Common Stock.

    Dividends. The Company paid quarterly per share cash dividends of $0.165 on its shares of Common Stock and $0.15 on its shares of Class B Common Stock during the last two fiscal years.

        On August 13, 2004, the Board of Directors declared a $0.165 per share cash dividend on shares of the Company’s common stock and $0.15 per share cash dividend on shares of its Class B common stock, payable September 10, 2004, to shareholders of record on August 27, 2004.

        Securities Authorized for Issuance Under Equity Compensation Plans. The Company had the following equity compensation plans at July 3, 2004:

These equity compensation plans are more fully described in Note 11 to the Consolidated Financial Statements.

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ITEM 6 — SELECTED FINANCIAL DATA

(a)     Total capital is defined as the sum of long-term debt plus stockholders’ equity.

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ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

        The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company’s results of operations and financial condition. The discussion should be read in conjunction with the Consolidated Financial Statements and Notes.

Basis of Presentation

        When considering year-over-year growth statistics, it is important to keep in mind that fiscal 2004 contained 53 weeks, compared to 52 weeks in fiscal 2003 and 2002.

Overview

        Knape & Vogt (“KV”) is a leading manufacturer of functional hardware, storage-related components and ergonomic products with a long history dating back to 1898. We complement our manufacturing capabilities with our design and distribution expertise.

        During the fourth quarter of fiscal 2004, management further defined the business divisions into market channels and began making business decisions and reviewing financial information by market channel rather than by the previous Home & Commercial Products and Office Products divisions. Due to the complexity in obtaining this information for prior years, restatement of prior year results by market is impracticable and net sales for prior years are shown below segregated by divisions only.

        The Office Products division was segregated into two market channels: OEM and dealer. The OEM market channel sells precision drawer slides, hardware and ergonomic products to original equipment office furniture manufacturers. The dealer market channel sells ergonomic products to independent office furniture dealers. These dealers purchase product from office furniture manufacturers and resell the furniture along with design and installation services to the end customer. These markets sell the KV® brand of hardware including drawer slides. Drawer slides include precision, Euro-style and utility slides. Precision drawer slides use ball bearings, while Euro-style and utility drawer slides use rollers. In addition, these two markets also sell the idea@WORK™ brand of ergonomic products.

        The Home & Commercial Products division was segregated into two market channels: consumer and distribution/other. The consumer market channel sells a majority of the Company’s product lines to retailers. The distribution/other market channel sells many of the Company’s product lines to kitchen and bath OEM manufacturers and full line woodworking distributors. These markets sell the KV® brand of products that include: a complete line of decorative and wall-attached shelving systems, builders’ hardware and drawer slides. In addition, these markets also sell the Real Solutions for Real Life™ brand of kitchen and bath storage products.

        While net sales and earnings improved during fiscal 2004, the Company was challenged by a significant increase in steel costs during the last half of the fiscal year. The Company was able to successfully procure sufficient quantities of steel to prevent any interruption in production, however, the cost of raw steel increased over 50% during this time period. KV was able to partially offset these raw material increases through a combination of price increases and surcharges to many of its customers. A more detailed discussion of this issue follows in the Gross Margin section of this report.

Critical Accounting Policies

        This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts. On an ongoing basis, we evaluate our estimates, which are based on historical experience and on various other assumptions and factors that we believe to be reasonable under the circumstances. Based on our ongoing review, we will make adjustments, as we consider appropriate under the current facts and circumstances.

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        We believe that the following represent the more critical estimates and assumptions used in preparation of our consolidated statements.

        Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed the Company’s disclosures relating to them in this Management Discussion and Analysis.

        In addition, we have not recently experienced changes in circumstances that would have significantly impacted our inventory reserves or our evaluation of the carrying value of the long-lived assets. Further, in accordance with SFAS No. 144, paragraph 8; we have not had to test for recoverability of our long-lived assets.

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Results of Operations

        The table below shows certain items in our Consolidated Statements of Operations as a percentage of net sales:

Sales

        The table below summarizes our sales by division for the past three fiscal years (in millions) and by market for fiscal 2004 and 2003:

        Consolidated net sales for fiscal 2004 increased 19.3% when compared to fiscal 2003, which followed a decline of 5.0% when comparing fiscal 2003 to fiscal 2002. It should be noted that fiscal 2004 included 53 weeks of sales versus 52 weeks in both fiscal 2003 and 2002. Excluding the extra week of sales, sales for fiscal 2004 would have increased approximately 16.9% over fiscal 2003.

