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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended June 30, 1999 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 incorporation or organization) (I.R.S. Employer Identification No.)
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 $67,909,280 as of August 27, 1999.
Number of shares outstanding of each class of common stock as of August 27,
1999: 2,080,531 shares of Common Stock, par value $2.00 per share, and 2,195,872
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, 1999,
are incorporated by reference into Part III of this Report.
PART I
ITEM 1--BUSINESS
Item 1(a)--General Development of Business
The Company is engaged primarily in the design, manufacture, and marketing
of storage products, which serve the consumer, contract builder, hardware, and
original equipment manufacturer markets. The Company was incorporated in
Michigan in 1906, reorganized in Delaware in 1961, and reorganized in Michigan
in 1985. The Company's main plant and corporate offices are located at 2700 Oak
Industrial Drive, N.E., Grand Rapids, Michigan 49505, and its telephone number
is (616) 459-3311. Unless otherwise noted or indicated by the context, the term
"Company" includes Knape & Vogt Manufacturing Company, its predecessors and its
subsidiaries.
The following significant events occurred in fiscal 1999:
On September 1, 1998, the Company completed the sale of The Hirsh Company
(Hirsh), a wholly-owned subsidiary. This resulted in a pre-tax loss of
$11,800,000, which was included in the June 30, 1998, financial results.
The loss included the write-off of the unamortized balance of goodwill
recorded in connection with the purchase of Hirsh. In connection with the
sale, the Company recognized an additional tax cost of $1,000,000,
resulting in a total loss related to the sale of Hirsh of $12,800,000.
On September 1, 1998, the Company announced its Board of Directors had
approved a new financial strategy which included authorization to purchase
up to 1,350,000 shares of the Company's common stock, including 1,200,000
shares pursuant to a "Dutch Auction" self-tender offer. Also included in
the new financial strategy was approval by the Board of Directors of a post
Dutch Auction purchase in the open market or in privately negotiated
transactions of common stock in an amount which when added to the number of
shares of common stock purchased in the Dutch Auction would equal
1,350,000. On January 22, 1999, the Board of Directors authorized the
repurchase of up to another 400,000 shares. Through June 30, 1999,
1,672,743 shares had been repurchased for a total of approximately
$33,400,000.
Item 1(b)--Financial Information About Industry Segments
The Company believes that a dominant portion of the Company's operations
(more than 95%) is in a single industry segment -- the design, manufacture, and
marketing of storage products. Accordingly, no separate industry segment
information is presented.
Item 1(c)--Narrative Description of Business
Products, Services, Markets and Methods of Distribution. The Company's
storage products include a complete line of decorative and utility wall-attached
shelving systems. Drawer slides manufactured by the Company include precision,
Euro-style and utility slides. Precision drawer slides use ball bearings, and
Euro-style and utility drawer slides use rollers. The Company's many different
hardware products include closet rods, kitchen storage products and various
fixtures.
Approximately 33% of the Company's sales were to the consumer market and
67% of the Company's sales were to original equipment manufacturers and
specialty distributors. Most sales are made through independent sales
representatives.
New Product and Capital Spending Information. Management believes that
capital spending in fiscal 2000 will increase from the $4,786,263 spent in
fiscal 1999. The increased spending will reflect investments made to improve
manufacturing technology and to bring new products and product enhancements to
the Company's customers.
Sources and Availability of Raw Materials. Most of the Company's storage
products are produced primarily from steel or wood. Historically, the Company
has not experienced difficulty in obtaining these raw materials and does not
anticipate any difficulty in the future, as the raw materials used are not
unique.
Patents, Licenses, Etc. Patents, trademarks, licenses, franchises, and
concessions 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/speciality distributor market. The consumer
market is comprised of a broad base of retail outlets. The OEM/speciality
distributor market is more concentrated with a fewer number of customers and is
more 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
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materially adverse effect upon the Company. The Company estimates that at
present it has over 1,500 active customers with approximately 35,000 outlets, of
which the five largest customers account for approximately 15% of sales and no
one of which accounts for more than 5% of sales.
Backlog of Orders. The Company typically has a short lead-time on its
orders and therefore does not believe that information concerning backlog is
material to an understanding of its business.
Government Contracts. The Company does not believe that any portion of its
business is subject to renegotiation of profits or termination of contracts or
subcontracts at the election of the government.
Competition. All aspects of the business in which the Company is engaged
are highly competitive. Competition is based upon price, service and quality. In
the various markets served by the Company, it competes with a number of
manufacturers that have significantly greater resources and sales, including
several conglomerate corporations, and with numerous smaller companies. While
the Company is not aware of any reliable statistics that are available to enable
the Company to accurately determine its relative position in the industry,
either overall or with respect to any particular product or market, the Company
believes that it is one of the three leading manufacturers of drawer slides in
North America.
Research, Design and Development. Approximately $1,543,000 was spent in
fiscal 1999 in the development of new products and in the improvement of
existing products; approximately $1,225,000 was spent in fiscal 1998 and
$1,373,000 in fiscal 1997 for the same purposes. The amount of research and
development expenditures are 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, 1999, the Company employed 846 persons. None of the
Company's employees are represented by collective bargaining agents.
Item 1(d)--Information About Foreign Operations
The Company's Canadian operation accounted for approximately 7% of
consolidated sales. Approximately 4% of consolidated net sales were derived from
export shipments from the Company's United States operations to customers in
other foreign countries. The Company does not know of any particular risks
attendant thereto, except that fluctuating exchange rates between the United
States and Canadian currencies and other factors beyond the control of the
Company, such as tariff and foreign economic policies, may affect future results
of such business. Reference is made to Notes 2, 3 and 12 of the Notes to the
Company's Consolidated Financial Statements contained herein for the fiscal year
ended June 30, 1999, for a presentation of additional information concerning the
Company's foreign operations.
3
ITEM 2--PROPERTIES
The Company owned or leased the following offices and manufacturing
facilities as of June 30, 1999:
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, 1999, the Company spent approximately $22,000,000 for expansion,
modernization and improvements of its facilities and equipment.
ITEM 3--LEGAL PROCEEDINGS
As of the date hereof, the Company has no material pending legal
proceedings other than ordinary routine litigation incidental to the Company's
business.
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, 1999.
ADDITIONAL ITEM--EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company were, at June 30, 1999, as follows:
Year First Elected
Name Age Positions and Offices Held an Executive Officer
William R. Dutmers 42 Chairman of the Board of Directors,
Chief Executive Officer and President 1998
Jack D. Poindexter 36 Chief Financial Officer, Treasurer
and Secretary 1998
Michael G. Van Rooy 46 Senior Vice President of Manufacturing 1993
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. Poindexter was named Chief Financial Officer, Treasurer and Secretary
in September 1998. Mr. Poindexter joined the Company in June 1997 as Assistant
Treasurer. Prior to joining Knape & Vogt, Mr. Poindexter was employed as the
Director of Tax at Kysor Industrial Corporation 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.
4
All terms of office are on an annual basis and will expire on October 15,
1999.
5
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 27, 1999, there were approximately 3,100 shareholders
of the Company's Common Stock and Class B Common Stock.
1999 1998
------------------------------------------------------------------------------
Quarter High Low High Low
- - ---------------------------------------------------------------------------------------------------------------------
First $22.75 $16.875 $18.50 $15.875
Second $20.50 $16.50 $22.75 $18.50
Third $18.00 $12.00 $23.00 $20.00
Fourth $17.875 $12.00 $24.75 $21.25
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, 1999 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 June 30, 1998 Common Stock Class B Common Stock
First Quarter $.165 $.15
Second Quarter $.165 $.15
Third Quarter $.165 $.15
Fourth Quarter $.165 $.15
On August 20, 1999, 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 10, 1999, to
shareholders of record on August 31, 1999.
6
ITEM 6--SELECTED FINANCIAL DATA
For the Year Ended 1999 1998 1997 1996 1995
(a) (b) (c) (d)
Summary of Operations
Net sales.......................................... $150,259,355 $181,632,570 $176,630,294 $163,012,030 $168,190,969
Sales growth %................................... (17.3)% 2.8% 8.4% (3.1)% 15.6%
Gross profit....................................... 36,092,104 42,299,900 43,548,529 38,603,382 40,894,499
Gross profit %................................... 24.0% 23.3% 24.7% 23.7% 24.3%
Selling and administrative......................... 25,721,924 29,152,388 28,436,330 27,438,017 26,804,654
Selling and administrative %..................... 17.1% 16.1% 16.1% 16.8% 15.9%
Operating income (loss)............................ 9,770,180 (2,644,764) 14,738,964 7,669,365 14,089,845
Operating income (loss) %........................ 6.5% (1.5)% 8.3% 4.7% 8.4%
Income (loss) from continuing operations........... 6,161,769 (8,369,182) 8,325,228 3,103,058 7,590,705
Income (loss) from discontinued operation.......... - (1,368,278) (471,624) (3,037,926) 654,433
Net income (loss).................................. 6,161,769 (9,737,460) 7,853,604 65,132 8,245,138
Common Stock Data
Diluted earnings per share from continuing
operations....................................... 1.24 (1.41) 1.41 0.53 1.29
Diluted earnings per share from discontinued
operation........................................ - (0.23) (0.08) (0.52) 0.11
Diluted earnings per share......................... 1.24 (1.64) 1.33 0.01 1.40
Weighted-average shares outstanding-diluted........ 4,950,008 5,954,713 5,903,237 5,897,237 5,893,651
Dividends per share--common........................ 0.66 0.66 0.66 0.66 0.66
Dividends per share--Class B common ............... 0.60 0.60 0.60 0.60 0.60
Year-end stock price............................... 17.625 22.50 16.00 15.75 15.00
Year-end Financial Position
Total assets....................................... 75,059,989 104,033,087 125,741,698 129,225,159 131,433,714
Working capital.................................... 18,298,515 38,276,167 39,266,034 39,535,991 45,796,753
Current ratio...................................... 2.0 2.5 4.2 4.0 5.8
Long-term debt..................................... 17,700,000 9,700,000 29,000,000 35,000,000 35,800,000
Long-term debt as a % of total capital............. 35.8% 13.6% 28.3% 33.6% 33.0%
Stockholders' equity............................... 31,758,785 61,756,674 73,460,498 69,173,750 72,713,836
Other Data/Key Ratios
Cash flow from operating activities................ 13,471,459 23,234,772 16,186,397 13,485,377 12,779,621
Capital expenditures............................... 4,786,263 4,228,552 7,763,482 8,032,779 4,181,472
Depreciation and amortization...................... 5,914,739 7,966,383 7,728,603 7,345,353 6,898,438
Research and development expenses.................. 1,543,000 1,225,000 1,373,000 1,223,000 1,038,000
Return on average assets........................... 6.9% (8.5)% 6.2% 0.0% 6.2%
Return on average equity........................... 13.2% (14.4)% 11.0% 0.1% 11.7%
Number of employees................................ 846 944 1,061 1,084 1,136
(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 $0.13 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 $0.57 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 $2.16 per diluted share; 4) a
$448,284 write-off of idle equipment; and 5) an after-tax charge of
$937,268 or $0.16 per diluted share to record the sale of Roll-it, a
discontinued operation.
(c) 1997 figures include an after-tax charge of $246,235 or $0.04 per
diluted share to record the March 1997 sale of Modar.
(d) 1996 figures include an inventory liquidation of $863,000 recorded in
cost of sales, a restructuring charge of $3,496,000 recorded in
operating expenses, and an income tax benefit of $1,534,000, for an
after-tax effect of $2,825,000, or $0.48 per diluted share. The 1996
figures also include an after-tax charge of $2,700,000 to recognize
the estimated loss on the sale of Roll-it, the Company's discontinued
store fixture operation.
7
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 consolidated net income of $6.2 million, or $1.24 per
diluted share in fiscal 1999, compared to a loss of $9.7 million, or $1.64 per
diluted share in the prior year. While this may seem like a substantial
improvement in the bottom-line performance, the loss in fiscal 1998 was
primarily attributable to the impairment and restructuring charges associated
with the implementation of the Company's strategy. Key activities included
selling those operations which did not fit with the Company's core competencies,
eliminating redundant operations, continuously improving existing operations and
investing in new products for and ways of doing business with the Company's
targeted customer base. Some of the current year steps accomplished are
highlighted below:
In September 1998, the Company sold The Hirsh Company ("Hirsh"), a
wholly-owned subsidiary which manufactured free-standing shelving, wood
storage products and workshop accessories. The loss of $12,800,000
associated with this sale was recorded in fiscal 1998. While this
subsidiary produced products which did serve the targeted customer base, it
did not do so profitably.
The Dutch Auction self-tender offer was completed early in the second
quarter of fiscal 1999, which resulted in the purchase of 1,230,784 shares
of the Company's outstanding stock. In addition, another 441,959 shares of
stock were repurchased through June 30, 1999. In total, slightly over 25
percent of the Company's outstanding stock was repurchased during fiscal
1999.
Lean manufacturing techniques were implemented in the existing operations.
This step allowed the Company to operate in a more efficient manner and
enjoy increased profitability on the products it sold during the year.
Results of Operations
The table below shows certain items in the Consolidated Statements of
Operations from continuing operations as a percentage of net sales:
Year ended June 30, 1999 1998 1997
- - -----------------------------------------------------------------------------------------
Net sales..................................... 100.0% 100.0% 100.0%
Cost of sales................................. 76.0 76.7 75.3
-----------------------------------------
Gross profit................................ 24.0 23.3 24.7
Selling and administrative expenses........... 17.1 16.1 16.1
Restructuring and impairment of assets........ .4 8.7 .3
-----------------------------------------
Operating income (loss)..................... 6.5 (1.5) 8.3
Interest expense.............................. .5 .6 1.1
Other expense (income)........................ (.2) .3 .1
-----------------------------------------
Income (loss) from continuing operations
before income taxes........................ 6.2 (2.4) 7.1
Income taxes - continuing operations.......... 2.1 2.2 2.4
-----------------------------------------
Income (loss) from continuing operations...... 4.1% (4.6)% 4.7%
- - -----------------------------------------------------------------------------------------
Sales
In accordance with Statement of Financial Accounting Standards No. 131,
Disclosure about Segments of an Enterprise and Related Information, the Company
operates as a single reportable segment, storage products. While the Company
does not maintain its sales records by product category, management believes the
table below (unaudited) approximates total net sales (in millions) for each of
the product categories:
8
Year ended June 30 1999 % 1998 % 1997 %
- - ----------------------------------------------------------------------------------------------------------------------------
Shelving systems $ 55.5 37.0% $ 83.0 45.7% $ 82.0 46.4%
Drawer slides 70.8 47.1% 69.8 38.4% 62.3 35.3%
Hardware 24.0 15.9% 28.8 15.9% 29.3 16.6%
Furniture components - - - - 3.0 1.7%
- - ----------------------------------------------------------------------------------------------------------------------------
Total $ 150.3 100% $ 181.6 100% $ 176.6 100%
============================================================================================================================
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 which was sold in September 1998.
Excluding Hirsh sales, fiscal 1998 net sales were $152.1 million. The remaining
year to year decline was due to two key factors. First, the Company performed a
profitability review of its current product offerings and decided to discontinue
certain product lines which were either unprofitable or provided only a minimal
return. Specifically, the Company opted to re-deploy production assets which
were utilized to produce certain utility slides to the production of the more
profitable precision drawer slides. While this decision improved the bottom
line, it did result in lower net sales for the fiscal year. Second, while the
Company experienced double-digit growth in precision drawer slides when compared
to the prior year, it did not achieve its planned level of sales during the last
six months of the fiscal year. Management believes that the lower level of sales
can be attributed to the fact that the office furniture market, the primary
customer for the precision drawer slides, had relatively flat sales during this
period. Given that the office furniture industry is projecting only nominal
growth through the remainder of the calendar year, this will continue to be an
area monitored closely by management.
Net sales in fiscal 1998 increased $5.0 million to a record $181.6 million,
or 2.8%, over fiscal 1997 sales of $176.6 million. The increase in sales was due
primarily to an increase in unit volumes. Drawer slide sales led this increase
with a $7.5 million improvement. The increase was due to growth in precision
drawer slide sales as the Company expanded its shipments into the metal office
furniture market. Euro-style drawer slide sales increases in fiscal 1998 were
offset by a decline in sales of utility slides. Shelving system sales increased
by $1.0 million due to increases in sales of wall-attached shelving. Hardware
sales declined $0.5 million in fiscal 1998 compared to fiscal 1997. Feeny's
continued increase in the sales of its kitchen and bath storage products were
offset by a decrease in the Hirsh Iron Horse product line. The decrease in Iron
Horse sales was caused by a reduction in promotions of the product line at major
home centers. Furniture component sales declined $3.0 million. No sales were
recorded in fiscal 1998 due to the elimination of the product line in fiscal
1997 with the sale of Modar Inc.
Gross Profit
Gross profit, as a percentage of net sales, was 24.0% in fiscal 1999,
compared to 23.3% in fiscal 1998, and 24.7% in fiscal 1997. Initially the sale
of Hirsh and the discontinuance of other low-margin product lines resulted in a
more favorable product mix which translated to improved gross profits beginning
in the second quarter of fiscal 1999. In the third quarter of fiscal 1999, the
Company started to realize some of the benefits from the implementation of lean
manufacturing techniques, which not only resulted in reduced manufacturing
costs, but also allowed the Company to improve its service to its customers.
During fiscal 2000, management will continue the efforts to improve gross
profits by utilizing lean manufacturing principles to help eliminate unnecessary
costs in all aspects of the business, coupled with various initiatives underway
to reduce the cost of its purchased components.
The decrease in the fiscal 1998 gross profit compared to fiscal 1997 was
attributable to the Company's continued investment in manufacturing and sales to
aggressively enter the metal office furniture market; transition costs that
cannot be classified as restructuring related to the reorganization of the
Company's Canadian operation near Toronto; continued softness in the Canadian
dollar; and an obsolete inventory charge of $910,000.
Selling and Administrative
Selling and administrative expenses, as a percent of net sales, were 17.1%
in fiscal 1999, compared to 16.1% in both fiscal 1998 and 1997. While management
took steps to reduce discretionary spending in response to the lower level of
sales, total spending, as a percent of net sales, increased in fiscal 1999
primarily due to severance payments and costs associated with the Company's
strategic planning effort. These increases were only partially offset by
reductions in costs which are variable with performance, such as incentive
programs and commissions.
Restructuring/Impairment
As a result of the decision to re-deploy certain utility slide production
assets, the Company recorded an impairment loss of $.6 million pre-tax in the
second quarter of fiscal 1999 to write the related tooling assets down to their
estimated fair value. In addition, excess inventory of $.4 million pre-tax
related to the discontinued product lines was charged directly to cost of sales.
In September 1998, the Company sold Hirsh, a wholly-owned subsidiary. The
sale of Hirsh reflected the Company's desire to enhance its corporate margins
and profitability and remain focused on its core products. The sale resulted in
a pre-tax loss of $11.8
9
million, which was included in the June 30, 1998, financial results. The loss
included the write-off of the unamortized balance of goodwill recorded in
connection with the purchase of Hirsh. In connection with the sale, the Company
recognized an additional tax cost of $1.0 million, resulting in a total loss
related to the sale of Hirsh of $12.8 million. A pre-tax restructuring charge of
$4.0 million was recorded in the third quarter of fiscal 1998 for Knape & Vogt
Canada. In March 1998, Knape & Vogt announced its plans to reorganize its
Canadian operation, including the sale of the Company's manufacturing facility
and equipment in the Toronto area. The sale was completed in May of 1998. The
Company will continue to sell and distribute its products in Canada and maintain
a sales office in the Toronto area. During fiscal 1997, the sale of Modar was
completed and resulted in an additional pre-tax restructuring and impairment of
assets charge of $.4 million which represented the difference between the
original estimate and the actual loss from the sale.