        Our Office Products division sales increased 30.2% when compared to fiscal 2003, following a decline of 9.6% in fiscal 2003 when compared to fiscal 2002. The office furniture industry shipments, as a whole, grew slightly during the eleven-month period from July 2003 to May 2004 as seen in the Business and Institutional Furniture Manufacturers’ Association (BIFMA) results. For this time period they reported an increase in shipments of 1.5% and an increase in orders of 3.8%. This followed a decline in shipments of 10.2% in fiscal 2003. The Company has been successful in growing sales to the Office Product original equipment manufacturers (“OEM’s”) with the addition of new products, in particular the addition of a number of customer specific versions of KV’s precision ball bearing slides and the new heavy-duty 8800™ precision slide with the patented interlock system. The Company also introduced new ergonomic products, including a new line of height adjustable tables, to both markets during the fiscal year.

        Our Home and Commercial Products division sales for fiscal 2004 increased by 14.9% when compared to fiscal 2003, following a slight decline in fiscal 2003 when compared to fiscal 2002. New products, including the Shelf Made™ Instant Shelves, the new line of display ledges, the new line of garage organization products and the 4X4 Pocket Door™ heavy-duty precision drawer slides, assisted in expanding sales to existing customers and obtaining new customers in both markets. Further, KV has seen growth in the distribution market where it made significant investments in the prior fiscal year.

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        In addition to ongoing cooperative advertising and rebate programs, certain introductory promotional incentives were offered during fiscal 2004 in the Consumer market to a few customers to encourage them to either add new product lines to their offering or to add KV as a vendor. These incentives reduced net sales and gross margins by approximately $1.7 million in fiscal 2004. The Company expenses these items at the initial shipment of product to the customer or pro-rata based on sales volumes over the contract period, if the Company has firm written purchase commitments from the customers. Unless new customers or significant new product lines are added during the upcoming fiscal year, management believes that these introductory promotional incentives will be significantly less in fiscal 2005.

        During the first quarter of fiscal 2003, we launched a consignment inventory program for certain customers. Under this program, the customers are not invoiced for product until the Company receives notice that the customer has utilized the inventory at their location. At July 3, 2004 and June 28, 2003, the total inventory in this program totaled $3.3 and $3.6 million at cost, respectively.

        New product sales (those products introduced within the last 24 months) were approximately $21.7 million in fiscal 2004 compared with $11.7 million in fiscal 2003 and $8.0 million in fiscal 2002. New product introductions, along with value-added services, such as vendor-managed inventory, remain key components of our strategy.

Gross Profit

        Gross profit, as a percentage of net sales, was 20.6% in fiscal 2004, compared to 21.8% in fiscal 2003 and 23.5% in fiscal 2002. During the third quarter of fiscal 2004, the Company began to realize increased steel costs for production of many of its products. The increased steel costs resulted in the Company paying approximately $2.4 million more for raw steel during the last six months of the fiscal year than it would have if the steel prices had remained stable. The uncertainty in the steel market makes it difficult for management to predict whether steel prices will continue to rise. Management has been able to quantify that a 5% increase in raw steel prices will result in approximately a 2.5% decrease in the Company’s gross margin, assuming the Company is unable to pass these increased raw material costs on to its customers. To date, the Company has been successful in passing through approximately 55% of the added costs to its customers. KV has seen the steel market stabilize for the summer of 2004, but early indicators, such as the price of scrap metal, are signaling potential increases in the fall.

        The Company has faced a competitive threat from Asian producers of both utility and precision drawers slides. KV has established solid vendor relationships with three key producers of these slides in Asia and has been utilizing product sourced from these manufacturers to successfully address pricing pressures. In addition, the Company has taken preliminary steps to establish its own manufacturing entity in mainland China. KV will be filing the necessary registrations for the entity and anticipates being in production in the early part of calendar 2005. The total initial investment is anticipated to be no more than $1.0 million. Management believes that utilizing these low-cost production resources will help it remain competitive in the U.S. marketplace and will allow it to improve the profitability of its Office Products OEM market.

        Domestically, the Company remains committed to utilizing lean manufacturing initiatives to minimize its manufacturing costs. To date, all of the slides produced in Asia have represented incremental sales to KV and have not reduced volume being produced in the U.S. In addition, KV is focusing its domestic production capabilities on manufacturing the new products, which typically represent higher margin items.

        The decline in gross margins when comparing fiscal 2003 to fiscal 2002 reflects the fact that KV has a significant investment in its manufacturing process, specifically machinery and tooling. With the decrease in sales volumes during fiscal 2003, it was more difficult to effectively leverage the fixed portion of these costs. In addition, KV was negatively impacted by increases in raw steel costs, ranging from 10% to 15% depending on the grade of steel, as a result of the statutory steel tariffs. These tariffs were removed in fiscal 2004, but as noted steel prices still increased during the last six months of fiscal 2004.

Selling, General and Administrative

        Selling, general and administrative expenses, as a percent of net sales, were 15.8% in fiscal 2004, compared to 18.6% in fiscal 2003 and 17.2% in fiscal 2002. In fiscal 2004, KV was successful in leveraging its selling and administrative costs as sales volumes grew, while still making certain that spending was sufficient to ensure its ongoing ability to develop and introduce new products to the market and have the appropriate advertising materials available to introduce those products. The prior year results reflected additional marketing to reintroduce its line of kitchen and bath accessories under the Real Solutions for Real Life™ logo, investments in selling efforts to the distribution channel and the cost to convert from independent third party representatives to a direct sales force. Fiscal 2003 also included a pre-tax gain of $0.8 million due to the successful resolution of certain legal matters.

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Impairment and Severance Costs

        During the first quarter of fiscal 2003, we recorded $271,325 (pre-tax) of severance costs, primarily related to the resignation of two of our executive officers in August 2002.

        In the fourth quarter of fiscal 2002, we recorded a pre-tax impairment charge of $690,000 in accordance with Financial Accounting Standard No. 144 for certain precision drawer slide tooling. While we continue to produce the drawer slides, the future cash flows associated with the sales of this particular product line were less than the cost of the tooling recorded. In addition, during the fourth quarter of fiscal 2002, we adopted a plan to reduce our salaried workforce in the Grand Rapids, Michigan facility. We recorded $245,000 (pre-tax) in severance costs for this workforce reduction.

Interest Expense and Other Net Expenses

        Interest expense was $1.6 million in fiscal 2004, compared to $1.5 million in fiscal years 2003 and 2002. Overall, interest expense has remained relatively stable over the past three fiscal years. Slight variations reflect the impact of higher or lower balances outstanding on the revolving credit facility.

        Net other expense was $2,202 in fiscal 2004, compared to net other income of $255,854 and $34,567, respectively, in fiscal 2003 and fiscal 2002. Fiscal 2004 included exchange rate losses in our Canadian entity and royalty income, received on certain patent settlements, that was significantly less than it had been in the two previous fiscal years. In addition, fiscal 2003 included interest of approximately $95,000 received related to refunds from the Internal Revenue Service.

Income Taxes

        The effective tax rate for fiscal 2004 was 32.4%. The Company benefited from the adjustment of certain deferred tax valuation reserves that were deemed to no longer be necessary and from the completion of a Canadian audit of taxes for fiscal years 1998 and 1999. Excluding these items, the effective rate would have been approximately 36.5% for the fiscal year.

        During fiscal 2003, KV amended its income tax returns previously filed for fiscal years 1999 and 1997. A change in the federal tax law allowed it to utilize a portion of its capital loss from fiscal years 1999 and 1997 that had been previously disallowed. As a result of this change, KV recognized an income tax benefit of $607,000 in fiscal 2003.

        Excluding the impact of the amended returns, the effective tax rate would have been 38.0% in fiscal 2003. Overall, rates have increased due to the ratio of foreign versus domestic income and expanded state exposure. See Note 10 to the Consolidated Financial Statements for a reconciliation of the effective tax rate.