Other Expenses/(Income) and Income Taxes
Interest expense was $.8 million in fiscal 1999, compared to $1.2 million
and $2.0 million, respectively, in fiscal years 1998 and 1997. The decrease in
interest expense reflected the lower average borrowing levels in both fiscal
1999 and fiscal 1998 resulting from proceeds received from the sales of Hirsh
and Roll-it, along with cash flow from operating activities.
Other miscellaneous expense/(income) in 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 other expense in fiscal 1998 was primarily attributable to the
write-off of fixed assets associated with a discontinued product line.
Net Income
Income from continuing operations in fiscal 1999 was $6.2 million, or $1.24
per diluted share compared to a loss of $8.4 million or $1.41 per diluted share
in fiscal 1998 and net income of $8.3 million, or $1.41 per diluted share in
fiscal 1997. The loss recorded in fiscal 1998 was primarily due to the losses
incurred on the sale of Hirsh and the restructuring of Knape & Vogt Canada.
The results of operations of Roll-it, net of income taxes, were presented
as a discontinued operation in both fiscal 1998 and fiscal 1997. In fiscal 1998,
the after-tax loss from discontinued operation was $1.4 million compared to $0.5
million in fiscal 1997. On March 27, 1998, the Company signed an agreement to
sell Roll-it which resulted in an additional loss of $.9 million, due to the
difference between the original estimate and the actual loss from the sale of
Roll-it.
Net income was $6.2 million, or $1.24 per diluted share in fiscal 1999,
compared to a loss of $9.7 million, or $1.64 per diluted share in fiscal 1998.
The improvement over the prior year was due to the $12.8 million after-tax
charge recorded for the sale of Hirsh, the $3.4 million restructuring charge for
Knape & Vogt Canada and the additional loss of $.9 million on the sale of
Roll-it. Without these charges, net income would have been $7.4 million, or
$1.25 per diluted share in fiscal 1998. This compares to net income of $7.9
million, or $1.33 per diluted share in fiscal 1997.
Liquidity And Capital Resources
Cash flows from operating activities generated $13.5 million in fiscal 1999
compared to $23.2 million in fiscal 1998 and $16.2 million in fiscal 1997. In
fiscal 1999, the cash flows from the change in accounts payable were
substantially lower than in fiscal 1998, due to two factors. First, in the prior
year, the Company adopted a more aggressive payment policy with its vendors
which resulted in a higher accounts payable balance and a significant one-time
increase in cash flows. Second, even though the Company was still utilizing the
more aggressive payment policy with its vendors in fiscal 1999, payables
decreased due to the sale of Hirsh.
Cash flows from investing activities of $13.1 million in fiscal 1999
included the cash proceeds of $18.2 million received from the sale of Hirsh. The
balance also included $4.8 million of capital expenditures, compared to $4.2
million and $7.8 million, respectively, in fiscal 1998 and 1997. The
expenditures in fiscal 1999 were primarily for improvements in the Company's
manufacturing process, including the installation of the new powder coat paint
line. Management believes that capital expenditures will increase in fiscal
2000, as investments are made to improve manufacturing technology and to bring
new products and product enhancements to the Company's customers.
Following the financial strategy announced last year, the Company completed
a Dutch Auction early in the second quarter of fiscal 1999. This resulted in the
repurchase of 1,230,784 shares of the Company's stock at a price of $21 per
share. In addition, the Company repurchased an additional 441,959 shares at
prices ranging from approximately $13 to $19 per share through June 30, 1999. In
total, the cost of the repurchased shares was $33.4 million in fiscal 1999. The
Company has authorization to repurchase an additional 77,257 shares.
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,
fixes the interest on $17 million of borrowings through August 31, 1999, and
increases to $20 million beginning September 1, 1999. The swap agreement fixes
the rate at 6.25% plus the Company's credit spread on the revolving credit
agreement.
10
The Company's outstanding debt at June 30, 1999, was $17.7 million,
compared to $9.7 million in fiscal 1998. The debt to total capital ratio
increased to 35.8% at June 30, 1999, from 13.6% at June 30, 1998. 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 new credit facility will be sufficient to fund working
capital requirements and capital expenditures in fiscal 2000.
Year 2000 Compliance
The Year 2000 issue is the result of computer systems that use two digits
rather than four to define the applicable year, which may prevent such systems
from accurately processing dates ending in the year 2000 and after. This could
result in system failures or in miscalculations, causing disruption of
operations, including, but not limited to, an inability to process transactions,
to send and receive electronic data, or to engage in routine business activities
and operations.
In 1995, the Company established a Year 2000 task force for Information
Technology ("IT") to develop and implement a Year 2000 readiness program. The
Company has developed a Year 2000 readiness plan, and has completed the audit,
assessment and scope phases of its plan. The Company has completed an inventory
of the software applications that it uses. The Company has also installed its
Corporate Information System software at its subsidiaries to improve efficiency
and facilitate Year 2000 compliance. The Company estimates that the readiness
program phase is approximately 90% complete for the Company's IT systems. The
Company's readiness program includes installing software releases designed to
cause the software to be Year 2000 compliant. The Company is in the process of
testing its IT systems for Year 2000 compliance, and expects testing activities
to continue through 1999. The Company reached its goal to be substantially Year
2000 compliant by December 1998, to allow for testing all systems during 1999.
In addition, in 1997 the Company began evaluating non-IT systems such as
imbedded chips in production equipment and personal computer hardware and
software. The Company's goal was substantially complete with the remediation of
non-IT systems by June 30, 1999. The Company presently is finishing the process
of testing and implementation, and is upgrading its non-IT systems to become
Year 2000 compliant as new releases are available from software vendors.
In addition to reviewing its internal systems, the Company has had formal
communications with its significant customers, vendors and freight companies
concerning Year 2000 compliance, including electronic commerce. There can be no
assurance that the systems of other companies that interact with the Company
will be sufficiently Year 2000 compliant so as to avoid an adverse impact on the
Company's operations, financial condition and results of operations.
The Company does not presently anticipate that the costs to address the
Year 2000 issue will have a materially adverse effect on the Company's financial
condition, results of operations or liquidity. To date, the Company has spent
approximately $823,000 on the Year 2000 issue and expects to spend an additional
$62,000 to complete this work.
The Company presently anticipates that it will complete its Year 2000
assessment and remediation by December 31, 1999. However, there can be no
assurance that the Company will be successful in implementing its Year 2000
remediation plan according to the anticipated schedule.
Although the Company expects its internal systems to be Year 2000 compliant
as described above, the Company is developing contingency plans for major
processes, in the event that it should have interruption during the first week
of calendar 2000. In addition, the Company may be adversely affected by the
inability of other companies, whose systems interact with the Company, to become
Year 2000 compliant and by potential interruptions of utility, communication or
transportation systems as a result of Year 2000 issues. The Company is preparing
a scenario where business could be interrupted for 3-5 days similar to an outage
from a major storm.
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, and the expected ability of the Company and
its key customers, dealers and suppliers to successfully manage Year 2000
issues. Such statements are subject to certain risks and uncertainties which
would cause actual results to differ materially from those expressed or implied
by such forward-looking statements. Readers are cautioned not to place undue
reliance on those forward-looking statements which speak only as of the date of
this report.
11
ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to market risks, which include changes in the
foreign currency exchange rate as measured against the U.S. dollar and changes
in U.S. interest rates. The Company holds a derivative instrument in the form of
an interest rate swap, which is viewed as a risk management tool and is not used
for trading or speculative purposes. The intent of the interest rate swap is to
effectively fix the interest rate on part of the borrowings on the Company's
variable rate revolving credit agreement.
A discussion of the Company's accounting policies for derivative financial
instruments is included in the Summary of Significant Accounting Policies in the
Notes to Consolidated Financial Statements. Additional information relating to
financial instruments and debt is included in Note 5 - Long-Term Debt and Note 7
- - - Derivative Financial Instruments. Quantitative disclosures relating to
financial instruments and debt are included in the tables below.
The following table provides information on the Company's fixed maturity
investments as of June 30, 1999, 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 $17,000,000 at an interest rate of 5.0425%
plus weighted average credit spread of .5%
Amounts in excess of $17,000,000 had an interest rate
ranging from 5.10% to 5.77% in 1999
Interest Rate Swaps
Notional amount $17 million August 31, 1999
Increased to $20 million June 1, 2006
Pay fixed/Receive variable - 5.05125%
Pay fixed interest rate - 6.25%
The Company has a sales office located in Canada. Sales are typically
denominated in Canadian dollars, thereby creating exposures to changes in
exchange rates. The changes in the Canadian/U.S. exchange rate may positively or
negatively affect the Company's sales, gross margins and retained earnings. The
Company attempts to minimize currency exposure risk through working capital
management. The Company does not hedge its exposure to translation gains and
losses relating to foreign currency net asset exposures.
12
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Immediately following are the consolidated balance sheets of the Company
and its subsidiaries as of June 30, 1999, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 1999, the notes thereto, summary of
accounting policies, and the independent auditors' report.
13
Knape & Vogt Manufacturing Company and Subsidiaries
Consolidated Statements of Operations
Year ended June 30, 1999 1998 1997
- - ---------------------------------------------------------------------------------------------------------------------
Net Sales $ 150,259,355 $ 181,632,570 $ 176,630,294
Cost of Sales 114,167,251 139,332,670 133,081,765
- - ---------------------------------------------------------------------------------------------------------------------
Gross Profit 36,092,104 42,299,900 43,548,529
- - ---------------------------------------------------------------------------------------------------------------------
Expenses
Selling and shipping 19,953,864 22,594,546 21,545,425
Administrative and general 5,768,060 6,557,842 6,890,905
Restructuring and impairment of assets 600,000 15,792,276 373,235
- - ---------------------------------------------------------------------------------------------------------------------
Total Expenses 26,321,924 44,944,664 28,809,565
- - ---------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 9,770,180 (2,644,764) 14,738,964
- - ---------------------------------------------------------------------------------------------------------------------
Other Expenses (Income)
Interest 802,202 1,224,394 1,986,522
Other, net (355,791) 569,024 163,214
- - ---------------------------------------------------------------------------------------------------------------------
Total Other Expenses 446,411 1,793,418 2,149,736
- - ---------------------------------------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations Before
Income Taxes 9,323,769 (4,438,182) 12,589,228
Income Taxes - Continuing Operations 3,162,000 3,931,000 4,264,000
- - ---------------------------------------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations 6,161,769 (8,369,182) 8,325,228
- - ---------------------------------------------------------------------------------------------------------------------
Discontinued Operation, Net of Income Taxes
Loss from operations - (431,010) (471,624)
Estimated loss on sale - (937,268) -
- - ---------------------------------------------------------------------------------------------------------------------
Total Discontinued Operation, Net of
Income Taxes - (1,368,278) (471,624)
- - ---------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 6,161,769 $ (9,737,460) $ 7,853,604
- - ---------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Income (loss) from continuing operations $ 1.25 $ (1.41) $ 1.41
Loss from discontinued operation - (0.23) (0.08)
----- ----- -----
Net Income (Loss) Per Share $ 1.25 $ (1.64) $ 1.33
- - ---------------------------------------------------------------------------------------------------------------------
Weighted Average Shares Outstanding 4,938,356 5,920,380 5,889,420
- - ---------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share
Income (loss) from continuing operations $ 1.24 $ (1.41) $ 1.41
Loss from discontinued operation - (0.23) (0.08)
----- ------ -----
Net Income (Loss) Per Share $ 1.24 $ (1.64) $ 1.33
- - ---------------------------------------------------------------------------------------------------------------------
Weighted Average Shares Outstanding 4,950,008 5,954,713 5,903,237
- - ---------------------------------------------------------------------------------------------------------------------
Dividends Per Share
Common stock $ .66 $ .66 $ .66
Class B common stock $ .60 $ .60 $ .60
- - ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
14
Knape & Vogt Manufacturing Company and Subsidiaries
Consolidated Balance Sheets
- - ----------------------------------------------------------------------------------------------------------------------------
June 30, 1999 1998
- - ----------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash $ 1,621,002 $ 3,057,158
Accounts receivable, less allowances of $389,000 and $352,000, respectively 18,930,039 25,677,043
Refundable income taxes 140,708 176,204
Inventories 13,149,649 12,808,532
Prepaid expenses 2,030,916 2,706,490
Net assets held for sale - 18,648,000
- - ----------------------------------------------------------------------------------------------------------------------------
Total Current Assets 35,872,314 63,073,427
- - ----------------------------------------------------------------------------------------------------------------------------
Property and Equipment
Land and improvements 1,815,127 1,804,948
Buildings 14,436,028 14,353,886
Machinery and equipment 48,180,990 44,207,020
Construction in progress 2,224,266 536,047
- - ----------------------------------------------------------------------------------------------------------------------------
66,656,411 60,901,901
Less accumulated depreciation 31,357,471 24,247,181
- - ----------------------------------------------------------------------------------------------------------------------------
Net Property and Equipment 35,298,940 36,654,720
- - ----------------------------------------------------------------------------------------------------------------------------
Goodwill, net 575,433 593,277
- - ----------------------------------------------------------------------------------------------------------------------------
Other Assets 3,313,302 3,711,663
- - ----------------------------------------------------------------------------------------------------------------------------
$ 75,059,989 $ 104,033,087
- - ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
15
Knape & Vogt Manufacturing Company and Subsidiaries
Consolidated Balance Sheets
- - -------------------------------------------------------------------------------------------------------------------
June 30, 1999 1998
- - -------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 9,129,514 $ 17,765,610
Accruals:
Income taxes 732,344 847,306
Taxes other than income 864,734 860,928
Compensation 3,055,717 3,067,186
Restructuring costs 377,515 828,932
Miscellaneous 3,413,975 1,427,298
- - -------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 17,573,799 24,797,260
Supplemental Retirement Benefits 3,155,405 1,837,153
Long-Term Debt 17,700,000 9,700,000
Deferred Income Taxes 4,872,000 5,942,000
- - -------------------------------------------------------------------------------------------------------------------
Total Liabilities 43,301,204 42,276,413
- - -------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Stock:
Common, $2 par - 6,000,000 shares authorized; 2,073,148
and 3,530,042 issued 4,146,296 7,060,084
Class B common, $2 par - 4,000,000 shares authorized;
2,238,227 and 2,405,583 issued 4,476,454 4,811,166
Preferred - 2,000,000 shares authorized and unissued - -
Additional paid-in capital 4,409,415 33,724,990
Accumulated other comprehensive income (loss) (478,606) -
Retained earnings 19,205,226 16,160,434
- - -------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 31,758,785 61,756,674
- - -------------------------------------------------------------------------------------------------------------------
$ 75,059,989 $ 104,033,087
- - -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
16
Knape & Vogt Manufacturing Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
Accumulated
Additional Restricted other
Common paid-in stock comprehensive Retained
stock capital grants income (loss) earnings Total
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance, July 1, 1996 $11,762,138 $ 33,080,087 $ - $ (1,211,286) $ 25,542,811 $ 69,173,750
Net income for 1997 - - - - 7,853,604 7,853,604
Cash dividends - - - - (3,738,138) (3,738,138)
Stock issued under stock option plan 45,520 260,454 - - - 305,974
Foreign currency translation adjustment - - - (134,692) - (134,692)
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 11,807,658 33,340,541 - (1,345,978) 29,658,277 73,460,498
Net loss for 1998 - - - - (9,737,460) (9,737,460)
Cash dividends - - - - (3,760,383) (3,760,383)
Stock issued under stock option plan 63,592 384,449 - - - 448,041
Foreign currency translation adjustment - - - (259,327) - (259,327)
Sale of Knape & Vogt Canada assets - - - 1,605,305 - 1,605,305
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 11,871,250 33,724,990 - - 16,160,434 61,756,674
Net income for 1999 - - - - 6,161,769 6,161,769
Cash dividends - - - - (3,116,977) (3,116,977)
Stock issued under stock option plan 75,986 472,431 - - - 548,417
Tax benefit from exercise
of stock options - 69,133 - - - 69,133
Stock grants issued 21,000 215,250 (236,250) - - -
Stock grants earned - - 236,250 - - 236,250
Repurchase and retirement of
shares of common stock (3,345,486) (30,072,389) - - - (33,417,875)
Foreign currency translation 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
- - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
17
Knape & Vogt Manufacturing Company and Subsidiaries
Consolidated Statements of Cash Flows
Year ended June 30, 1999 1998 1997
- - -----------------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ 6,161,769 $ (9,737,460) $ 7,853,604
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation of fixed assets 5,123,290 6,604,799 6,542,750
Amortization of other assets 791,449 1,361,584 1,185,853
Decrease in deferred income taxes (810,856) (752,000) (334,800)
Increase in supplemental retirement ben 605,313 264,957 76,740
Decrease in deferred lease costs (93,248) (556,992) (541,696)
Loss on sale of the discontinued operation - 937,268 -
Write-off of foreign currency translation adjustment - 1,605,305 -
Loss on sale of The Hirsh Company - 12,800,000 -
Impairment loss on product line discontinued 600,000 - -
Loss on disposal of property and equipment 593,431 - -
Stock grants earned 236,250 - -
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 6,717,542 (809,180) (2,248,856)
Refundable income taxes 33,961 1,157,735 272,579
Inventories (341,117) 1,903,218 4,372,415
Net assets of discontinued operation - (995,000) 592,226
Assets held for sale 490,116 - -
Prepaid expenses 882,696 384,903 (629,600)
Increase (decrease) in:
Accounts payable (8,631,246) 8,776,835 1,158,861
Accrued restructuring costs (436,172) 672,004 (3,440,184)
Accruals 1,548,281 (383,204) 1,326,505
- - -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,471,459 23,234,772 16,186,397
- - -----------------------------------------------------------------------------------------------------------------
Investing Activities
Additions to property and equipment (4,786,263) (4,228,552) (7,763,482)
Proceeds from sales of property and equipment 20,250 2,564,744 2,985,833
Proceeds from the sale of The Hirsh Company 18,157,884 - -
Disposition of discontinued operation - 2,045,364 -
Other, net (312,330) 803,530 (1,079,168)
- - -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 13,079,541 1,185,086 (5,856,817)
- - -----------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of common stock 548,417 448,041 305,974
Repurchase and retirement of common stock (33,417,875) - -
Cash dividends declared (3,116,977) (3,760,383) (3,738,138)
Borrowings (payments) on long-term debt 8,000,000 (19,300,000) (6,000,000)
- - -----------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (27,986,435) (22,612,342) (9,432,164)
- - -----------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (721) 103,096 4,859
- - -----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash (1,436,156) 1,910,612 902,275
Cash, beginning of year 3,057,158 1,146,546 244,271
- - -----------------------------------------------------------------------------------------------------------------
Cash, end of year $ 1,621,002 $ 3,057,158 $ 1,146,546
- - -----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
18
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Knape & Vogt
Manufacturing Company and its wholly-owned subsidiaries (the Company). All
material intercompany balances, transactions and stockholdings have been
eliminated in consolidation.
Year End
Effective July 1, 1999, the Company adopted a 52- or 53-week fiscal year,
changing the year-end date from June 30 to the Saturday nearest the end of June.
Description of Business, Revenue Recognition and Concentration of Credit Risk
The Company designs, manufactures and distributes storage products including
decorative and utility wall-attached shelving systems, drawer slides, kitchen
and closet storage products and cabinet hardware. On August 20, 1996, the
Company announced its decision to sell its store fixture operation and this
portion of the business was shown as a discontinued operation. The sale of
Roll-it was completed in March 1998. The Company primarily sells its products to
hardware c distributors and original equipment manufacturers and recognizes
revenue upon shipment of products to customers. No single customer accounts for
more than 10% of consolidated sales. The Company performs ongoing credit
evaluations and maintains reserves for potential credit losses.
Foreign Currency Translation
The accounts of the foreign subsidiary are translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards (SFAS) No. 52.
Assets and liabilities are translated at year-end exchange rates. Income and
expense accounts are translated at average exchange rates in effect during the
year. Translation adjustments resulting from fluctuations in the exchange rates
are recorded in accumulated other comprehensive income, a separate component of
stock
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which consist of
cash, receivables, bank revolving credit agreement and accounts payable,
approximate their fair values. The fair market value of the interest rate swap
agreement at June 30, 1999, was approximately $100,000.
Cash Equivalents
From time to time, the Company holds short-term investments with a maturity of
three months or less when purchased which are considered cash equivalents.
Inventories
Inventories are stated at the lower of FIFO (first-in, first-out) cost or
market.
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.
19
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
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 a period
of 40 years using the straight-line method. Accumulated amortization of goodwill
was $138,285 and $120,441 at June 30, 1999 and 1998, respectively. The Company
periodically reviews goodwill for impairment based upon undiscounted operating
income over the remaining life of the goodwill. While the estimates are
experience and assumptions regarding future operations, the amounts the Company
will ultimately realize could differ from those used in the 1999 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
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 $799,000 in 1999, $636,000 in 1998 and $678,000 in 1997.
Earnings Per Share
During fiscal 1998, the Company adopted SFAS No. 128, Earnings per Share. SFAS
No. 128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes the dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. SFAS No. 128 requires tha
prior periods presented be restated to give effect to the provisions of the
statement. SFAS No. 128 did not materially impact earnings per share information
previously reported. For the periods presented, the numerators remained the same
in both the basic and diluted earnings per share calculations. The denominator
was increased in the diluted computation due to the recognition of stock options
as common stock equivalents.
20
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
The following table reconciles the numerators and denominators used in the
calculations of basic and diluted EPS for each of the last three years:
1999 1998 1997
- - ------------------------------------------------------------------------------------
Numerators:
Numerator for both basic and
diluted EPS, net income (loss) $6,161,769 $(9,737,460) $7,853,604
- - ------------------------------------------------------------------------------------
Denominators:
Denominator for basic EPS,
weighted-average common
shares outstanding 4,938,356 5,920,380 5,889,420
Potentially dilutive shares
resulting from stock option
plans 11,652 34,333 13,817
- - ------------------------------------------------------------------------------------
Denominator for diluted EPS 4,950,008 5,954,713 5,903,237
====================================================================================
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.
1999 1998 1997
- - ------------------------------------------------------------------------------------
Exercise Price
$18.41 13,750 - 22,825
$20.00 13,500 - 22,250
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 1999, the Company adopted SFAS No. 130, Reporting Comprehensive
Income, which established standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company
elected to disclose comprehensive income within the consolidated statements of
stockholders' equity. Prior years' financial statements have been reclassified
to conform with these requirements.
21
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
During fiscal 1999, the Company adopted SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, which superseded SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise, and established
standards for the way that public enterprises report information about operating
segments in annual financial statements and required reporting of selected
information about operating segments in interim financial statements issued to
the public impact the Company as it operates in a single reportable segment.
During fiscal 1999, the Company adopted SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits, which revised existing
disclosure requirements for pension and other postretirement benefit plans. All
information in the Retirement Plans note has been presented accordingly.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
requires companies to recognize all derivatives on the balance sheet at fair
value and establishes accounting rules for changes in fair value that result
from hedging activities. SFAS No. 133 is effective for fiscal years beginning
after June 15, 2000. Management is currently evaluating the impact that SFAS No.
133 may have on its financial statements.
Reclassifications
Certain prior year information has been reclassified to conform to the current
year presentation.
2. Restructuring and Impairment of Assets
During 1997, the sale of Modar was completed and resulted in an additional
impairment charge of $373,235 which represents the difference between the
original estimate and the actual loss from the sale. After a related income tax
benefit of $127,000, fiscal year 1997 earnings were reduced by $246,235 or $0.04
per diluted share.
A restructuring charge of $3,392,276, or $0.57 per diluted share was recorded in
the third quarter of fiscal 1998 for Knape & Vogt Canada. In March 1998, Knape &
Vogt announced its plans to reorganize its Canadian operation, including the
sale of the Company's manufacturing facility and equipment in the Toronto area.
The sale was completed in May of 1998. The Company continues to sell and
distribute its products in Canada and maintain a sales office in the Toronto
area.
In September 1998, the Company sold The Hirsh Company, a wholly-owned
subsidiary. Hirsh manufactured free-standing shelving, wood storage products and
workshop accessories. The sale resulted in a loss of $12,800,000, which was
included in the restructuring and impairment of assets line of the fiscal 1998
consolidated statement of operations. The loss included the write-off of the
unamortized balance of goodwill recorded in connection with the purchase of
Hirsh.
In connection with its restructuring activities, the Company has recorded
reserves for various costs to be incurred. Amounts paid or charged against these
reserves were as follows:
22
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
Fiscal 1998 Costs Paid June 30, Costs Paid June 30,
Additions or Charged 1998 or Charged 1999
- - --------------------------------------------------------------------------------------------
Facilities and equipment $1,076,453 $(1,063,232) $ 13,221 $ (13,221) -
Severance 994,698 (575,269) 419,429 (358,095) 61,334
Settlement cost 681,300 (303,037) 378,263 (80,101) 298,162
Other exit costs 340,650 (322,631) 18,019 - 18,019
- - --------------------------------------------------------------------------------------------
Total $3,093,101 $(2,264,169) $828,932 $(451,417) $377,515
============================================================================================
Summary operating results for Hirsh (in thousands) were as follows:
Year ended June 30, 1998 1997
- - ----------------------------------------------------------------
Revenues $ 35,634 $ 36,589
Costs and expenses 47,880 37,344
- - ----------------------------------------------------------------
Income (loss) before taxes (12,246) (755)
Income tax expense (benefit) 998 (79)
- - ----------------------------------------------------------------
Net income (loss) $ (13,244) $ (676)
================================================================
During the second quarter of fiscal 1999, the Company decided to re-deploy
certain drawer slide production assets to product lines considered to have
higher growth potential. This resulted in the write-down of the tooling ($.6
million pre-tax) and excess inventory ($.4 million pre-tax, charged directly to
cost of sales) related to the discontinued product lines.
3. Discontinued Operation
On August 20, 1996, the Company announced its decision to sell the Roll-it
division of Knape & Vogt Canada Inc., the Company's store fixture operation.
Accordingly, Roll-it was reported as a discontinued operation, and the
consolidated financial statements were reclassified to segregate the net assets
and operating results of the business. During fiscal 1996, the Company recorded
an estimated loss of $3.9 million pre-tax or $2.7 million after-tax on the sale
of Roll-it.
During the third quarter of fiscal 1997, the Company recorded an additional
after-tax loss of $471,624 which was an adjustment to the estimated provision
for operating loss of Roll-it through fiscal 1997. Income or loss attributable
to Roll-it's operations beyond fiscal year 1997 through the date of the sale
were reflected as incurred in the appropriate periods.
On March 27, 1998, the Company signed an agreement to sell Roll-it which
resulted in an additional loss of $937,268, which represented the difference
between the original estimate and the actual loss from the sale of Roll-it.
Summary operating results of the discontinued operation (in thousands) were as
follows:
Year ended June 30, 1998 1997
- - ---------------------------------------------------------------------
Revenues $ 11,865 $ 10,531
Costs and expenses 12,519 11,237
- - ---------------------------------------------------------------------
Income (loss) before taxes (654) (706)
Income tax expense (benefit) (223) (234)
- - ---------------------------------------------------------------------
Net income (loss) $ (431) $ (472)
=====================================================================
23
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
4. Inventories
Inventories are summarized as follows:
June 30, 1999 1998
- - -------------------------------------------------------------------------------
Finished products $ 8,523,866 $ 7,369,923
Work in process 1,634,904 1,719,891
Raw materials and supplies 2,990,879 3,718,718
- - -------------------------------------------------------------------------------
$ 13,149,649 $ 12,808,532
===============================================================================
5. Long-Term Debt
On June 1, 1999, the Company replaced its prior credit facility with a new
revolving credit agreement that provides for up to $45,000,000 in borrowings
through November 1, 2004. At June 30, 1999, there was a $17,700,000 balance
outstanding under this agreement. The interest rate on the first $17,000,000 of
the outstanding balance was 5.5425%, which was the 90-day LIBOR rate plus an
additional 50 basis points credit spread. The interest rate on the remaining
$700,000 and averaged 5.4% for the month of June 1999. 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. Both the
interest rate and the commitment 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 t required under this agreement to maintain financial ratios, and at
June 30, 1999, was in compliance with these covenants.
The Company entered into a seven-year interest rate swap agreement with a
notional amount of $17,000,000 through August 31, 1999, and increasing to
$20,000,000 thereafter, which converts a corresponding amount of the revolving
credit agreement into a fixed-rate obligation with an effective interest rate of
6.25% plus the Company's credit spread on the revolving credit agreement. The
swap agreement will terminate on June 1, 2006.
6. Lease Commitments
The Company leases certain real property and equipment under operating lease
agreements which expire at various dates through fiscal 2004.
Annual minimum rental payments required under all noncancelable operating leases
are as follows: 2000-$217,076; 2001-$66,616; 2002-$66,616; 2003-$62,142;
2004-$9,101. Rent expense under all operating leases was approximately $553,000,
$1,848,000 and $1,991,000 in 1999, 1998 and 1997, respectively.
The signed agreement for the sale of the assets of Hirsh (see Note 2) included
the assumption of the lease for the Hirsh building by the buyer of the assets of
Hirsh. The Company continues to guarantee to the landlord all lease obligations
through the expiration of this lease in August 2000. Monthly lease payments are
$105,564 through August 1999 and $108,731 thereafter.
7. Derivative Financial Instruments
The Company has entered into an interest rate swap agreement designated as a
partial hedge of the Company's variable rate revolving credit agreement. The
purpose of this swap is to fix the interest rate on the variable rate debt and
reduce the exposure to interest rate fluctuations. At June 30, 1999, the Company
had an interest rate swap with a notional amount of $17,000,000, increasing to
$20,000,000 on September 1, 1999. Under this agreement, the Company will pay t
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 5.05% at June 30,
1999. 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.
24
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
Neither the Company nor the counterparty, which is a prominent bank institution,
is required to collateralize the respective obligation under the swap. The
Company is exposed to loss if the counterparty should default. At June 30, 1999,
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.
8. Retirement Plans
The Company has several noncontributory defined benefit pension plans and
defined contribution plans covering substantially all of its employees. The
defined benefit plans provide benefits based on the participants' years of
service. The Company's funding policy for defined benefit plans is to make
annual contributions which equal or exceed regulatory requirements. The
Company's Board of Directors annually approves contributions to defined
contribution plans. The as consist primarily of equity securities, debt
securities and cash equivalents. The pension and profit-sharing plans at June
30, 1999 and 1998, hold a combined total of 258,761 shares and 304,425 shares,
respectively, of the Company's Class B common stock.
The defined postretirement plan covers substantially all employees and provides
certain health care benefits. The plan is unfunded and contributory.
Pension Benefits Postretirement Benefits
- - --------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- - --------------------------------------------------------------------------------------------------
Change in benefit obligations
Benefit obligations at beginning
of year $12,292,838 $10,681,208 $2,093,739 $1,821,448
Service cost 307,112 267,092 97,320 85,042
Interest cost 915,727 885,949 146,127 156,507
Actuarial (gains)/losses 651,301 1,477,637 (56,649) 119,196
Benefits paid (1,013,125) (1,019,048) (174,370) (88,454)
Other (4,463) - - -
- - --------------------------------------------------------------------------------------------------
Benefit obligation at end of year $13,149,390 $12,292,838 $2,106,167 $2,093,739
- - --------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at
beginning of year $13,389,253 $11,794,363 $ - $ -
Actual return on plan assets 706,224 2,102,398 - -
Employer contributions 762,036 550,677 174,370 88,454
Benefits paid (1,013,125) (1,019,048) (174,370) (88,454)
Other (10,827) (39,137) - -
- - --------------------------------------------------------------------------------------------------
Fair value of plan assets at
end of year $13,833,561 $13,389,253 $ - $ -
==================================================================================================
Funded status $684,171 $ 1,096,415 $(2,106,167) $(2,093,739)
Unrecognized transition amount (239,300) (293,700) 624,487 672,524
Unrecognized net actuarial
(gain)/loss 643,546 47,659 602,271 679,380
Unrecognized prior service cost 1,153,202 1,287,172 - -
- - --------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $2,241,619 $ 2,137,546 $ (879,409) $ (741,835)
==================================================================================================
Weighted -average assumptions
Discount rate 7.25% 7.5% 7.25% 7.5%
Expected return on plan assets 8.5% 8.5% N/A N/A
==================================================================================================
25
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
The net periodic benefit cost related to the defined benefit pension plans is
made up of the following components:
- - -------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- - -------------------------------------------------------------------------------------------------------------
Service cost $307,112 $ 267,092 $276,718 $ 97,320 $ 85,042 $ 86,588
Interest cost 915,727 885,949 847,333 146,127 156,507 138,498
Expected return on plan assets (841,093) (2,102,398) (1,504,890) - - -
Net amortization 276,217 1,282,412 715,578 68,497 75,651 60,994
- - -------------------------------------------------------------------------------------------------------------
Net periodic pension cost $657,963 $ 333,055 $334,739 $311,944 $317,200 $286,080
=============================================================================================================
The health care cost trend rate used to determine the postretirement benefit
obligation was 6.84% for 1999. This rate decreases gradually to 5.00% 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:
One-Percentage Point Increase Decrease
- - --------------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 38,343 $ (30,845)
Effect on postretirement benefit obligation 267,694 (226,413)
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:
1999 1998 1997
- - ----------------------------------------------------------------------------------
Pension benefit obligation $2,275,996 $1,365,232 $1,217,740
Pension expense 435,226 320,534 199,700
Expense for the discretionary profit sharing plan amounted to $744,511, $758,055
and $685,564 in 1999, 1998 and 1997, respectively.
The Company also provides a 401(k) plan for all of its employees. Employees may
contribute up to 15 percent of their pay. For all hourly employees, the Company
will match 25 percent of the first 4 percent that an employee contributes. The
amount expensed for the Company match provision of the plan was $195,483,
$172,550 and $95,043 in fiscal 1999, 1998 and 1997, respectively.
9. Income Taxes
The components of income (loss) from continuing operations before taxes consists
of:
Year ended June 30, 1999 1998 1997
- - -------------------------------------------------------------------------------
United States $ 9,098,594 $ (919,274) $ 12,028,340
Foreign 225,175 (3,518,908) 560,888
- - -------------------------------------------------------------------------------
Income (loss) from
continuing operations
before income taxes $ 9,323,769 $(4,438,182) $ 12,589,228
===============================================================================
26
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
Income tax expense (benefit) from continuing operations consists of:
Year ended June 30, 1999 1998 1997
- - -------------------------------------------------------------------------------
Current:
United States $ 3,950,000 $ 3,740,000 $ 4,558,800
Foreign - 541,000 (115,000)
State and local 326,000 368,000 155,000
- - ------------------------------------------------------------------------------
Total current 4,276,000 4,649,000 4,598,800
- - ------------------------------------------------------------------------------
Deferred:
United States (1,133,000) 377,000 (546,800)
Foreign 97,000 (955,000) 287,000
State and local (78,000) (140,000) (75,000)
- - -------------------------------------------------------------------------------
Total deferred (1,114,000) (718,000) (334,800)
- - -------------------------------------------------------------------------------
Income tax expense $ 3,162,000 $ 3,931,000 $ 4,264,000
===============================================================================
The difference between the federal statutory tax rate and the effective tax rate
on continuing operations was as follows:
Year ended June 30, 1999 1998 1997
- - ----------------------------------------------------------------------------
Income (loss) from
continuing operations $ 3,170,000 $ (1,509,000) $ 4,280,000
Foreign earnings taxed at
different rate 20,000 237,000 109,000
Nondeductible losses-Hirsh Sale - 5,012,000 -
Write-off of foreign currency
translation adjustment - 546,000 -
State and local income taxes 102,000 530,000 159,000
Tax credits and other (130,000) (885,000) (284,000)
- - ----------------------------------------------------------------------------
Income tax expense $ 3,162,000 $ 3,931,000 $ 4,264,000
============================================================================
The sources of the net deferred income tax liability were as follows:
June 30, 1999 1998
- - -----------------------------------------------------------------------------
Property and equipment $ 6,978,000 $ 7,716,000
Pension accrual 762,000 705,000
Net operating loss carryforward (797,000) (995,000)
Supplemental retirement plan (693,000) (418,000)
Stock basis of Canadian subsidiary (1,436,000) (1,419,000)
Other 58,000 353,000
- - -----------------------------------------------------------------------------
$ 4,872,000 $ 5,942,000
=============================================================================
For Canadian tax purposes, the Company has net operating losses expiring through
2005 totaling approximately $2,800,000. The tax benefit reflected above for
these loss carryforwards is net of a valuation allowance of $476,000.
27
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
10. Stock Option Plans
The 1987 Stock Option Plan granted key employees of the Company options to
purchase shares of common stock. Options were granted at or above the market
price of the Company's common stock on the date of the grant, were exercisable
from that date and terminated ten years from the grant date. The plan, as
amended in October 1994 and in October 1991, authorized a total of 300,000
shares to be available for issuance under the plan. Grants can no longer be made
under the 1987 Stock Option Plan.
Shareholders at the 1997 annual meeting approved the Company's 1997 Stock
Incentive Plan. Under this plan, up to 600,000 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 50,000 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 gr plan will be determined based on the amount of the participant's
election under the EVA bonus plan. Each participant may elect to receive options
by electing to forego a portion of the cash bonus that may be earned by them,
with the option price determined in accordance with the plan. The exercise price
per share of common stock purchasable under an option shall be a single fixed
exercise price equal to 100% of the fair market value of the common stock at the
award da 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 1999, 177,850 options were granted to
participants at an exercise price of $29.19 per share. No options or restricted
stock shares were granted during fiscal 1998.
Transactions under the plans are as follows:
Weighted Weighted
average average
exercise exercise
Year ended June 30, 1999 price 1998 price
- - ---------------------------------------------------------------------------------------
Options outstanding, beginning of year 134,041 $15.30 170,337 $15.55
Granted 177,850 29.19 - 0.00
Exercised (34,924) 19.53 (31,796) 16.40
Forfeited (116,121) 29.19 (4,500) 17.00
- - ---------------------------------------------------------------------------------------
Options outstanding and
exercisable, end of year 160,846 $19.71 134,041 $15.30
=======================================================================================
Options available for grant,
end of year 22,150 -
=======================================================================================
Weighted average fair value of
options granted during the year $2.19 N/A
=======================================================================================
The Company accounts for its stock option plans in accordance with APB Opinion
25, Accounting for Stock Issued to Employees. Since the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of the grant, no compensation cost is recognized under APB Opinion
25. In accordance with SFAS No. 123, Accounting for Stock-Based Compensation,
the Company is required to provide pro forma information regarding net income
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:
28
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
1999 1998
- - -------------------------------------------------------------------------------
Dividends per share $ 0.66 $ 0.66
Expected volatility 0.3251 0.3134
Risk-free interest rate 5.45% 5.4%
Expected lives 5.4 10.0
===============================================================================
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:
1999 1998
- - -------------------------------------------------------------------------------
Net income (loss):
As reported $ 6,161,769 $ (9,737,460)
Pro forma 5,772,277 (9,737,460)
Earnings per share:
As reported $ 1.24 $ (1.64)
Pro forma 1.17 (1.64)
===============================================================================
Of the 600,000 shares available for issuance under the 1997 Stock Incentive
Plan, no more than 50,000 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. S 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 ac established by the Committee.
On July 1, 1998, William Dutmers, Chairman of the Board of Knape & Vogt, was
granted 10,500 shares of common stock. The stock was subject to restrictions on
transfer for one year. The stock was the principal compensation for one year's
service by Mr. Dutmers to the Company as Chairman of the Board of Directors. In
addition, under the EVA bonus plan, Mr. Dutmers was eligible to receive a target
bonus of 65% times the value of the above awarded shares which was determ in the
30-day period preceding the date of grant. Mr. Dutmers elected to receive up to
50% of his fiscal 1999 target bonus in leveraged stock options. The deferred
compensation expense related to the restricted stock grants was amortized to
expense on a straight-line basis over the one-year period.