Net Income

        Net income was $3.7 million, or $0.83 per diluted share, in fiscal 2004 compared to $2.2 million, or $0.49 per diluted share, in fiscal 2003 and $3.8 million, or $0.83 per diluted share, in fiscal 2002. Improved sales volumes, along with better leveraging of selling and administrative expenses, were the primary contributors to the net income improvement in fiscal 2004.

Liquidity and Capital Resources

Cash Flows Provided by Operating Activities

        Net cash provided by operating activities in fiscal 2004 was $4.9 million compared to $.5 million in fiscal 2003 and $13.4 million in fiscal 2002. The Company has invested approximately $5.0 million in inventory during fiscal 2004 to support the launch of certain new products. Following the initial launch period for these products, management will be able to reduce this level of cash invested in inventory and accordingly, expects the inventory balances to be lower in fiscal 2005. In addition, the 2004 increased sales volume resulted in a $3.1 million increase in accounts receivable.

        The lower cash flow from operating activities in fiscal 2003 reflects lower earnings, a significant contribution to our defined benefit pension plans, and higher inventory levels needed to support the launch of the new products and the consignment inventory program. In addition, the payment of the legal settlements during fiscal 2003 also reduced the cash generated by operating activities.

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Cash Flows Used for Investing Activities

        Cash used for investing activities was $1.2 million in fiscal 2004, compared to $3.5 million in fiscal 2003 and $2.3 million in fiscal 2002. The capital expenditures in fiscal 2004 represented investments in tooling for new products, including certain new custom precision slides. There were no significant capital expenditure commitments at July 3, 2004. The fiscal 2003 capital expenditures represented investments in tooling for new products, including the Hopper™ and certain precision drawer slides, along with investment in our web-based customer service application and our new office showroom in Chicago.

        Capital spending declined in fiscal 2004 and 2003, due to the fact that we believe that our investments made in earlier years in the manufacturing process have been sufficient to meet the anticipated capacity needs for at least the next three to five years. We believe that capital expenditures will approximate $4.0 million in fiscal 2005, as investments will be focused on bringing new products and product enhancements to our customers. The cost to complete the items classified as construction in progress at July 3, 2004 was estimated to be approximately $919,000, which will be derived from cash flows from operations or from the revolving credit facility.

Cash Flows Provided by (Used for) Financing Activities

        Cash flows utilized for financing activities were $2.4 million in fiscal 2004, compared to cash provided by financing activities of $1.1 million in fiscal 2003, and $7.8 million of cash flow used in fiscal 2002. The use of funds in fiscal 2004 reflected the ongoing costs of the Company’s dividend program, which were only partially offset by $.5 million of borrowings under the revolving credit facility. The generation of funds in fiscal 2003 reflects borrowings under the revolving credit facility. The use of funds in fiscal 2002 reflects the repayment of $3.8 million of debt under the revolving credit facility along with the repurchase of $1.2 million of our common stock.

        KV has a stock repurchase program, under which it purchased no shares in fiscal 2004 and 2,280 shares during fiscal 2003 with the price per share ranging from approximately $9 to $11. At July 3, 2004, KV is authorized to repurchase an additional 272,202 shares.

        On August 28, 2003, the Company entered into a new $35 million revolving credit facility that matures on November 1, 2006. The new three-year revolving credit facility is unsecured and replaces a $45 million credit facility that would have expired in 2004. Interest rates on outstanding loans under the revolving credit facility are either based on the London Interbank Offering Rate (LIBOR), plus a negotiated spread over LIBOR, or at the U.S. prime rate. The new agreement requires the Company to pay a non-use fee on amounts not outstanding under the credit facility based on a ratio of the Company’s adjusted total debt (funded debt less cash and cash equivalents) to EBITDA (earnings before interest, income taxes, depreciation and amortization). In addition, KV has an interest rate swap agreement, which expires on June 1, 2006, in order to fix the interest rate on $20 million of borrowings under the revolving credit facility. The swap agreement fixed the rate at 6.25% plus our credit spread on the revolving credit agreement.

        At July 3, 2004, KV was in compliance with all of the covenants of the revolving credit agreement.