11. Stockholders' Equity
The Company has three classes of stock, common stock, Class B common stock and
unissued preferred stock. Each share of common stock entitles the holder thereof
to one vote on all matters submitted to the shareholders. Each share of Class B
common stock entitles the holder to ten votes on all such matters, except that
the holders of common stock are entitled to elect, voting separately as a class,
at least one quarter of the Company's directors to be elected at each meeting
held for the election of directors. In all other instances, holders of common
stock and Class B common stock
29
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
vote together, except for matters affecting the powers, preferences or rights of
the respective classes or as otherwise required under the Michigan Corporation
Act. With respect to dividend rights, each share of common stock is entitled to
cash dividends at least ten percent (10%) higher than those payable on each
share of Class B common stock. Class B common stock is subject to certain
restrictions on transfer, but is convertible into common stock on a
share-for-share basis at any time.
On September 1, 1998, the Company announced its intention to purchase up to
1,200,000 shares of the Company's common stock pursuant to a Dutch Auction
self-tender offer at a price range of $19 to $22 per share. The Board of
Directors also approved the purchase in the open market or in privately
negotiated transactions, following the completion of the Dutch Auction, of
shares of common stock in an amount which when added to the number of shares of
common stock purchased 1,350,000. The Dutch Auction was concluded on October 7,
1998, with the purchase of 1,230,784 shares at a price of $21 per share. At the
January 22, 1999, Board of Directors meeting, the Board approved another 400,000
shares for the stock repurchase program. Utilizing both of the Board
authorizations, the Company has purchased an additional 441,959 shares through
the end of the fiscal year with the price per share ranging from approximately
$13 to $19. In total, the $33,400,000 on share repurchases.
12. Business Segments
Effective for the year ended June 30, 1999, the Company adopted SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information. In
accordance with SFAS No. 131, the Company operates on a worldwide basis within a
single reportable segment, storage products. The nature of the products,
production processes, types of customers and methods of distribution are
consistent across the Company and its subsidiaries and therefore have been
aggregated into one r primary product categories include shelving systems,
drawer slides and builder's hardware.
Geographic information related to net sales and long-lived assets are summarized
between domestic and foreign locations as follows:
Year ended June 30, 1999 1998 1997
- - ------------------------------------------------------------------------------------
Net sales:
United States $133,805,266 $158,810,004 $153,032,471
Canada 9,919,229 14,868,871 15,859,242
Other foreign 6,534,860 7,953,695 7,738,581
Long-lived assets:
United States 35,298,940 36,654,720 46,256,302
Canada - - 3,771,240
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.
13. Supplemental Cash Flow Information
Total interest paid during the years ended June 30, 1999, 1998 and 1997, was
$754,166, $1,310,066 and $2,025,599, respectively.
Total income taxes paid during the years ended June 30, 1999, 1998 and 1997,
were $3,912,773, $3,686,753 and $4,324,000, respectively.
30
Knape & Vogt Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
14. Quarterly Results (Unaudited)
The table below sets forth summary unaudited information on a quarterly basis
for the Company.
Year ended June 30, 1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- - ------------------------------------------------------------------------------------------------------
Net sales $43,678,644 $36,359,076 $36,038,270 $34,183,365
Gross profit 9,893,904 8,653,296 8,945,301 8,599,603
Net income 2,521,982 1,025,172 1,565,117 1,049,498
Earnings per share, net-diluted 0.42 0.21 0.34 0.24
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 June 30, 1998 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- - ------------------------------------------------------------------------------------------------------
Net sales $44,658,302 $42,677,957 $49,469,554 $44,826,757
Gross profit 11,503,905 10,243,477 11,554,926 8,997,592
Income (loss) from continuing operations 2,470,026 2,017,210 (1,056,822) (11,799,596)
Income (loss) from discontinued operation 200,886 (294,525) (1,274,639) -
Net income (loss) 2,670,912 1,722,685 (2,331,461) (11,799,596)
Earnings (loss) per share from continuing
operations-diluted 0.42 0.34 (0.18) (1.97)
Earnings (loss) per share from
discontinued operation-diluted 0.03 (0.05) (0.21) -
Earnings (loss) per share, net-diluted 0.45 0.29 (0.39) (1.97)
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
- - -----------------------------------------------------------------------------------------------------
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, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Knape & Vogt
Manufacturing Company and subsidiaries at June 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1999, in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
Grand Rapids, Michigan
July 30, 1999
-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 15, 1999, 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
1999 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 15, 1999, 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 15, 1999, 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 15, 1999, 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 14
Consolidated Balance Sheets 15
Consolidated Statements of Stockholders' Equity 17
Consolidated Statements of Cash Flows 18
Notes to Consolidated Financial Statements 19
Independent Auditors'Report 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, 1999.
-34-
Independent Auditors' Report on Schedule
Knape & Vogt Manufacturing Company
Grand Rapids, Michigan
The audits referred to in our report dated July 30, 1999, 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
Grand Rapids, Michigan
July 30, 1999
-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) (2) period
- - ----------------------------------------------------------------------------------------------------------
Year ended June 30, 1999:
Allowances deducted from assets:
Accounts receivable for:
Doubtful accounts $177,000 $336,000 $ 271,000 $ 242,000
Cash discounts 175,000 - 28,000 147,000
- - ----------------------------------------------------------------------------------------------------------
$352,000 $336,000 $ 299,000 $ 389,000
Year ended June 30, 1998:
Allowances deducted from
assets:
Accounts receivable for:
Doubtful accounts $ 268,000 $ 390,000 $ 481,000 $ 177,000
Cash discounts 257,000 - 82,000 175,000
- - ----------------------------------------------------------------------------------------------------------
$ 525,000 $ 390,000 $ 563,000 $ 352,000
Year ended June 30, 1997:
Allowances deducted from
assets:
Accounts receivable for:
Doubtful accounts $ 340,000 $ 318,000 $ 390,000 $ 268,000
Cash discounts 223,000 34,000 - 257,000
- - ---------------------------------------------------------------------------------------------------------
$563,000 $ 352,000 $ 390,000 $ 525,000
(1) Write-off of doubtful accounts and collections on accounts previously
written off, including reduction in allowance balance.
(2) Year ended June 30, 1998 balances include the reclassification of
allowances recorded for The Hirsh Company to net assets held for sale.
-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/ Jack D. Poindexter
Jack D. Poindexter, Chief Financial Officer,
Treasurer and Secretary
Date: September 15, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on September 15, 1999, by the following persons on
behalf of the registrant in the capacities indicated. Each director or officer
of the registrant, whose signature appears below, hereby appoints Jack D.
Poindexter as his attorney-in-fact to sign in his name and on his behalf, as a
director or officer of the registrant, and to file with the Commission any and
all amendments to this Report on Form 10-K.
/s/ William R. Dutmers /s/ Mary Rita Cuddohy
William R. Dutmers, Chairman of the Board, Mary Rita Cuddohy, Director
Chief Executive Officer and President
/s/ John E. Fallon /s/ Michael J. Kregor
John E. Fallon, 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
Robert J. Knape, 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, is 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 - filed herewith.
10(e) Interest swap agreement with Bank One dated June 1, 1999 - filed
herewith.
10(f) 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(g) Management Continuity Agreement dated July 1, 1997, between Knape &
Vogt Manufacturing Company and Michael G. Van Rooy filed as Exhibit
10(I) of the Registrant's Form 10-K annual report for the fiscal year
ended June 30, 1998, is incorporated by reference.
21 Subsidiaries of Registrant.
23 Consent of BDO Seidman, LLP, independent public accountants.
24 Power of Attorney (Included on page 37).
27 Financial Data Schedule.
-38-
Exhibit 10(d)
LOAN AGREEMENT
between
KNAPE & VOGT MANUFACTURING COMPANY
and
OLD KENT BANK
Dated as of June 1, 1999
TABLE OF CONTENTS
Page
SECTION 1. DEFINITIONS...................................................... 1
SECTION 2. WARRANTIES AND REPRESENTATIONS................................... 5
SECTION 3. REVOLVING LINE OF CREDIT......................................... 8
SECTION 4. AFFIRMATIVE COVENANTS............................................ 9
SECTION 5. NEGATIVE COVENANTS............................................... 11
SECTION 6. APPLICATION OF PROCEEDS.......................................... 12
SECTION 7. EVENTS OF DEFAULT AND REMEDIES................................... 12
SECTION 8. CONDITIONS PRECEDENT............................................. 14
SECTION 9. MISCELLANEOUS.................................................... 15
SCHEDULES
SCHEDULE A PENDING OR THREATENED PROCEEDINGS
SCHEDULE B INVESTMENTS OF BORROWER IN OTHER CORPORATIONS AND BUSINESS ENTITIES
SCHEDULE C EMPLOYEE PENSION BENEFIT PLANS
SCHEDULE D REVOLVING CREDIT NOTE
SCHEDULE E CERTIFICATION OF FINANCIAL STATEMENTS AND FINANCIAL COVENANTS
#418144v2
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LOAN AGREEMENT
THIS LOAN AGREEMENT, made as of this 1st day of June, 1999, by and between
KNAPE & VOGT MANUFACTURING COMPANY, a Michigan corporation, of Grand Rapids,
Michigan ("Borrower"), and OLD KENT BANK, a Michigan banking corporation, of
Grand Rapids, Michigan ("Bank").
R E C I T A L S :
A. Borrower has requested Bank to extend to it a Revolving Line of Credit
of up to Forty-five Million Dollars ($45,000,000);
B. Bank is willing to extend the Revolving Line of Credit on the terms and
subject to the conditions set forth in this Agreement;
ACCORDINGLY, THE PARTIES AGREE AS FOLLOWS:
SECTION 1. DEFINITIONS.
In this Agreement:
"Affiliate" means any person, firm, or corporation that now or hereafter
controls, is controlled by, or is under common control with the Borrower. The
term "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of the Borrower or
any such other person, firm, or corporation.
"Agreement" means this Loan Agreement.
"Applicable Margin" means that number of percentage points to be taken into
account in computing the interest rate for Revolving Line of Credit. The
Applicable Margin shall be determined in accordance with the following table,
based on the ratio of Funded Debt to EBITDA of the Borrower:
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Funded Debt to
EBITDA Prime Loans Eurodollar Loans Fed Fund Loans
Greater than 3.0 to 1.0 .25% 1.400% 1.550%
2.99 to 1.0 through 2.50 to 1.0 0% 1.150% 1.300%
2.49 to 1.0 through 2.00 to 1.0 0% .875% 1.025%
1.99 to 1.0 through 1.50 to 1.0 0% .750% .900%
1.49 to 1.0 through 1.25 to 1.0 0% .625% .775%
1.24 to 1.0 through 1.00 to 1.0 0% .500% .650%
Less than 1.00 to 1.0 0% .400% .550%
The Applicable Margin shall be adjusted as of the first day of each June,
September, December and March based on Borrower's ratio of Funded Debt to EBITDA
at the end of its last completed fiscal quarter preceding the date of
adjustment.
"Bank Indebtedness" means any indebtedness, obligation, or liability, of
whatever type or nature, now or later owing to Bank by the Borrower, including,
without limitation, all indebtedness and obligations under this Agreement.
"Capitalized Lease Obligation" means any obligation of the Borrower to pay
future rentals under a lease that, in accordance with GAAP, is required to be
shown as a liability on the balance sheet of the Borrower.
"Contamination" or "Contaminated" means, when used with reference to any
real or personal property, that a Hazardous Substance is present on or in the
property in any amount or level excluding Hazardous Substances which are used in
the manufacturing operations of the Borrower and which are used and disposed of
in accordance with Environmental Laws.
"Current Assets" and "Current Liabilities" mean, at any time, all assets or
liabilities, respectively, that, in accordance with GAAP, should be classified
as current assets or current liabilities, respectively, on a consolidated
balance sheet of the Borrower.
"EBITDA" means, for each period of four consecutive fiscal quarters of the
Borrower, its consolidated net income before interest, taxes, depreciation,
amortization and non-cash restructuring charges.
"ERISA" means the Employee Retirement Income Security Act of 1974, as now
and later amended, together with all regulations issued pursuant thereto.
"Environmental Law" means any applicable law, ordinance, rule, regulation,
or order that regulates or is intended to protect public health or the
environment, or that establishes
#418144v2
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liability for the investigation, removal, or cleanup of, or damage caused by any
Contamination including, without limitation, any law, ordinance, rule,
regulation, or order that regulates, or prescribes requirements for, air
quality, water quality, or the disposition, transportation, or management of
waste materials or toxic substances.
"Funded Debt" means all interest bearing Indebtedness of the Borrower
(including, but not limited to, Bank Indebtedness and Capitalized Lease
Obligations).
"GAAP" means generally accepted accounting principles, consistently
applied.
"Hazardous Substance" means any product or waste that is now or later
regulated by or subject to any Environmental Law and any other pollutant,
contaminant, or waste, including, without limitation, asbestos and
polychlorinated biphenyls.
"Indebtedness" means indebtedness for borrowed money, indebtedness
representing the deferred purchase price of property (excluding indebtedness
under normal trade credit for property purchased in the normal course of
operations), any obligation under a note payable or draft accepted representing
an extension of credit, indebtedness (whether or not assumed) secured by a
mortgage, security interest, or other lien on property, and any Capitalized
Lease Obligation.
"Liabilities" means all liabilities that, in accordance with GAAP, are
required to be classified as liabilities on a consolidated balance sheet of the
Borrower.
"Loan Document" means this Agreement, each Note, and any other agreement or
document that has been or in the future is signed or delivered in connection
with this Agreement or in connection with any Bank Indebtedness.
"Material Adverse Effect" means any material adverse effect upon (a) the
validity, performance, or enforceability of any Loan Document, (b) the
properties, contracts, business operations, prospects, profits, or condition
(financial or otherwise) of the Borrower on a consolidated basis, or (c) the
ability of the Borrower to fulfill any material obligation under any Loan
Document.
"Note" means the Revolving Credit Note and any other promissory note signed
and delivered by Borrower that now or in the future evidences any Bank
Indebtedness, together with any renewals, extensions, or modifications of it.
"Permitted Lien" means (a) a security interest, mortgage, or other lien in
favor of Bank; (b) a lien for taxes not delinquent or, being contested in good
faith by appropriate proceedings, if adequate reserves for it have been set
aside on its books; (c) an inchoate material men's, mechanics', workmen's,
repairmen's, or other like lien arising in the ordinary course of
#418144v2
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business, if the obligation secured is not delinquent; and (d) liens securing
Indebtedness not exceeding $1,000,000.
"Plan" means an employee pension benefit plan or other plan with respect to
which Borrower or any Affiliate is an "employer" or "party in interest," as
those terms are defined in ERISA.
"Revolving Credit Commitment" means at any given time Forty-five Million
Dollars ($45,000,000).
"Revolving Credit Loans" shall have the meaning set forth in Section 3.1 of
this Agreement.
"Revolving Credit Note" shall have the meaning set forth in Section 3.3 of
this Agreement.
"Stockholders' Equity" means, at any time, the sum of the following
accounts set forth in a consolidated balance sheet of the Borrower, prepared in
accordance with GAAP: (a) the par or stated value of all outstanding capital
stock; (b) capital surplus; and (c) retained earnings.
"Tangible Net Worth" means, at any time, Stockholders' Equity, less the sum
of: (a) goodwill, including any amounts, however designated on a consolidated
balance sheet of the Borrower, representing the excess of the purchase price
paid for assets or stock acquired over the value assigned to the stock or assets
on the books of the Borrower; (b) treasury stock; and (c) loans and advances to
stockholders, directors, officers, or employees.
"Working Capital" means, at any time, the amount by which Current Assets
exceed Current Liabilities.
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#418144v2
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SECTION 2. WARRANTIES AND REPRESENTATIONS.
Borrower represents and warrants to Bank and agrees as follows:
2.1 The Borrower is a corporation duly organized, validly existing and in
good standing under the laws of the State of Michigan. The Borrower is duly
qualified and authorized to do business, and is in good standing as a foreign
corporation, in each jurisdiction in which the failure to be so qualified or
authorized to do business could have a Material Adverse Effect.
2.2 The Borrower has all requisite corporate power and authority and all
necessary licenses and permits to own and operate its properties and to carry on
its business as now conducted and as it contemplates that business to be
conducted in the future. The Borrower is in compliance in all material respects
with all laws, rules and regulations that are applicable to it, its operations,
or its properties, the failure to comply with which would have a Material
Adverse Effect.
2.3 The balance sheets of Borrower as of June 30, 1998, and March 31, 1999,
and the related statements of income, of retained earnings and of changes in
financial position for the periods then ended, copies of all of which have been
delivered to Bank, have been prepared in accordance with GAAP and present fairly
the financial position of Borrower as of those dates, and the results of its
operations for those periods. Since the date of the most recent of those fi
nancial statements, no change has occurred in the financial condition or
operations of the Borrower that could have a Material Adverse Effect.
2.4 Neither this Agreement nor any financial statement referred to in
Section 2.3 above nor any other written statement furnished by the Borrower to
Bank in connection with the negotiation of the loans provided for in this
Agreement, contains any untrue statement of a material fact or omits a material
fact necessary to make the statements contained in this Agreement, the financial
statement or other written statement not misleading. There is no fact that the
Borrower has not disclosed to Bank in writing that has, or, to the best of the
knowledge of the officers of the Borrower, in the future could have, a Material
Adverse Effect.
2.5 Except as identified on Schedule A attached to this Agreement, there is
no proceeding pending, or to the knowledge of the officers of the Borrower
threatened, before any court, governmental authority or arbitration board or
tribunal, against or affecting the Borrower, that, if determined adversely to
the Borrower, could reasonably be expected to have a Material Adverse Effect.
The Borrower is not in default with respect to any order, judgment, or decree of
any court, governmental authority or arbitration board or tribunal.
2.6 The Borrower has good and marketable title to all of the assets that it
purports to own, including the assets described in the financial statements
referred to in Section 2.3 of this Agreement, free and clear from all liens,
encumbrances, security interests, claims, charges, and restrictions, except
Permitted Liens.
#418144v2
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2.7 The Borrower owns and controls all of the patents, trademarks, service
marks, trade names, copyrights, licenses, and rights necessary for the present
and planned future conduct of its business and, to the best of its knowledge,
without any conflict with the right of any other person, firm, or corporation,
the failure of which to own or control could have a Material Adverse Effect.
2.8 The Borrower has full corporate power and authority to execute,
deliver, and perform the Loan Documents; the execution, delivery, and
performance of the Loan Documents given by the Borrower (a) have been duly
authorized by appropriate corporate action of the Borrower, (b) will not violate
the provisions of the articles of incorporation or bylaws of the Borrower or of
any law, rule, judgment, order, agreement, or instrument to which the Borrower
is a party or by which it is bound, and (c) do not require any approval or
consent of any public authority or other third party; and the Loan Documents
have been properly signed and delivered by, and are the valid and binding
obligations of, the parties to them and are enforceable in accordance with their
terms, subject to bankruptcy, insolvency or similar laws affecting the
enforcement of creditors' rights generally and to general principles of equity.
2.9 All tax returns required to be filed by the Borrower in any
jurisdiction have been filed, and each tax, assessment, fee and other
governmental charge upon it or upon its assets, in come or franchises has been
paid before the time when its nonpayment could give rise to a lien. The officers
of the Borrower know of no proposed additional tax assessment against it.
2.10 Except as identified on Schedule B attached to this Agreement,
Borrower has no investments in the securities of any other corporation or
business entity. Borrower does not intend to carry or purchase any "margin
security" within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System, 12 C.F.R. Chapter II.