        The outstanding debt at July 3, 2004 was $24.5 million, compared to $24.1 million at fiscal 2003 year-end. The debt to total capital ratio improved to 40.0% at July 3, 2004, from 40.9% at June 28, 2003. Note that KV defines total capital as the sum of long-term debt plus total stockholders’ equity. Management continues to manage the Company’s debt levels in an effort to maintain its debt to total capital in a range of 35 to 45%. Anticipated cash flows from operations and available balances on the revolving credit line are expected to be adequate to fund working capital, capital expenditures, stock repurchases and dividend payments in fiscal 2005.

Legal Contingencies

        The Canada Customs and Revenue Agency (“CCRA”) has performed an audit of the Company’s sales to its wholly-owned subsidiary, Knape & Vogt Canada. Preliminary results from a joint review by the Company and its customs broker indicate that the Company may be liable for certain customs transactions, however, the amount of any such potential liability is unknown at this time. The Company is defending its position that Knape & Vogt Canada is the importer of record for all Knape & Vogt goods shipped into Canada and management believes that based on the information available at this time, any liability owed to the CCRA will not have a material adverse effect on the Company’s earnings.

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        The Company was sued in the Kent County, Michigan Circuit Court in 1997 by a former employee seeking additional benefits under an executive retirement plan. The Circuit Court ruled in favor of the plaintiff, but in June 2002, the Circuit Court was reversed on the Company’s appeal to the Michigan Court of Appeals. A delayed request for leave to appeal to the Michigan Supreme Court which the plaintiff filed was denied during the fourth quarter of fiscal 2003. In August 2002, the plaintiff filed a lawsuit seeking these retirement benefits in the Federal District Court for the Western District of Michigan. The Company moved to dismiss the federal litigation based on the statute of limitations. In September 2003, the Federal District Court dismissed the litigation. In October 2003, the plaintiff appealed the dismissal to the Sixth Circuit Court of Appeals. That appeal is pending. Management believes that any liability resulting from this case will not have a material adverse affect on the Company’s earnings.

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

        In the opinion of management, based on the information presently known and taking into account established accruals of approximately $455,000 at July 3, 2004, the ultimate liability for these matters will not have a material adverse effect on our financial position or the results of our operations.

Contractual Obligations

        As more fully described in the Notes to the Consolidated Financial Statements, we are obligated to make future payments under certain debt and lease agreements, and are a party to other commitments. The following table summarizes these obligations as of July 3, 2004.

        In addition, we are a party to certain other agreements that contractually and unconditionally commit us to pay certain amounts in the future. While we believe it is probable that amounts will be spent in the future under such contracts, the amount and/or the timing of such future payments will vary depending on certain provisions of the applicable contract. The agreements to which we are a party that fall into this category include certain royalty agreements under which we pay a royalty based on the sales volume of certain products that we manufacture and sell.

Inflation

        Inflation, excluding the increase in steel discussed in the Gross Margin section of this report, has not had a significant effect on KV over the past three years, nor is it expected to have a significant effect in the foreseeable future. KV continuously attempts to minimize the effect of inflation through cost reductions and improved productivity.

Recently Issued Accounting Standards

        In January 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003". This statement permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (‘the Act”). The Act, signed into law in December 2003, introduces a prescription drug benefit under Medicare (“Medicare part D”) and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Given the cap on postretirement benefits introduced in fiscal 2002, the Act is not expected to have a material impact on the Company’s accumulated postretirement benefit obligation or the net postretirement benefit costs, however, the Company has elected to defer the adoption of FSP FAS 106-2 until the specific authoritative accounting guidance for the federal subsidy is issued.

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        In December 2003, the FASB issued a revision of Statement of Financial Accounting Standards (“SFAS”) No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to improve financial disclosures for defined benefit plans. The revised SFAS requires that companies provide more details about their plan assets, benefit obligations, cash flows, benefit costs and other relevant information. The Company is now required to provide additional disclosures, including, but not limited to, a breakdown of plan assets by category, a description of investment policies and strategies and target allocation percentages for these asset categories. The Company adopted the revised disclosure provisions in the third quarter of fiscal 2004.

        In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” It is effective for contracts entered into or modified after June 30, 2003, except as stated within the statement, and should be applied prospectively. This statement had no material effect on the consolidated financial statements.