2.11 Attached to this Agreement as Schedule C is a list of all Plans. No
Plan has been terminated since the effective date of ERISA. No Plan is a
"multi-employer plan" within the meaning of Section 3(37)(A) of ERISA. No
"accumulated deficiency" (within the meaning of Section 412 of ERISA) or
"reportable event" (as defined in Title IV of ERISA) has occurred with respect
to any Plan. Neither the Borrower nor any Affiliate has incurred any material
liability to the Pension Benefit Guaranty Corporation ("PBGC") or otherwise
under ERISA. The PBGC has not started or threatened to start a proceeding
against the Borrower or any Affiliate under ERISA.
2.12 The Borrower is not, and no person, firm or corporation having
"control" of the Borrower is, an "executive officer," "director" or "person who
directly or indirectly, or in concert with one or more persons owns, controls or
has the power to vote more than 10 percent of any class of voting securities"
(within the meaning of 12 U.S.C. ss. 375(b) and regulations issued under that
section), of Bank, Old Kent Financial Corporation ("OKFC") or any subsidiary of
OKFC.
#418144v2
-6-
2.13 All of the real and personal property of the Borrower, and all
operations and activities on it, are in compliance in all material respects with
all Environmental Laws; and none of the real or personal property of the
Borrower is (a) Contaminated or the site of the disposal or release of any
Hazardous Substance; (b) the source of any Contamination of any adjacent
property or of any groundwater or surface water; or (c) the source of any air
emissions in excess of any legal limit now or later in effect, the effect of
which in the case of (a), (b) and (c) could result in a Material Adverse Effect.
[the balance of this page intentionally left blank]
#418144v2
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SECTION 3. REVOLVING LINE OF CREDIT.
3.1 Subject to satisfaction of the conditions precedent set forth in
Section 8 of this Agreement, and so long as there shall not have occurred any
event of default as defined in Section 7 of this Agreement, or any event that
with the giving of notice or lapse of time, or both, would be an event of
default, Bank shall extend to Borrower loans ("Revolving Credit Loans") in
amounts that shall not at any time in the aggregate exceed the Revolving Credit
Commitment.
3.2 If the aggregate principal amount of the Revolving Credit Loans
outstanding should at any time exceed the Revolving Credit Commitment, Borrower
shall immediately repay a sufficient amount of the Loans as shall be required to
eliminate the excess.
3.3 All Revolving Credit Loans shall be evidenced by and payable with
interest in accordance with the terms of the promissory note in the form
attached to this Agreement as Schedule D ("Revolving Credit Note"), which
Borrower shall sign and deliver to Bank.
3.4 As provided in the Revolving Credit Note, Borrower shall have the right
to prepay all Revolving Credit Loans, subject to the provisions of the Revolving
Credit Note.
3.5 In the event that after the date of this Agreement the Revolving Credit
Loans hereunder are classified on Bank's books as a "highly leveraged
transaction" (an "HLT Classification") by Bank or any governmental authority,
central bank or comparable agency having jurisdiction over Bank, Bank shall
promptly give notice of that HLT Classification to Borrower whereupon Bank and
Borrower shall commence negotiations in good faith to agree on revised interest
rates and/or margins hereunder reflecting that HLT Classification. In the event
that Borrower and Bank fail to agree on revised interest rates and/or margins
within 90 days of the notice given by Bank referred to above, then Bank may (i)
by five Banking Days' notice to Borrower terminate the unused portions of the
Revolving Credit Commitment and they shall thereupon terminate, and (ii) by five
Banking Days' notice to the Borrower declare all amounts outstanding under the
Revolving Credit Note (together with accrued interest thereon and any other
amounts payable hereunder) to be, and all such amounts shall thereupon become,
absolutely and immediately due and payable. Borrower hereby absolutely and
unconditionally agrees to pay to Bank on the date of any such acceleration all
amounts payable hereunder and under the Note. Bank acknowledges that an HLT
Classification (including any election to accelerate amounts payable hereunder
and under the Revolving Credit Note, as provided herein) is not an event of
default under this Agreement. Bank represents to Borrower that it has, on the
date of this Agreement, no basis to believe that the Revolving Credit Loans
should be classified as a "highly leveraged transaction."
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#418144v2
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SECTION 4. AFFIRMATIVE COVENANTS.
From the date of this Agreement and until all Bank Indebtedness is fully
paid and Bank has no further obligation to extend loans or other credit
facilities to Borrower, Borrower shall:
4.1 Furnish to Bank, within 100 days after the end of each of Borrower's
fiscal years, beginning with its fiscal year ending June 30, 1999, an audited
consolidated financial report of the Borrower prepared in accordance with GAAP
by independent certified public accountants satisfactory to Bank, containing its
consolidated and consolidating balance sheets as of the end of that year, its
consolidated and consolidating related profit and loss and reconciliation of
retained earnings for that year, their statement of cash flows for that year,
together with any management letter prepared by those certified public
accountants, and such comments and financial details as are customarily included
in reports of that type and the unqualified opinion of the certified public
accountants as to the fairness of the statements contained in the report.
4.2 Furnish to Bank within 45 days after the end of each fiscal quarter,
beginning with the quarter ending June 30, 1999, consolidated and consolidating
financial reports, the accuracy of which are certified to by the President or
the Chief Financial Officer of Borrower, prepared in accordance with GAAP,
containing balance sheet of the Borrower as of the end of the period and its
income statement showing the results of its operations for the portion of its
fiscal year then elapsed, which shall be accompanied by a properly completed
Certification of Financial Statements and Financial Covenants in the form of
Schedule E attached to this Agreement, signed by Borrower's President or Chief
Financial Officer.
4.3 Promptly inform Bank of any occurrence that is an event of default as
defined in Section 7 of this Agreement or that, with the giving of notice or the
lapse of time, or both, would be an event of default and of any other occurrence
that has, or could reasonably be expected to have, a Material Adverse Effect;
grant to or cause to be granted to Bank or its representatives the right to
examine the books and records of the Borrower at any reasonable time or times;
maintain complete and accurate books and records of the transactions of the
Borrower in accordance with good accounting practices; and furnish to Bank any
information that it may reasonably request concerning financial affairs of the
Borrower within 10 days after Bank requests that information.
4.4 Maintain insurance, including, but not limited to, fire and extended
coverage insurance, workers' compensation insurance, and casualty and liability
insurance with responsible insurance companies on such of the properties of the
Borrower and against such risks and in such amounts as is customarily maintained
by similar businesses; furnish to Bank the details with respect to that
insurance and satisfactory evidence of that insurance coverage; and, within 30
days after Bank requests, obtain any additional insurance that Bank may
reasonably request.
4.5 Pay and discharge, as often as they may become due and payable, all
taxes and assessments of whatever nature that may be levied or assessed against
the Borrower or any of its
#418144v2
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properties, unless and to the extent only that (a) those taxes or assessments
shall be contested in good faith by appropriate proceedings and (b) the Borrower
shall have set aside on its books adequate reserves with respect to those taxes
and assessments.
4.6 Maintain the corporate existence of the Borrower in good standing in
the State of Michigan and its qualification in good standing in every other
jurisdiction in which the failure to be so qualified or authorized to do
business could have a Material Adverse Effect; continue to conduct and operate
the businesses of the Borrower substantially as presently conducted and
operated; and comply with all governmental laws, rules, regulations, and orders
applicable to the Borrower, the failure to comply with which could have a
Material Adverse Effect.
4.7 Maintain a ratio of Funded Debt to EBITDA of not more than 3.25 to 1.0.
4.8 Maintain consolidated Working Capital of not less than $15,000,000.
4.9 Maintain a consolidated Tangible Net Worth of not less than $29,000,000
on and after June 30, 1999, increasing on each June 30 thereafter by 50% of
Borrower's consolidated net income, computed in accordance with GAAP, for the
Borrower's fiscal year ending on that June 30.
4.10 Maintain the principal commercial deposit accounts of the Borrower
with Bank.
4.11 Comply in all material respects with the requirements of ERISA,
including, without limitation, all provisions regarding minimum funding
requirements and requirements as to plan termination insurance; within 30 days
after it is filed, furnish to Bank a copy of each annual report and annual
return, with all schedules and attachments, required to be filed with the Depart
ment of Labor or the Internal Revenue Service pursuant to ERISA in connection
with each Plan for each Plan year; notify Bank immediately of any fact or
circumstance, including, but not limited to, any "reportable event" (as defined
in Title IV of ERISA), that might be grounds for ter mination of a Plan by the
Pension Benefit Guaranty Corporation or for the appointment by the appropriate
United States District Court of a trustee to administer the Plan, together with
a statement, if requested by Bank, as to the reason the fact or circumstance has
occurred and the action, if any, that Borrower proposes to take to avoid
termination of the plan; and furnish to Bank, upon its request, any additional
information concerning any Plan that Bank may reasonably request.
4.12 Notify Bank in writing within 10 days after Borrower receives any
notice of the commencement of (a) any proceeding or investigation by a federal
or state environmental agency against the Borrower regarding the compliance of
the Borrower with Environmental Laws, or (b) any other judicial or
administrative proceeding or litigation by or against the Borrower, where in the
case of (a) and (b) the cost thereof or amount sought exceeds $500,000.
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SECTION 5. NEGATIVE COVENANTS.
From the date of this Agreement and until all Bank Indebtedness is fully
paid and Bank has no further obligation to extend loans or other credit
facilities to Borrower, Borrower agrees that it will not, and will not permit
any of its subsidiaries to, without the prior written consent of Bank:
5.1 Create or permit to exist any lien, mortgage, pledge, attachment,
garnishment, execution, or other legal process, or encumbrance, on any of its
assets, other than Permitted Liens.
5.2 Sell, lease, or otherwise dispose of any of its assets except for (a)
the sale of inventory in the ordinary course of business (as Borrower's business
is conducted on the date of this Agreement); (b) the disposition, in the
ordinary course of business, of machinery and equipment that shall have become
obsolete, damaged, unsuitable, or unnecessary for its business, if the net
proceeds of sale or disposition are promptly paid to Bank to the extent not
applied to acquire additional or substitute machinery and equipment; and (c) the
sale of Borrower's Cambridge building and/or its Feeny buildings.
5.3 Make loans or advances to any person, firm, or corporation in excess of
$1,000,000 in the aggregate.
5.4 Guarantee, endorse, assume, or otherwise incur or suffer to exist any
contingent liability in respect of, any obligation of any other person, firm, or
corporation (other than subsidiaries of the Borrower), except by the endorsement
of negotiable instruments for deposit or collection in the ordinary course of
business.
5.5 Enter into any merger, consolidation, reorganization, or
recapitalization, or purchase or otherwise acquire all, or substantially all, of
the assets, obligations, or capital stock of or any other interest in any other
person, firm, or corporation where the total consideration paid or contributed
by Borrower exceeds $15,000,000.
5.6 Subordinate any indebtedness owing to it by any person, firm, or
corporation to indebtedness of that person, firm, or corporation owing to any
other person, firm, or corporation.
5.7 Engage in any transaction with any Affiliate on terms less favorable to
it than would be obtainable at the time in a comparable transaction of it in an
arm's-length dealing with a person other than an Affiliate (except for sales of
product between Borrower and its subsidiaries).
5.8 Become a contributing employer with respect to a multi-employer
employee benefit plan within the meaning of Section 3(37)(A) of ERISA (29 U.S.C.
1002), as amended by Section 302 of the Multi-Employer Pension Plan Amendments
Act of 1980 (other than the plans described on Schedule B attached to this
Agreement); or establish for any of its employees any employee benefit plan that
has, or may in the future incur, any unfunded past service liability.
#418144v2
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SECTION 6. APPLICATION OF PROCEEDS.
The proceeds of the Revolving Line of Credit provided for in this Agreement
shall be applied to working capital, acquisitions, stock redemptions, equipment
purchases or any other purposes agreed to by Bank.
SECTION 7. EVENTS OF DEFAULT AND REMEDIES.
7.1 Each of the following shall be an event of default under this
Agreement:
A. If (i) Borrower shall fail to pay the payment of the principal or
interest of any loan provided for under this Agreement or the principal or
interest of any other Bank Indebtedness, when and as it shall be due and
payable, whether by acceleration or otherwise and (ii) that failure shall
continue unremedied for 10 days.
B. If Borrower shall fail to perform any of its other obligations
under, or to comply with any of the terms, conditions, and covenants,
contained in, this Agreement and that failure shall continue for more than
30 days after Bank has given Borrower written notice of that failure
(provided that no written notice need be given with respect to Sections
4.7, 4.8, 4.9, 5.1, 5.2, 5.5 or 5.6); or if an event of default shall occur
any other Loan Document or other agreement, document, or instrument that
has been or later is given to Bank by Borrower or by any third party to
secure any Bank Indebtedness.
C. If Borrower shall default in the payment of any Indebtedness that
exceeds $1,000,000 owing to any other firm, person, or corporation and that
default shall continue for a period that exceeds any applicable grace or
notice period.
D. If any warranty or representation made in this Agreement or any
statement, warranty, or representation that has been or in the future is
made in any other Loan Document, certificate, report, or other document,
instrument or agreement delivered under this Agreement or in connection
with any Bank Indebtedness, shall be false or inaccurate in any material
respect when made.
E. If Borrower shall (i) apply for or consent to the appointment of,
or the taking of possession by, a receiver, custodian, trustee, or
liquidator of itself or of all or a substantial part of its property; (ii)
be generally unable to pay its debts as they become due; (iii) make a
general assignment for the benefit of its creditors; (iv) start a voluntary
case under the federal Bankruptcy Code (as now or later in effect); (v)
file a petition seeking to take advantage of any other law providing for
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the relief of debtors; (vi) fail to controvert in a timely or appropriate
manner, or acquiesce in writing to, any petition filed against Borrower in
any involuntary case under the Bankruptcy Code; or (vii) take any action
for the purpose of effecting any of the foregoing.
F. If a proceeding or case shall be started in any court of competent
jurisdiction and is not dismissed within 60 days, seeking (i) the
liquidation, reorganization, dissolution, winding up, or composition or
readjustment of Borrower or its assets or the appointment of a trustee,
receiver, custodian, liqui dator, or the like of Borrower or of all or any
substantial part of the assets of Borrower; or (ii) similar relief in
respect of Borrower under any law providing for the relief of debtors; or
if an order for relief against Borrower shall be entered in an involuntary
case under the Bankruptcy Code.
7.2 Upon the occurrence of any event of default set forth in subsections
7.1A through 7.1D above, at the option of Bank, Bank's obligation to make or
renew the Revolving Credit Loans and the Revolving Line of Credit shall
terminate, and all or any part of the unpaid principal balance of and accrued
interest on all Bank Indebtedness shall become immediately due and pay able,
without presentment, demand, or notice of any kind, all of which are waived by
Borrower.
7.3 Upon the occurrence of any event of default set forth in subsections
7.1E or 7.1F above, Bank's obligation to make or renew Revolving Credit Loans
and the Revolving Line of Credit shall immediately terminate, and the entire
unpaid principal balance of and accrued interest on all Bank Indebtedness shall
automatically become due and payable without presentment, demand, or notice of
any kind, all of which are waived by Borrower.
7.4 After the occurrence of an event of default under this Agreement, Bank
shall, notwithstanding any contrary instructions received by Bank, have the
right to apply any payments made by Borrower in any order and in any amounts as
Bank in its sole and unrestricted discretion shall determine.
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SECTION 8. CONDITIONS PRECEDENT.
The obligation of Bank to make the Revolving Credit Loans shall be subject
to the following conditions precedent:
8.1 Bank shall have received copies of resolutions of the Boards of
Directors of the Borrower, certified by the Secretary of the Borrower as being
in full force and effect on the date of making the loans, authorizing the
signing, delivery, and performance by Borrower of this Agreement and all other
Loan Documents.
8.2 Bank shall have received all reports, certificates, and opinions of
attorneys and accountants that Bank may have requested in connection with the
Loan Documents, and all legal matters incident to them shall be satisfactory to
Bank's attorneys.
8.3 Bank shall have received copies of the Bylaws of the Borrower,
including all amendments to them, certified by the Secretary of the Borrower as
being in full force and effect on the date of making the loans.
8.4 Bank shall have received a copy of the Articles of Incorporation of the
Borrower, including all amendments to them, certified by the appropriate
department of Borrower's state of incorporation not more than 30 days before the
initial extension of loans under this Agreement.
8.5 Bank shall have received good standing certificate with respect to the
Borrower from the Michigan Department of Consumer and Industry Services dated
not more than 30 days before the initial extension of loans under this
Agreement.
8.6 The Borrower shall have signed and delivered to Bank all Loan
Documents.
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SECTION 9. MISCELLANEOUS.
9.1 Borrower shall pay, or reimburse Bank for, all out-of-pocket expenses
incurred by Bank (including, but not limited to, recording and filing fees,
search fees and reasonable expenses of legal counsel, other professional
advisers, consultants and experts) in connection with (a) the negotiation,
preparation and execution of the Loan Documents, any amendments to, or waivers
of any provisions of, the Loan Documents and any refinancing or restructuring of
any Bank Indebtedness, (b) the administration of this Agreement and the other
Loan Documents, including, without limitation, obtaining title searches,
financing statement searches, tax lien searches and appraisals, (c) obtaining
advice of counsel or other professional advisers, consultants and experts
regarding any aspect of the Loan Documents or any Bank Indebtedness, (d) the
enforcement of any of the provisions of the Loan Documents, and (e) the
collection of any Bank Indebtedness.
9.2 This Agreement replaces in its entirety all prior loan agreements
between Borrower and Bank.
9.3 As long as Bank is obligated to extend Revolving Credit Loan to
Borrower, Borrower shall pay to Bank revolving line of credit facility fees on
the daily average unused amount of the maximum Revolving Credit Commitment which
is $45,000,000, at a rate equal to the applicable percent per year stated below
(based on the Borrower's consolidated ratio of Funded Debt to EBITDA) computed
on the basis of a 360-day year for the actual number of days elapsed:
Funded Debt to EBITDA Non-Use Fee
Greater than 3.0 to 1.0 .250%
2.99 to 1.0 through 2.50 to 1.0 .225%
2.49 to 1.0 through 2.00 to 1.0 .200%
1.99 to 1.0 through 1.50 to 1.0 .175%
1.49 to 1.0 through 1.25 to 1.0 .150%
1.24 to 1.0 through 1.00 to 1.0 .125%
Less than 1.00 to 1.0 .100%
Accrued revolving line of credit facility fees shall be paid quarterly in
arrears on the 1st day of each September, December, March, and June, beginning
September 1, 1999. The applicable nonuse fee shall be adjusted on the first day
of each fiscal quarter of the Borrower based on Borrower's consolidated ratio of
Funded Debt to EBITDA at the end of the fiscal quarter immediately preceding the
fiscal quarter most recently ended.
9.4 On and after the occurrence of an event of default under this
Agreement, Borrower acknowledges that Bank has and shall have the right to set
off any indebtedness from time to time owing to the Borrower by Bank, including,
without limitation, any indebtedness
#418144v2
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represented by any account maintained with Bank by the Borrower, against any
Bank Indebtedness.
9.5 Each right and remedy granted to Bank in this Agreement or in any other
Loan Document or allowed to Bank by law shall be cumulative and may be exercised
from time to time. No failure on the part of Bank to exercise, and no delay in
exercising, any right or remedy shall be a waiver of that right or remedy or a
waiver of any other right or remedy. This Agreement may not be amended and no
provision of it may be waived except by a writing signed by Bank.
9.6 The relationship between the Borrower and Bank under this Agreement and
the other Loan Documents is solely that of debtor and creditor. Bank has no
fiduciary responsibilities to the Borrower. Bank does not and shall not have any
responsibility to review, or inform Borrower of any matter in connection with,
any aspect of the businesses, operations, or properties of the Borrower.
Borrower shall rely entirely upon its own judgment with respect to its business
and properties. Any review, appraisal, audit, survey, inspection, report, or
other information obtained by Bank, whether or not paid for by Borrower or
furnished to it ("Bank Information"), is solely for the benefit of Bank. Neither
Borrower nor any third party is entitled to rely on any Bank Information. Bank
has no duty to Borrower with respect to any Bank Information, including, without
limitation, any duty to assure that any review, audit, survey, inspection, or
appraisal is performed properly or any duty to disclose to any of the Borrower
any facts, information, opinions, conclusions or statements contained in any
review, audit, survey, inspection, appraisal, or other Bank Information.