        We adopted SFAS No. 142 in the first quarter of fiscal 2003. Application of the nonamortization provisions of SFAS No. 142 resulted in an increase in net earnings of approximately $237,000 ($0.05 per diluted share) in both fiscal 2004 and 2003. We performed the required impairment tests of goodwill as of the first day of each fiscal year and determined that the recorded goodwill was not impaired.

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, gross margin improvement and the impact of steel price increases. 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.

        Risk Factors include, but are not limited to, uncertainties relating to changes in demand for our products; the cost and availability of materials, including but not limited to steel; changes in trading policies or import and export regulations; fluctuation of foreign currency exchange rates; changes in duties, tariffs, quotas or applicable assessments; the ability to secure and protect patents and other intellectual property; foreign competition; loss of significant customers; and changes in the general U.S. economy. These matters are representative of the Risk Factors that could cause a difference between an ultimate actual outcome and a forward-looking statement.

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ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

        The Company is exposed to market risks, which include changes in the Canadian dollar foreign currency exchange rate as measured against the U.S. dollar and changes in U.S. interest rates. The Company holds a derivative instrument in the form of an interest rate swap, which is viewed as a risk management tool and is not used for trading or speculative purposes. The intent of the interest rate swap is to effectively fix the interest rate on part of the borrowings under the Company’s variable rate revolving credit agreement. The derivative was recognized as a liability on the balance sheet at its fair value of $1,391,133 at July 3, 2004 and $2,554,980 at June 28, 2003.

        A discussion of the Company’s accounting policies for derivative financial instruments is included in Note 2 of the Notes to Consolidated Financial Statements. Additional information relating to financial instruments and debt is included in Notes 6 and 7.

        The following table provides information on the Company’s fixed maturity investments as of July 3, 2004 and June 28, 2003 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.

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        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 profits 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.

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ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        Immediately following are the consolidated balance sheets of the Company and its subsidiaries as of July 3, 2004 and June 28, 2003, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended July 3, 2004, the notes thereto, and the report of independent registered public accounting firm.

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Knape & Vogt Manufacturing Company and Subsidiaries Consolidated Statements of Operations
Year Ended		July 3, 2004		June 28, 2003		June 29, 2002
Net Sales		$148,977,742		$ 124,920,476		$ 131,481,631
Cost of Sales		118,249,399		97,638,310		100,648,746
Gross Profit		30,728,343		27,282,166		30,832,885
Expenses
Selling		19,312,542		17,961,595		17,626,073
Administrative and general		4,256,199		5,229,120		4,909,465
Other		-		271,325		935,000
Total Expenses		23,568,741		23,462,040		23,470,538
Operating Income		7,159,602		3,820,126		7,362,347
Other Expenses (Income)
Interest		1,632,201		1,458,580		1,484,868
Other, net		2,202		(255,854	)	(34,567	)
Total Other Expenses		1,634,403		1,202,726		1,450,301
Income Before Income Taxes		5,525,199		2,617,400		5,912,046
Income Taxes		1,790,267		386,501		2,123,000
Net Income		$    3,734,932		$     2,230,899		$     3,789,046
Basic and Diluted Earnings Per Share		$             0.83		$              0.49		$              0.83
Weighted-Average Shares Outstanding		4,516,245		4,516,706		4,569,942
Dividends Per Share
Common stock		$              .66		$               .66		$               .66
Class B common stock		$              .60		$               .60		$               .60

See accompanying notes to consolidated financial statements.

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Knape & Vogt Manufacturing Company and Subsidiaries
Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

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Knape & Vogt Manufacturing Company and Subsidiaries
Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

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Knape & Vogt Manufacturing Company and Subsidiaries
Consolidated Statements of Stockholders’ Equity

See accompanying notes to consolidated financial statements.

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Knape & Vogt Manufacturing Company and Subsidiaries
Consolidated Statements of Cash Flows

See accompanying notes to consolidated financial statements.

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Knape & Vogt Manufacturing Company and Subsidiaries

Notes to Consolidated Financial Statements

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Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements

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Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements

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Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements

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Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements

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Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements

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Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements

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Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements

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Knape & Vogt Manufacturing Company and Subsidiaries

Notes to Consolidated Financial Statements