9.7 Bank may, after consulting with Borrower, sell or otherwise grant any
participation in Bank's rights under this Agreement and the Loan Documents to
one or more financial institutions without the prior written consent of Borrower
and in connection with that grant or transfer may distribute the financial
statements of the Borrower to those financial institutions.
9.8 Borrower shall make or cause to be made each payment due to Bank under
this Agreement and the Notes in immediately available funds at Bank's address
set forth in Section 9.10 prior to 3:00 p.m. Grand Rapids time on the due date
of that payment. Each payment received after 3:00 p.m. Grand Rapids time shall
be deemed to be a payment made prior to 3:00 p.m. Grand Rapids time on the next
Business Day. As used herein, "Business Day" means any day other than a
Saturday, Sunday or other day on which Bank is not open for the transaction of
substantially all of its banking functions.
9.9 This Agreement and the rights and obligations of the parties under it
shall be governed and interpreted in accordance with the laws of the State of
Michigan.
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9.10 Any notice or other communication required or permitted under this
Agreement shall be in writing and shall be served either personally or by
certified United States mail with postage fully prepaid, or by overnight express
courier, addressed to Borrower as:
Knape & Vogt Manufacturing Company
2700 Oak Industrial Drive, N.E.
Grand Rapids, Michigan 49505
Attention: Jack D. Poindexter, Chief Financial Officer
If to the Bank:
Old Kent Bank
111 Lyon Street, N.W.
Grand Rapids, Michigan 49503
Attention: Bryce E. Tallant, Corporate Banking Department
or to such other place as either party shall designate by written notice served
upon the other party.
9.11 This Agreement shall be binding upon and shall inure to the benefit of
Borrower and Bank and their respective successors and assigns.
9.12 BORROWER AND BANK, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO
CONSULT WITH COUNSEL, HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY
RIGHT EITHER OF THEM MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION BASED UPON OR
ARISING OUT OF THIS AGREEMENT, THE NOTES OR ANY RELATED INSTRUMENT OR AGREEMENT
OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY COURSE OF
CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF EITHER OF
THEM. NEITHER BORROWER NOR BANK SHALL SEEK TO CONSOLIDATE (BY COUNTERCLAIM OR
OTHERWISE) ANY SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER
ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED.
IN WITNESS WHEREOF, the parties have signed this Agreement as of the date
stated on the first page of this Agreement.
KNAPE & VOGT MANUFACTURING COMPANY
By /s/ Jack D. Poindexter
Jack D. Poindexter, Chief Financial Officer
OLD KENT BANK
By _______________________________________
Bryce E. Tallant, Vice President
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SCHEDULE B
----------
INVESTMENTS OF BORROWER IN
--------------------------
OTHER CORPORATIONS AND BUSINESS ENTITIES
----------------------------------------
State in which
State of Business is Stock Owned
Company Incorporation Conducted by Borrower
------- ------------- --------- -----------
Feeny Manufacturing Co. Michigan Michigan, Indiana 100%
Knape & Vogt Canada, Inc. Ontario, Canada Canada 100%
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SCHEDULE C
----------
EMPLOYEE PENSION BENEFIT PLANS
------------------------------
Name of Plan Date Adopted Administrator Trustee
------------ ------------ ------------- --------
Knape & Vogt Manufacturing
Company Pension Plan July 1, 1955 Knape & Vogt Comerica Bank
Knape & Vogt Manufacturing
Company Profit Sharing Plan June 30, 1953 Knape & Vogt Comerica Bank
Knape & Vogt Manufacturing
Company Employee's Retirement
Savings Plan July 1, 1987 Knape & Vogt Old Kent Bank
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SCHEDULE D
----------
REVOLVING CREDIT NOTE
$45,000,000 Grand Rapids, Michigan
June 1, 1999
FOR VALUE RECEIVED, the undersigned, KNAPE & VOGT MANUFACTURING COMPANY, a
Michigan corporation ("Company"), promises to pay to the order of OLD KENT BANK,
a Michigan banking corporation ("Bank"), whose address is 111 Lyon Street, N.W.,
Grand Rapids, Michigan 49503, in lawful currency of the United States of America
and in immediately available funds, the principal sum of Forty-five Million
Dollars ($45,000,000) or such lesser amount as may have been loaned by Bank to
Company pursuant to this Revolving Credit Note ("Note") and to pay interest on
the unpaid principal balance from time to time outstanding, in like money and
funds, for the period from the date of this Note until the principal balance
shall be paid in full, at the rates and on the dates provided for below.
1. Loans. As long as no Event of Default or Unmatured Event of Default
exists under this Note, Bank agrees that Company may, before the Termination
Date, borrow, repay and reborrow the principal of this Note in accordance with
the terms and conditions of this Note and the Loan Agreement.
2. Definitions. In this Note:
"Applicable Margin" shall have the meaning provided for in the Loan
Agreement.
"Available Interest Rate" means the Prime Rate, the Eurodollar Rate or
the Fed Funds Rate.
"Banking Day" means any day, other than a Saturday or Sunday, on which
Bank is open for the transaction of substantially all of its banking
functions and, with respect to Eurodollar Loan Segments, on which dealings
in foreign exchange and currencies may be carried on by Bank in the
interbank eurodollar market.
"Dollars" and the sign "$" mean lawful money of the United States of
America.
"Effective Date" has the meaning given to it in Section 3 of this
Note.
"Eurodollar Loan Segment" means a Loan Segment that bears interest at
the Eurodollar Rate.
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"Eurodollar Rate" means, with respect to any Eurodollar Loan Segment
and the related Interest Period, an annual interest rate that is equal to
the sum of (a) Applicable Margin (Eurodollar Loans), and (b) the arithmetic
mean, truncated to the nearest one one-hundredth of a percent, of interbank
interest rates offered by major banks in the London, United Kingdom market
at 11:00 a.m. London Time, for U.S. dollar denominated deposits on deposit
for a period of time equal to the Interest Period elected by and made
available to Company under this Note, as referenced and reported two (2)
Banking Days prior to the Effective Date of that rate by one of the
following sources, selected by Bank on an availability basis in descending
order of priority: (i) the Telerate System "Page 3750" report of those
interest rates as determined by the British Bankers Association; (ii) the
Telerate Systems "LIBO Page" report of such interest rates as determined by
Reuter's News Service; (iii) the Wall Street Journal, Midwest Edition,
report of that interest rate; or (iv) any other generally accepted
authoritative source as Bank may reference.
"Event of Default" has the meaning specified in Section 10 of the Loan
Agreement.
"Fed Funds Loan Segment" means a Loan Segment that bears interest at
the Fed Funds Rate.
"Fed Funds Rate" means, with respect to any Fed Funds Segment, an
annual rate that is equal to (a) the rate of interest announced from time
to time by the Federal Reserve Bank of New York as the "average federal
funds rate," which Federal Funds Rate shall change simultaneously with any
change in the "average federal funds rate," plus (b) the Applicable Margin.
"Interest Period" means, with respect to any Eurodollar Loan Segment,
the period beginning on the Effective Date of that Eurodollar Loan Segment
and ending on the date 30, 60 or 90 days after that date, as Company elects
under Section 3 of this Note, except that each Interest Period that would
otherwise end on a day that is not a Banking Day shall end on the next
succeeding Banking Day or, if that next succeeding Banking Day falls in the
next succeeding calendar month, on the next preceding Banking Day.
"Loan Agreement" means the Loan Agreement, dated June 1, 1999, between
Company and Bank.
"Loan Segment" means each portion of the unpaid principal balance of
this Note as to which Company has elected or in the future elects, under
Section 3, an Available Interest Rate to apply.
"Material Adverse Effect" means any material adverse effect upon (i)
the validity, performance, or enforceability of this Note or the Loan
Agreement, (ii) the properties, contracts, business operations, prospects,
profits, or condition (financial or otherwise) of
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Company, or (iii) the ability of Company to fulfill any material obligation
under this Note or the Loan Agreement.
"Maturity" means the time when the entire remaining unpaid principal
balance of this Note shall be or shall become due and payable for any
reason, including acceleration under Section 7 of the Loan Agreement.
"Overdue Rate" means (i) in respect of principal of any Eurodollar
Loan Segment, a rate per annum that is equal to the sum of two percent (2%)
per annum plus the per annum rate in effect with respect to the Eurodollar
Loan Segment until the end of the then-current Interest Period of the
Eurodollar Loan Segment and after that a rate per annum that is equal to
the sum of two percent (2%) per annum plus the Prime Rate, (ii) in respect
of principal of any Prime Loan Segment or Fed Funds Loan Segment, a rate
per annum that is equal to the sum of two percent (2%) per annum plus the
Prime Rate, and (iii) in respect of every other amount payable by Company
under this Note (other than interest), a per annum rate that is equal to
the sum of two percent (2%) per annum plus the Prime Rate.
"Payment Date" means (i) as to any Prime Loan Segment or Fed Funds
Loan Segment, the first day of each month and (ii) as to any Eurodollar
Loan Segment, the last day of the Interest Period for the Eurodollar Loan
Segment, except that, if the Interest Period exceeds three months, the term
Payment Date shall also mean the day in the third month following the month
during which the Interest Period began that numerically corresponds to the
first day of the Interest Period or, if there is no numerically
corresponding day, the last Banking Day of that third month.
"Prime Loan Segment" means a Loan Segment that bears interest at the
Prime Rate.
"Prime Rate" means, with respect to any Prime Loan Segment, an annual
interest rate that is equal to the sum of (i) the rate of interest then in
effect as Bank's announced "prime rate," which is not necessarily the
lowest rate of interest charged by Bank to its customers, which Prime Rate
shall change simultaneously with any change in Bank's announced "prime
rate", and (ii) plus the Applicable Margin (Prime Loans).
"Revolving Credit Commitment" shall have the meaning provided in
Section 1 of the Loan Agreement.
"Termination Date" means November 1, 2004.
"Unmatured Event of Default" means an event, condition or circumstance
that with the lapse of time or the giving of notice to Company, or both,
would be an Event of Default.
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3. Interest Rates. Until Maturity the unpaid principal balance of this Note
shall bear interest at one or more of the Available Interest Rates. After
Maturity, the unpaid principal balance of this Note shall bear interest at the
Overdue Rate. Company may elect from time to time to divide the unpaid principal
balance of this Note into two or more Loan Segments and to cause each Loan
Segment to bear interest at an Available Interest Rate selected by Company,
subject to the following terms and conditions and other applicable provisions of
this Note:
(a) Each Eurodollar Loan Segment must be in the amount of $1,000,000
or an integral multiple of $100,000 in excess of that amount. Each Prime
Loan Segment or Fed Funds Loan Segment must be in the amount of $50,000 or
an integral multiple of $10,000 in excess of that amount.
(b) To make an election under this Section 3, Company shall give Bank
written notice (on Bank's standard loan request form, a copy of which is
attached to this Note as Exhibit A) which must be received by Bank no later
than (i) if Company requests a Eurodollar Loan Segment, the second Banking
Day before the Banking Day on which the election is to be effective
("Effective Date") or (ii) if Company requests a Prime Loan Segment or a
Fed Funds Loan Segment, by 12:00 p.m. on the Effective Date. The election
shall specify (i) the amount of each Loan Segment into which the unpaid
principal balance of this Note is to be divided, (ii) the Available
Interest Rate that will apply to each Loan Segment from and after the
Effective Date and (iii) if a Loan Segment is to be a Eurodollar Loan
Segment, the Interest Period applicable to that Eurodollar Loan Segment.
(c) After expiration of the Interest Period applicable to a Eurodollar
Loan Segment, that Loan Segment shall automatically convert to a Prime Loan
Segment unless Company shall have elected differently under Section 3(b).
(d) During the Interest Period applicable to a Eurodollar Loan
Segment, Company may not elect to change all or any part of the Eurodollar
Loan Segment to a different type of Loan Segment, unless the election is
effective after expiration of the Interest Period.
(e) Company may not elect to have a Loan Segment bear interest at the
Eurodollar Rate if the Interest Period for that Loan Segment would extend
past the Termination Date.
(f) Company may not make an election under this Section after the
occurrence and during the continuance of an Event of Default or an
Unmatured Event of Default.
(g) If Company attempts to make an election that it is not permitted
to make under this Section, the election shall not be effective.
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4. Payments of Principal and Interest. Company shall pay the principal and
interest of this Note as follows:
(a) Prior to Maturity, Company shall pay the interest of each Loan
Segment on the Payment Date for that Loan Segment. After Maturity, the
accrued interest of all Loan Segments shall be payable immediately.
(b) Unless earlier payment is required under Section 7 of the Loan
Agreement, Company shall pay the entire unpaid principal of this Note on
the Termination Date.
(c) If the unpaid principal of this Note at any time exceeds the
Revolving Credit Commitment, Company shall immediately repay a sufficient
amount as shall be required to eliminate the excess, which prepayment shall
be applied first to Fed Funds Loan Segments, second to Prime Loan Segments
and third to Eurodollar Loan Segments.
(d) Company may from time to time prepay the principal of this Note in
whole or in part without premium, but (i) any partial prepayment of
principal must be in the amount of $10,000 or an integral multiple of
$10,000 in excess thereof and (ii) Company may make a prepayment of a
Eurodollar Loan Segment only on the last day of the Interest Period
applicable to that Eurodollar Loan Segment.
5. Method of Calculating Interest. Interest on this Note and other amounts
due under this Note shall be computed on the basis of a year consisting of 360
days and paid for actual days elapsed, calculated as to each Interest Period
from and including the first day of the Interest Period but excluding the last
day of the Interest Period.
6. Additional Costs. If any applicable law, treaty, rule or regulation
(whether domestic or foreign) now or in the future in effect and whether or not
presently applicable to Bank, or any interpretation or administration of it by
any governmental authority charged with its interpretation or administration, or
compliance by Bank with any request or directive of that authority (whether or
not having the force of law), shall (i) affect the basis of taxation of payments
to Bank of any amounts payable by Company under this Note (other than taxes
imposed on the overall net income of Bank), or (ii) impose, modify or deem
applicable any reserve, special deposit or similar requirement against assets
of, deposits with or for the account of, or credit extended by Bank, or (iii)
impose any other condition with respect to this Note, or any Loan Segment, and
the result is to increase the cost to Bank of establishing or maintaining any
Eurodollar Loan Segment or to reduce the amount of any sum receivable by Bank
with respect to any Eurodollar Loan Segment, then Company shall pay to Bank,
from time to time, upon request by Bank, additional amounts sufficient to
compensate Bank for the increased cost or reduced sum receivable. A detailed
statement as to the amount of the increased cost or reduced sum receivable,
prepared in good faith and submitted by Bank to Company, shall be conclusive and
binding for all purposes absent manifest error in computation. Bank represents
to Company that
#418144v2
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on the date of this Note it has no knowledge of any cost or reduced sum within
the meaning of this Section 6.
7. Limitation of Requests and Elections. Notwithstanding any other
provision of this Note to the contrary, if, upon receiving an election by
Company to establish a Eurodollar Loan Segment under Section 3 of this Note,
Bank determines that (i) deposits in Dollars for periods comparable to the
Interest Period elected by Company are not available to Bank in the relevant
interbank or secondary market or otherwise, or (ii) the Eurodollar Rate will not
adequately and fairly reflect the cost to Bank of establishing or maintaining
the related Eurodollar Loan Segment, or (iii) by reason of national or
international financial, political or economic conditions or any applicable law,
treaty, rule or regulation (whether domestic or foreign) now or in the future in
effect, or the interpretation or administration of it by any governmental
authority charged with its interpretation or administration, or compliance by
Bank with any request or directive of that authority (whether or not having the
force of law), including without limitation exchange controls, it is
impracticable, unlawful or impossible for Bank to establish the Eurodollar Loan
Segment, then Company shall not be entitled, as long as that circumstance
continues, to elect to establish a Eurodollar Loan Segment under Section 3.
8. Illegality and Impossibility. If Bank determines that (i) any applicable
law, treaty, rule or regulation (whether domestic or foreign) now or in the
future in effect, (ii) any interpretation or administration of it by any
governmental authority charged with its interpretation or administration, or
(iii) compliance by Bank with any request or directive of that authority
(whether or not having the force of law), including without limitation exchange
controls, makes it unlawful or impossible for Bank to maintain a Eurodollar Loan
Segment under this Note, then Company shall upon receipt of notice of that
determination from Bank, either convert the Eurodollar Loan Segment to a Prime
Loan Segment or repay in full the then-outstanding principal amount of the
Eurodollar Loan Segment together with all accrued interest to the date of
payment and all amounts due to Bank under Section 9 of this Note. Company shall
do so either (a) on the last day of the Interest Period applicable to the
Eurodollar Loan Segment if Bank may lawfully continue to maintain the Eurodollar
Loan Segment until that day, or (b) immediately if Bank may not continue to
maintain the Eurodollar Loan Segment until that day.
9. Indemnification. If Company makes any payment of principal with respect
to a Eurodollar Loan Segment on any day other than the last day of the Interest
Period applicable to the Eurodollar Loan Segment (except for any prepayment made
under Section 8 of this Note) or if Company fails to make any payment of
principal or interest when due under Section 1, then Company shall reimburse
Bank on demand for any resulting loss or expense incurred by Bank, including
without limitation any loss incurred in obtaining, liquidating or employing
deposits from third parties. A detailed statement as to the amount of the loss
or expense, prepared in good faith and submitted by Bank to Company, shall be
conclusive and binding for all purposes absent manifest error in computation.
#418144v2
-6-
10. Late Charge. If any payment of principal or interest under this Note is
not paid within ten days after it is due, Company shall immediately pay to Bank
a late charge in an amount equal to the greater of (a) $50.00 or (b) the lesser
of $2,500 or one-tenth of one percent (.1%) of the unpaid principal balance as
of the date the payment was due. This late charge is in addition to Bank's other
rights and remedies for default in payment of an installment of principal or
interest when due.
11. Place and Application of Payments. Each payment upon this Note shall be
made at Bank's address set forth above or at any other place that the holder of
this Note shall direct in writing. Company authorizes Bank to debit deposit
account No. 2056612, which is maintained with Bank by Company, for any payment
due to Bank under this Note. Any payment upon this Note shall be applied first
to any expenses (including expenses of collection) then due and payable to Bank
under this Note, then to late charges due and payable, then to any accrued and
unpaid interest under this Note and then to the unpaid principal balance, except
that after Maturity Bank may apply any payment or collection to those amounts in
any manner that Bank shall determine in its sole discretion. If Company at any
time owes Bank any indebtedness or obligation in addition to the indebtedness
evidenced by this Note, and if any indebtedness owed by Company to Bank is then
in default, Company shall not have, and waives, any right to direct or designate
the particular indebtedness or obligation upon which any payment made by, or
collected from, Company shall be applied. The manner of application of the
payment, as between or among such indebtedness and obligations, shall be
determined by Bank in its sole discretion.
12. Eurodollar Loan Segments. Notwithstanding any other provision of this
Note, Bank shall be entitled to fund and maintain its funding of all or any part
of any Eurodollar Loan Segment in any manner it sees fit; but all determinations
under this Note shall be made as if Bank had actually funded and maintained each
Eurodollar Loan Segment during each related Interest Period through the purchase
of a deposit in the interbank eurodollar market having a maturity corresponding
to that related Interest Period and bearing an interest rate equal to the
Eurodollar Rate for that Interest Period.
13. Remedies. Bank shall have all rights and remedies provided by law and
by agree ment of Company, including, but not limited to, the Loan Agreement.
Bank shall have the right at any time, afer and during the continuance of an
Event of Default, to set off any indebtedness that Bank then owes to Company
against any indebtedness evidenced by this Note that is then due and payable.
14. Expenses. Company shall pay, or reimburse Bank for, all expenses
incurred by Bank (including, but not limited to, search fees and fees and
reasonable expenses of legal counsel, other professional advisers, consultants
and experts) in connection with (i) the negotiation, preparation and execution
of this Note and the Loan Agreement, each amendment to, or waiver of any
provision of, this Note and the Loan Agreement, and each refinancing or
restructuring of this Note and the Loan Agreement, (ii) the administration of
this Note and the Loan Agreement, (iii) obtaining advice of counsel or other
professional advisers, consultants and experts regarding any
#418144v2
-7-
aspect of this Note and the Loan Agreement, (iv) the enforcement of any
provision of this Note and the Loan Agreement, and (v) the collection of any
amount at any time owing to Bank by Company under this Note and the Loan
Agreement.
15. Relationship. The relationship between Company and Bank under this Note
is solely that of debtor and creditor. Bank has no fiduciary responsibilities to
Company. Bank does not and shall not have any responsibility to review, or to
inform Company of any matter in connection with, any aspect of Company's
business, operations or properties. Company shall rely entirely upon its own
judgment with respect to its business, operations and properties.
16. Waivers. No delay by Bank in the exercise of any right or remedy shall
be a waiver of that right or remedy. No single or partial exercise by Bank of
any right or remedy shall preclude any other or future exercise of that or any
other right or remedy. No waiver by Bank of any default or of any provision of
this Note shall be effective unless it is in writing and signed by Bank. No
waiver of any right or remedy on one occasion shall be a waiver of that right or
remedy on any future occasion. Company waives demand for payment, presentment,
notice of dishonor, and protest of this Note and consents to any extension or
postponement of time of its payment.
17. Notices. Each notice required or permitted under this Note shall be in
writing and shall be personally delivered, sent by facsimile transmission or
sent by first-class mail, postage prepaid, or by a nationally-recognized
overnight courier service. The following addresses (and facsimile numbers) shall
be used for notices unless and until a party notifies the other of a change in
its address or facsimile number:
Bank
OLD KENT BANK
Corporate Banking Department
111 Lyon Street, N.W.
Grand Rapids, Michigan 49503
Fax: (616) - 771 - 4641
Company
Knape & Vogt Manufacturing Company
2700 Oak Industrial Drive, N.E.
Grand Rapids, Michigan 49505
Fax: (616) - 459-3957
Telephone: (616) 459-3311
Notwithstanding the foregoing, all loan requests made by Company under Section 3
of this Note shall be sent by facsimile transmission to the facsimile number
listed on Exhibit A attached to this Note.
#418144v2
-8-
18. Applicable Law and Jurisdiction. This Note shall be governed by and
interpreted according to the laws of the State of Michigan, without giving
effect to principles of conflict of laws. Company irrevocably agrees and
consents that any action against Company for collection or enforcement of this
Note may be brought in any state or federal court that has subject matter
jurisdiction and is located in, or whose district includes, Kent County,
Michigan, and that any such court shall have personal jurisdiction over Company
for purposes of the action.
KNAPE & VOGT MANUFACTURING COMPANY
By ____________________________________________
Jack D. Poindexter, Chief Financial Officer
Accepted by:
OLD KENT BANK
By ____________________________________________
Bryce E. Tallant, Vice President
#418144v2
-9-
(Multicurrency-Cross Border)
ISDA
International Swap Dealers Association. Inc.
MASTER AGREEMENT
dated as of______________
and _____________________________
have entered and/or anticipate entering into one or more transactions (each a
"Transaction") that are or will be governed by this Master Agreement, which
includes the schedule (the "Schedule"), and the documents and other confirming
evidence (each a "Confirmation") exchanged between the parties confirming those
Transactions.
Accordingly, the parties agree as follows:
Interpretation
(a) Definitions. The terms defined in Section 14 and in the Schedule will have
the meanings therein specified for the purpose of this Master Agreement.
(b) Inconsistency. In the event of any inconsistency between the provisions of
the Schedule and the other provisions of this Master Agreement, the Schedule
will prevail. In the event of any inconsistency between the provisions of any
Confirmation and this Master Agreement (including the Schedule), such
Confirmation will prevail for the purpose of the relevant Transaction.
(c) Single Agreement. All Transactions are entered into in reliance on the fact
that this Master Agreement and all Confirmations form a single agreement between
the parties (collectively referred to as this "Agreement") and the parties would
not otherwise enter into any Transactions.
2. Obligations
(a) General Conditions.
(i) Each party will make each payment or delivery specified in each
Confirmation to be made by it, subject to the other provisions of this
Agreement.
(ii) Payments under this Agreement will be made on the due date for value
on that date in the place of the account specified in the relevant
Confirmation or otherwise pursuant to
this Agreement, in freely transferable funds and in the manner customary
for payments in the required currency. Where settlement is by delivery
(that is, other than by payment), such delivery will be made for receipt on
the due date in the manner customary for the relevant obligation unless
otherwise specified in the relevant Confirmation or elsewhere in this
Agreement.
(iii) Each obligation of each party under Section 2(a)(i) is subject to (l)
the condition precedent that no Event of Default or Potential Event of
Default with respect to the other party has occurred and is continuing, (2)
the condition precedent that no Early Termination Date in respect of the
relevant Transaction has occurred or been effectively designated and (3)
each other applicable condition precedent specified in this Agreement.
(b) Change of Account. Either party may change its account for receiving a
payment or delivery by giving notice to the other party at least five Local
Business Days prior to the scheduled date for the payment or delivery to which
such change applies unless such other party gives timely notice of a reasonable
objection to such change.
(c) Netting. If on any date amounts would otherwise be payable:-
(i) in the same currency; and
(ii) in respect of the same Transaction,
by each party to the other, then, on such date, each party's obligation to make
payment of any such amount will be automatically satisfied and discharged and,
if the aggregate amount that would otherwise have been payable by one party
exceeds the aggregate amount that would otherwise have been payable by the other
party, replaced by an obligation upon the party by whom the larger aggregate
amount would have been payable to pay to the other party the excess of the
larger aggregate amount over the smaller aggregate amount.
The parties may elect in respect of two or more Transactions that a net amount
will be determined in respect of all amounts payable on the same date in the
same currency in respect of such Transactions, regardless of whether such
amounts are payable in respect of the same Transaction. The election may be made
in the Schedule or a Confirmation by specifying that subparagraph (ii) above
will not apply to the Transactions identified as being subject to the election,
together with the starting date (in which case subparagraph (ii) above will not,
or will cease to, apply to such Transactions from such date). This election may
be made separately for different groups of Transactions and will apply
separately to each pairing of Offices through which the parties make and receive
payments or deliveries.
2
(d) Deduction or Withholding/or Tax.
(i) Gross-Up. All payments under this Agreement will be made without any
deduction or withholding for or on account of any Tax unless such deduction
or withholding is required by any applicable law, as modified by the
practice of any relevant governmental revenue authority, then in effect. If
a party is so required to deduct or withhold, then that party ("X") will:
(l) promptly notify the other party ("Y") of such requirement;
(2) pay to the relevant authorities the full amount required to be
deducted or withheld (including the full amount required to be
deducted or withheld from any additional amount paid by X to Y under
this Section 2(d)) promptly upon the earlier of determining that such
deduction or withholding is required or receiving notice that such
amount has been assessed against Y;
(3) promptly forward to Y an official receipt (or a certified copy),
or other documentation reasonably acceptable to Y, evidencing such
payment to such authorities; and
(4) if such Tax is an Indemnifiable Tax, pay to Y, in addition to the
payment to which Y is otherwise entitled under this Agreement, such
additional amount as is necessary to ensure that the net amount
actually received by Y (free and clear of Indemnifiable Taxes, whether
assessed against X or Y) will equal the full amount Y would have
received had no such deduction or withholding been required. However,
X will not be required to pay any additional amount to Y to the extent
that it would not be required to be paid but for:
(A) the failure by Y to comply with or perform any agreement
contained in Section 4(a)(i), 4(a)(iii) or 4(d); or
(B) the failure of a representation made by Y pursuant to Section
3(f) to be accurate and true unless such failure would not have
occurred but for (I) any action taken by a taxing authority, or
brought in a court of competent jurisdiction, on or after the
date on which a Transaction is entered into (regardless of
whether such action is taken or brought with respect to a party
to this Agreement) or (II) a Change in Tax Law.
3
(ii) Liability. If:
(I) X is required by any applicable law, as modified by the practice
of any relevant governmental revenue authority, to make any deduction
or withholding in respect of which X would not be required to pay an
additional amount to Y under Section 2(d)(i)(4);
(2) X does not so deduct or withhold; and
(3) a liability resulting from such Tax is assessed directly against
X,
then, except to the extent Y has satisfied or then satisfies the liability
resulting from such Tax, Y will promptly pay to X the amount of such
liability (including any related liability for interest, but including any
related liability for penalties only if Y has failed to comply with or
perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d)).
(e) Default Interest; Other Amounts. Prior to the occurrence or effective
designation of an Early Termination Date in respect of the relevant Transaction,
a party that defaults in the performance of any payment obligation will, to the
extent permitted by law and subject to Section 6(c), be required to pay interest
(before as well as after judgment) on the overdue amount to the other party on
demand in the same currency as such overdue amount, for the period from (and
including) the original due date for payment to (but excluding) the date of
actual payment, at the Default Rate. Such interest will be calculated on the
basis of daily compounding and the actual number of days elapsed. If, prior to
the occurrence or effective designation of an Early Termination Date in respect
of the relevant Transaction, a party defaults in the performance of any
obligation required to be settled by delivery, it will compensate the other
party on demand if and to the extent provided for in the relevant Confirmation
or elsewhere in this Agreement.
3. Representations
Each party represents to the other party (which representations will be deemed
to be repeated by each party on each date on which a Transaction is entered into
and, in the case of the representations in Section 3(f), at all times until the
termination of this Agreement) that:
(a) Basic Representations.
(i) Status. It is duly organised and validly existing under the laws of the
jurisdiction of its organisation or incorporation and, if relevant under
such laws, in good standing;
4
(ii) Powers. It has the power to execute this Agreement and any other
documentation relating to this Agreement to which it is a party, to deliver
this Agreement and any other documentation relating to this Agreement that
it is required by this Agreement to deliver and to perform its obligations
under this Agreement and any obligations it has under any Credit Support
Document to which it is a party and has taken all necessary action to
authorize such execution, delivery and performance;
(iii) No Violation or Conflict. Such execution, delivery and performance do
not violate or conflict with any law applicable to it, any provision of its
constitutional documents, any order or judgment of any court or other
agency of government applicable to it or any of its assets or any
contractual restriction binding on or affecting it or any of its assets;
(iv) Consents. All governmental and other consents that are required to
have been obtained by it with respect to this Agreement or any Credit
Support Document to which it is a party have been obtained and are in full
force and effect and all conditions of any such consents have been complied
with; and
(v) Obligations Binding. Its obligations under this Agreement and any
Credit Support Document to which it is a party constitute its legal, valid
and binding obligations, enforceable in accordance with their respective
terms (subject to applicable bankruptcy, reorganisation, insolvency,
moratorium or similar laws affecting creditors' rights generally and
subject, as to enforceability, to equitable principles of general
application (regardless of whether enforcement is sought in a proceeding in
equity or at law)).
(b) Absence of Certain Events. No Event of Default or Potential Event of Default
or, to its knowledge, Termination Event with respect to it has occurred and is
continuing and no such event or circumstance would occur as a result of its
entering into or performing its obligations under this Agreement or any Credit
Support Document to which it is a party.
(c) Absence of Litigation. There is not pending or, to its knowledge, threatened
against it or any of its Affiliates any action, suit or proceeding at law or in
equity or before any court, tribunal, governmental body, agency or official or
any arbitrator that is likely to affect the legality, validity or enforceability
against it of this Agreement or any Credit Support Document to which it is a
party or its ability to perform its obligations under this Agreement or such
Credit Support Document.
(d) Accuracy of Specified Information. All applicable information that is
furnished in writing by or on behalf of it to the other party and is identified
for the purpose of this Section 3(d) in the Schedule is, as of the date of the
information, true, accurate and complete in every material
5
respect.
(e) Payer Tax Representation. Each representation specified in the Schedule as
being made by it for the purpose of this Section 3(e) is accurate and true.
(f) Payee Tax Representations. Each representation specified in the Schedule as
being made by it for the purpose of this Section 3(f) is accurate and true.
4. Agreements
Each party agrees with the other that, so long as either party has or may have
any obligation under this Agreement or under any Credit Support Document to
which it is a party:
(a) Furnish Specified Information. It will deliver to the other party or, in
certain cases under subparagraph (iii) below, to such government or taxing
authority as the other party reasonably directs:
(i) any forms, documents or certificates relating to taxation specified in
the Schedule or any Confirmation;
(ii) any other documents specified in the Schedule or any Confirmation; and
(iii) upon reasonable demand by such other party, any form or document that
may be required or reasonably requested in writing in order to allow such
other party or its Credit Support Provider to make a payment under this
Agreement or any applicable Credit Support Document without any deduction
or withholding for or on account of any Tax or with such deduction or
withholding at a reduced rate (so long as the completion, execution or
submission of such form or document would not materially prejudice the
legal or commercial position of the party in receipt of such demand), with
any such form or document to be accurate and completed in a manner
reasonably satisfactory to such other party and to be executed and to be
delivered with any reasonably required certification,
in each case by the date specified in the Schedule or such Confirmation or, if
none is specified, as soon as reasonably practicable.
(b) Maintain Authorizations. It will use all reasonable efforts to maintain in
full force and effect all consents of any governmental or other authority that
are required to be obtained by it with respect to this Agreement or any Credit
Support Document to which it is a party and will use all reasonable efforts to
obtain any that may become necessary in the future.
6
(c) Comply with Laws. It will comply in all material respects with all
applicable laws and orders to which it may be subject if failure so to comply
would materially impair its ability to perform its obligations under this
Agreement or any Credit Support Document to which it is a party.
(d) Tax Agreement. It will give notice of any failure of a representation made
by it under Section 3(f) to be accurate and true promptly upon learning of such
failure.
(e) Payment of Stamp Tax. Subject to Section 11, it will pay any Stamp Tax
levied or imposed upon it or in respect of its execution or performance of this
Agreement by a jurisdiction in which it is incorporated, organised, managed and
controlled, or considered to have its seat, or in which a branch or office
through which it is acting for the purpose of this Agreement is located ("Stamp
Tax Jurisdiction") and will indemnify the other party against any Stamp Tax
levied or imposed upon the other party or in respect of the other party's
execution or performance of this Agreement by any such Stamp Tax Jurisdiction
which is not also a Stamp Tax Jurisdiction with respect to the other party.
5. Events of Default and Termination Events
(a) Events of Default. The occurrence at any time with respect to a party or, if
applicable, any Credit Support Provider of such party or any Specified Entity of
such party of any of the following events constitutes an event of default (an
"Event of Default") with respect to such party:
(i) Failure to Pay or Deliver. Failure by the party to make, when due, any
payment under this Agreement or delivery under Section 2(a)(i) or 2(c)
required to be made by it if such failure is not remedied on or before the
third Local Business Day after notice of such failure is given to the
party;
(ii) Breach of Agreement. Failure by the party to comply with or perform
any agreement or obligation (other than an obligation to make any payment
under this Agreement or delivery under Section 2(a)(i) or 2(e) or to give
notice of a Termination Event or any agreement or obligation under Section
4(a)(i), 4(a)(iii) or 4(d)) to be complied with or performed by the party
in accordance with this Agreement if such failure is not remedied on or
before the thirtieth day after notice of such failure is given to the
party;
7
(iii) Credit Support Default.
(l) Failure by the party or any Credit Support Provider of such party
to comply with or perform any agreement or obligation to be complied
with or performed by it in accordance with any Credit Support Document
if such failure is continuing after any applicable grace period has
elapsed;
(2) the expiration or termination of such Credit Support Document or
the failing or ceasing of such Credit Support Document to be in full
force and effect for the purpose of this Agreement (in either case
other than in accordance with its terms) prior to the satisfaction of
all obligations of such party under each Transaction to which such
Credit Support Document relates without the written consent of the
other party; or
(3) the party or such Credit Support Provider disaffirms, disclaims,
repudiates or rejects, in whole or in part, or challenges the validity
of, such Credit Support Document;
(iv) Misrepresentation. A representation (other than a representation under
Section 3(e) or (f)) made or repeated or deemed to have been made or
repeated by the party or any Credit Support Provider of such party in this
Agreement or any Credit Support Document proves to have been incorrect or
misleading in any material respect when made or repeated or deemed to have
been made or repeated;
(v) Default under Specified Transaction. The party, any Credit Support
Provider of such party or any applicable Specified Entity of such party (l)
defaults under a Specified Transaction and, after giving effect to any
applicable notice requirement or grace period, there occurs a liquidation
of, an acceleration of obligations under, or an early termination of, that
Specified Transaction, (2) defaults, after giving effect to any applicable
notice requirement or grace period, in making any payment or delivery due
on the last payment, delivery or exchange date of, or any payment on early
termination of, a Specified Transaction (or such default continues for at
least three Local Business Days if there is no applicable notice
requirement or grace period) or (3) disaffirms, disclaims, repudiates or
rejects, in whole or in part, a Specified Transaction (or such action is
taken by any person or entity appointed or empowered to operate it or act
on its behalf);
(vi) Cross Default. If "Cross Default" is specified in the Schedule as
applying to the party, the occurrence or existence of ( l) a default, event
of default or other similar condition or event (however described) in
respect of such party, any Credit Support
8
Provider of such party or any applicable Specified Entity of such party
under one or more agreements or instruments relating to Specified
Indebtedness of any of them (individually or collectively) in an aggregate
amount of not less than the applicable Threshold Amount (as specified in
the Schedule) which has resulted in such Specified Indebtedness becoming,
or becoming capable at such time of being declared, due and payable under
such agreements or instruments, before it would otherwise have been due and
payable or (2) a default by such party, such Credit Support Provider or
such Specified Entity (individually or collectively) in making one or more
payments on the due date thereof in an aggregate amount of not less than
the applicable Threshold Amount under such agreements or instruments (after
giving effect to any applicable notice requirement or grace period);
(vii) Bankruptcy. The party, any Credit Support Provider of such party or
any applicable Specified Entity of such party:
(l) is dissolved (other than pursuant to a consolidation, amalgamation
or merger); (2) becomes insolvent or is unable to pay its debts or
fails or admits in writing its inability generally to pay its debts as
they become due; (3) makes a general assignment, arrangement or
composition with or for the benefit of its creditors; (4) institutes
or has instituted against it a proceeding seeking a judgment of
insolvency or bankruptcy or any other relief under any bankruptcy or
insolvency law or other similar law affecting creditors' rights, or a
petition is presented for its winding-up or liquidation, and, in the
case of any such proceeding or petition instituted or presented
against it, such proceeding or petition (A) results in a judgment of
insolvency or bankruptcy or the entry of an order for relief or the
making of an order for its winding-up or liquidation or (B) is not
dismissed, discharged, stayed or restrained in each case within 30
days of the institution or presentation thereof; (5) has a resolution
passed for its winding-up, official management or liquidation (other
than pursuant to a consolidation, amalgamation or merger); (6) seeks
or becomes subject to the appointment of an administrator, provisional
liquidator, conservator, receiver, trustee, custodian or other similar
official for it or for all or substantially all its assets; (7) has a
secured party take possession of all or substantially all its assets
or has a distress, execution, attachment, sequestration or other legal
process levied, enforced or sued on or against all or substantially
all its assets and such secured party maintains possession, or any
such process is not dismissed, discharged, stayed or restrained, in
each case within 30 days thereafter; (8) causes or is subject to any
event with respect to it which, under the applicable laws of any
jurisdiction, has an analogous effect to any of the events specified
in clauses (l) to (7) (inclusive); or (9) takes any action in
furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the foregoing acts; or
9
(viii) Merger Without Assumption. The party or any Credit Support Provider
of such party consolidates or amalgamates with, or merges with or into, or
transfers all or substantially all its assets to, another entity and, at
the time of such consolidation, amalgamation, merger or transfer:
(l) the resulting, surviving or transferee entity fails to assume all
the obligations of such party or such Credit Support Provider under
this Agreement or any Credit Support Document to which it or its
predecessor was a party by operation of law or pursuant to an
agreement reasonably satisfactory to the other party to this
Agreement; or
(2) the benefits of any Credit Support Document fail to extend
(without the consent of the other party) to the performance by such
resulting, surviving or transferee entity of its obligations under
this Agreement.
(b) Termination Events. The occurrence at any time with respect to a party or,
if applicable, any Credit Support Provider of such party or any Specified Entity
of such party of any event specified below constitutes an Illegality if the
event is specified in (i) below, a Tax Event if the event is specified in (ii)
below or a Tax Event Upon Merger if the event is specified in (iii) below, and,
if specified to be applicable, a Credit Event. Upon Merger if the event is
specified pursuant to (iv) below or an Additional Termination Event if the event
is specified pursuant to (v) below:
(i) Illegality. Due to the adoption of, or any change in, any applicable
law after the date on which a Transaction is entered into, or due to the
promulgation of, or any change in, the interpretation by any court,
tribunal or regulatory authority with competent jurisdiction of any
applicable law after such date, it becomes unlawful (other than as a result
of a breach by the party of Section 4(b)) for such party (which will be the
Affected Party):
(l) to perform any absolute or contingent obligation to make a payment
or delivery or to receive a payment or delivery in respect of such
Transaction or to comply with any other material provision of this
Agreement relating to such Transaction; or
(2) to perform, or for any Credit Support Provider of such party to
perform, any contingent or other obligation which the party (or such
Credit Support Provider) has under any Credit Support Document
relating to such Transaction;
10
(ii) Tax Event. Due to (x) any action taken by a taxing authority, or
brought in a court of competent jurisdiction, on or after the date on which
a Transaction is entered into (regardless of whether such action is taken
or brought with respect to a party to this Agreement) or (y) a Change in
Tax Law, the party (which will be the Affected Party) will, or there is a
substantial likelihood that it will, on the next succeeding Scheduled
Payment Date (l) be required to pay to the other party an additional amount
in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in
respect of interest under Section 2(e), 6(d)(ii) or 6(e)) or (2) receive a
payment from which an amount is required to be deducted or withheld for or
on account of a Tax (except in respect of interest under Section 2(e),
6(d)(ii) or 6(e)) and no additional amount is required to be paid in
respect of such Tax under Section 2(d)(i)(4) (other than by reason of
Section 2(d)(i)(4)(A) or (B));
(iii) Tax Event Upon Merger. The party (the "Burdened Party") on the next
succeeding Scheduled Payment Date will either (I) be required to pay an
additional amount in respect of an Indemnifiable Tax under Section
2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(ii) or
6(e)) or (2) receive a payment from which an amount has been deducted or
withheld for or on account of any Indemnifiable Tax in respect of which the
other party is not required to pay an additional amount (other than by
reason of Section 2(d)(i)(4)(A) or (B)), in either case as a result of a
party consolidating or amalgamating with, or merging with or into, or
transferring all or substantially all its assets to, another entity (which
will be the Affected Party) where such action does not constitute an event
described in Section 5(a)(viii);
(iv) Credit Event Upon Merger. If"Credit Event Upon Merger" is specified in
the Schedule as applying to the party, such party ("X"), any Credit Support
Provider of X or any applicable Specified Entity of X consolidates or
amalgamates with, or merges with or into, or transfers all or substantially
all its assets to, another entity and such action does not constitute an
event described in Section 5(a)(viii) but the creditworthiness of the
resulting, surviving or transferee entity is materially weaker than that of
X, such Credit Support Provider or such Specified Entity, as the case may
be, immediately prior to such action (and, in such event, X or its
successor or transferee, as appropriate, will be the Affected Party); or
(v) Additional Termination Event. If any "Additional Termination Event" is
specified in the Schedule or any Confirmation as applying, the occurrence
of such event (and, in such event, the Affected Party or Affected Parties
shall be as specified for such Additional Termination Event in the Schedule
or such Confirmation).
(c) Event of Default and Illegality. If an event or circumstance which would
otherwise
11
constitute or give rise to an Event of Default also constitutes an Illegality,
it will be treated as an Illegality and will not constitute an Event of Default.
6. Early Termination
(a) Right to Terminate Following Event of Default. If at any time an Event of
Default with respect to a party (the 'Defaulting Party") has occurred and is
then continuing, the other party (the "Non-defaulting Party") may, by not more
than 20 days notice to the Defaulting Party specifying the relevant Event of
Default, designate a day not earlier than the day such notice is effective as an
Early Termination Date in respect of all outstanding Transactions. If, however,
"Automatic Early Termination" is specified in the Schedule as applying to a
party, then an Early Termination Date in respect of all outstanding Transactions
will occur immediately upon the occurrence with respect to such party of an
Event of Default specified in Section 5(a)(vii)(l), (3), (5), (6) or, to the
extent analogous thereto, (8), and as of the time immediately preceding the
institution of the relevant proceeding or the presentation of the relevant
petition upon the occurrence with respect to such party of an Event of Default
specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8).
(b) Right to Terminate Following Termination Event.
(i) Notice. If a Termination Event occurs, an Affected Party will, promptly
upon becoming aware of it notify the other party, specifying the nature of
that Termination Event and each Affected Transaction and will also give
such other information about that Termination Event as the other party may
reasonably require.
(ii) Transfer to Avoid Termination Event. If either an Illegality under
Section 5(b)(i)(I) or a Tax Event occurs and there is only one Affected
Party, or if a Tax Event Upon Merger occurs and the Burdened Party is the
Affected Party, the Affected Party will, as a condition to its right to
designate an Early Termination Date under Section 6(b)(iv), use all
reasonable efforts (which will not require such party to incur a loss,
excluding immaterial, incidental expenses) to transfer within 20 days after
it gives notice under Section 6(b)(i) all its rights and obligations under
this Agreement in respect of the Affected Transactions to another of its
Offices or Affiliates so that such Termination Event ceases to exist.
If the Affected Party is not able to make such a transfer it will give
notice to the other party to that effect within such 20 day period,
whereupon the other party may effect such a transfer within 30 days after
the notice is given under Section 6(b)(i).
Any such transfer by a party under this Section 6(b)(ii) will be subject to
and conditional
12
upon the prior written consent of the other party. which consent will not
be withheld if such other party's policies in effect at such time would
permit it to enter into transactions with the transferee on the terms
proposed.
13
(iii) Two Affected Parties. If an Illegality under Section 5(b)(i)(l) or a
Tax Event occurs and there are two Affected Parties, each party will use
all reasonable efforts to reach agreement within 30 days after notice
thereof is given under Section 6(b)(i) on action to avoid that Termination
Event.
(iv) Right to Terminate. If:
(l) a transfer under Section 6(b)(ii) or an agreement under Section
6(b)(iii), as the case may be, has not been effected with respect to
all Affected Transactions within 30 days after an Affected Party gives
notice under Section 6(b)(i); or
(2) an Illegality under Section 5(b)(i)(2), a Credit Event Upon Merger
or an Additional Termination Event occurs, or a Tax Event Upon Merger
occurs and the Burdened Party is not the Affected Party, either party
in the case of an Illegality, the Burdened Party in the case of a Tax
Event Upon Merger, any Affected Party in the case of a Tax Event or an
Additional Termination Event if there is more than one Affected Party,
or the party which is not the Affected Party in the case of a Credit
Event Upon Merger or an Additional Termination Event if there is only
one Affected Party may, by not more than 20 days notice to the other
party and provided that the relevant Termination Event is then
continuing, designate a day not earlier than the day such notice is
effective as an Early Termination Date in respect of all Affected
Transactions.
(c) Effect of Designation.
(i) If notice designating an Early Termination Date is given under Section
6(a) or (b), the Early Termination Date will occur on the date so
designated, whether or not the relevant Event of Default or Termination
Event is then continuing.
(ii) Upon the occurrence or effective designation of an Early Termination
Date, no further payments or deliveries under Section 2(a)(i) or 2(e) in
respect of the Terminated Transactions will be required to be made, but
without prejudice to the other provisions of this Agreement. The amount, if
any, payable in respect of an Early Termination Date shall be determined
pursuant to Section 6(e).
14
(d) Calculations.
(i) Statement. On or as soon as reasonably practicable following the
occurrence of an Early Termination Date, each party will make the
calculations on its part if any, contemplated by Section 6(e) and will
provide to the other party a statement (l) showing, in reasonable detail,
such calculations (including all relevant quotations and specifying any
amount payable under Section 6(e)) and (2) giving details of the relevant
account to which any amount payable to it is to be paid. In the absence of
written confirmation from the source of a quotation obtained in determining
a Market Quotation, the records of the party obtaining such quotation will
be conclusive evidence of the existence and accuracy of such quotation.
(ii) Payment Date. An amount calculated as being due in respect of any
Early Termination Date under Section 6(e) will be payable on the day that
notice of the amount payable is effective (in the case of an Early
Termination Date which is designated or occurs as a result of an Event of
Default) and on the day which is two Local Business Days after the day on
which notice of the amount payable is effective (in the case of an Early
Termination Date which is designated as a result of a Termination Event).
Such amount will be paid together with (to the extent permitted under
applicable law) interest thereon (before as well as after judgment) in the
Termination Currency, from (and including) the relevant Early Termination
Date to (but excluding) the date such amount is paid, at the Applicable
Rate. Such interest will be calculated on the basis of daily compounding
and the actual number of days elapsed.
(e) Payments on Early Termination. If an Early Termination Date occurs, the
following provisions shall apply based on the parties' election in the Schedule
of a payment measure, either "Market Quotation" or "Loss", and a payment method,
either the "First Method" or the "Second Method". If the parties fail to
designate a payment measure or payment method in the Schedule, it will be deemed
that "Market Quotation" or the "Second Method", as the case may be, shall apply.
The amount, if any, payable in respect of an Early Termination Date and
determined pursuant to this Section will be subject to any Set-off.
(i) Events of Default. If the Early Termination Date results from an Event
of Default:
(l) First Method and Market Quotations If the First Method and Market
Quotation apply, the Defaulting Party will pay to the Non-defaulting
Party the excess, if a positive number, of (A) the sum of the
Settlement Amount (determined by the Non-defaulting Party) in respect
of the Terminated Transactions and the Termination Currency Equivalent
of the Unpaid Amounts owing to the Non- defaulting Party over (B) the
Termination Currency Equivalent of the Unpaid Amounts owing to the
Defaulting Party.
15
(2) First Method and Loss. If the First Method and Loss apply, the
Defaulting Party will pay to the Non-defaulting Party, if a positive
number, the Non- defaulting Party's Loss in respect of this Agreement.
(3) Second Method and Market Quotation. If the Second Method and
Market Quotation apply, an amount will be payable equal to (A) the sum
of the Settlement Amount (determined by the Non-defaulting Party) in
respect of the Terminated Transactions and the Termination Currency
Equivalent of the Unpaid Amounts owing to the Non-defaulting Party
less (B) the Termination Currency Equivalent of the Unpaid Amounts
owing to the Defaulting Party. If that amount is a positive number,
the Defaulting Party will pay it to the Non-defaulting Party; if it is
a negative number, the Non-defaulting Party will pay the absolute
value of that amount to the Defaulting Party.
(4) Second Method and Loss. If the Second Method and Loss apply, an
amount will be payable equal to the Non-defaulting Party's Loss in
respect of this Agreement. If that amount is a positive number, the
Defaulting Party will pay it to the Non-defaulting Party; if it is a
negative number, the Non-defaulting Party will pay the absolute value
of that amount to the Defaulting Party.
(ii) Termination Events. If the Early Termination Date results from a
Termination Event:
(l) One Affected Party. If there is one Affected Party, the amount
payable will be determined in accordance with Section 6(e)(i)(3), if
Market Quotation applies, or Section 6(e)(i)(4), if Loss applies,
except that, in either case, references to the Defaulting Party and to
the Non-defaulting Party will be deemed to be references to the
Affected Party and the party which is not the Affected Party,
respectively, and, if Loss applies and fewer than all the Transactions
are being terminated, Loss shall be calculated in respect of all
Terminated Transactions.
(2) Two Affected Parties. If there are two Affected Parties:
(A) if Market Quotation applies, each party will determine a
Settlement Amount in respect of the Terminated Transactions, and
an amount will be payable equal to (D the sum of (a) one-half of
the difference between the Settlement Amount of the party with
the higher Settlement Amount ("X") and the Settlement Amount of
the
16
party with the lower Settlement Amount ("Y") and (b) the
Termination Currency Equivalent of the Unpaid Amounts owing to X
less (II) the Termination Currency Equivalent of the Unpaid
Amounts owing to Y; and
(B) if Loss applies, each party will determine its Loss in
respect of this Agreement (or, if fewer than all the Transactions
are being terminated, in respect of all Terminated Transactions)
and an amount will be payable equal to one-half of the difference
between the Loss of the party with the higher Loss ("X") and the
Loss of the party with the lower Loss ("Y").
If the amount payable is a positive number, Y will pay it to X; if it is a
negative number, X will pay the absolute value of that amount to Y.
(iii) Adjustment for Bankruptcy. In circumstances where an Early
Termination Date occurs because "Automatic Early Termination" applies in
respect of a party, the amount determined under this Section 6(e) will be
subject to such adjustments as are appropriate and permitted by law to
reflect any payments or deliveries made by one party to the other under
this Agreement (and retained by such other party) during the period from
the relevant Early Termination Date to the date for payment determined
under Section 6(d)(ii).
(iv) Pre-Estimate. The parties agree that if Market Quotation applies an
amount recoverable under this Section 6(e) is a reasonable pre-estimate of
loss and not a penalty. Such amount is payable for the loss of bargain and
the loss of protection against future risks and except as otherwise
provided in this Agreement neither party will be entitled to recover any
additional damages as a consequence of such losses.
7. Transfer
Subject to Section 6(b)(ii), neither this Agreement nor any interest or
obligation in or under this Agreement may be transferred (whether by way of
security or otherwise) by either party without the prior written consent of the
other party, except that:
(a) a party may make such a transfer of this Agreement pursuant to a
consolidation or amalgamation with, or merger with or into, or transfer of all
or substantially all its assets to, another entity (but without prejudice to any
other right or remedy under this Agreement); and
(b) a party may make such a transfer of all or any part of its interest in any
amount payable to it from a Defaulting Party under Section 6(e).
Any purported transfer that is not in compliance with this Section will be void.
17
8. Contractual Currency
(a) Payment in the Contractual Currency. Each payment under this Agreement will
be made in the relevant currency specified in this Agreement for that payment
(the 'Contractual Currency"). To the extent permitted by applicable law, any
obligation to make payments under this Agreement in the Contractual Currency
will not be discharged or satisfied by any tender in any currency other than the
Contractual Currency, except to the extent such tender results in the actual
receipt by the party to which payment is owed, acting in a reasonable manner and
in good faith in converting the currency so tendered into the Contractual
Currency, of the full amount in the Contractual Currency of all amounts payable
in respect of this Agreement. If for any reason the amount in the Contractual
Currency so received falls short of the amount in the Contractual Currency
payable in respect of this Agreement, the party required to make the payment
will, to the extent permitted by applicable law, immediately pay such additional
amount in the Contractual Currency as may be necessary to compensate for the
shortfall. If for any reason the amount in the Contractual Currency so received
exceeds the amount in the Contractual Currency payable in respect of this
Agreement, the party receiving the payment will refund promptly the amount of
such excess.
(b) Judgments. To the extent permitted by applicable law, if any judgment or
order expressed in a currency other than the Contractual Currency is rendered
(i) for the payment of any amount owing in respect of this Agreement (ii) for
the payment of any amount relating to any early termination in respect of this
Agreement or (iii) in respect of a judgment or order of another court for the
payment of any amount described in (i) or (ii) above, the party seeking
recovery, after recovery in full of the aggregate amount to which such party is
entitled pursuant to the judgment or order, will be entitled to receive
immediately from the other party the amount of any shortfall of the Contractual
Currency received by such party as a consequence of sums paid in such other
currency and will refund promptly to the other party any excess of the
Contractual Currency received by such party as a consequence of sums paid in
such other currency if such shortfall or such excess arises or results from any
variation between the rate of exchange at which the Contractual Currency is
converted into the currency of the judgment or order for the purposes of such
judgment or order and the rate of exchange at which such party is able, acting
in a reasonable manner and in good faith in converting the currency received
into the Contractual Currency, to purchase the Contractual Currency with the
amount of the currency of the judgment or order actually received by such party.
The term rate of exchange" includes, without limitation, any premiums and costs
of exchange payable in connection with the purchase of or conversion into the
Contractual Currency.
18
(c) Separate Indemnities. To the extent permitted by applicable law, these
indemnities constitute separate and independent obligations from the other
obligations in this Agreement, will be enforceable as separate and independent
causes of action, will apply notwithstanding any indulgence granted by the party
to which any payment is owed and will not be affected by judgment being obtained
or claim or proof being made for any other sums payable in respect of this
Agreement.
(d) Evidence of Loss. For the purpose of this Section 8, it will be sufficient
for a party to demonstrate that it would have suffered a loss had an actual
exchange or purchase been made.
9. Miscellaneous
(a) Entire Agreement. This Agreement constitutes the entire agreement and
understanding of the parties with respect to its subject matter and supersedes
all oral communication and prior writings with respect thereto.
(b) Amendments. No amendment, modification or waiver in respect of this
Agreement will be effective unless in writing (including a writing evidenced by
a facsimile transmission) and executed by each of the parties or confirmed by an
exchange of telexes or electronic messages on an electronic messaging system.
(c) Survival of Obligations. Without prejudice to Sections 2(a)(iii) and
6(c)(ii), the obligations of the parties under this Agreement will survive the
termination of any Transaction.
(d) Remedies Cumulative. Except as provided in this Agreement, the rights,
powers, remedies and privileges provided in this Agreement are cumulative and
not exclusive of any rights, powers, remedies and privileges provided by law.
(e) Counterparts and Confirmations.
(i) This Agreement (and each amendment, modification and waiver in respect
of it) may be executed and delivered in counterparts (including by
facsimile transmission), each of which will be deemed an original.
19
(ii) The parties intend that they are legally bound by the terms of each
Transaction from the moment they agree to those terms (whether orally or
otherwise). A Confirmation shall be entered into as soon as practicable and
may be executed and delivered in counterparts (including by facsimile
transmission) or be created by an exchange of telexes or by an exchange of
electronic messages on an electronic messaging system, which in each case
will be sufficient for all purposes to evidence a binding supplement to
this Agreement. The parties will specify therein or through another
effective means that any such counterpart, telex or electronic message
constitutes a Confirmation.
(f) No Waiver of Rights. A failure or delay in exercising any right, power or
privilege in respect of this Agreement will not be presumed to operate as a
waiver, and a single or partial exercise of any right, power or privilege will
not be presumed to preclude any subsequent or further exercise, of that right,
power or privilege or the exercise of any other right, power or privilege.
(g) Headings. The headings used in this Agreement are for convenience of
reference only and are not to affect the construction of or to be taken into
consideration in interpreting this Agreement.
10. Offices; Multibranch Parties
(a) If Section 10(a) is specified in the Schedule as applying, each party that
enters into a Transaction through an Office other than its head or home office
represents to the other party that, notwithstanding the place of booking office
or jurisdiction of incorporation or organisation of such party, the obligations
of such party are the same as if it had entered into the Transaction through its
head or home office. This representation will be deemed to be repeated by such
party on each date on which a Transaction is entered into.
(b) Neither party may change the Office through which it makes and receives
payments or deliveries for the purpose of a Transaction without the prior
written consent of the other party.
(c) If a party is specified as a Multibranch Party in the Schedule, such
Multibranch Party may make and receive payments or deliveries under any
Transaction through any Office listed in the Schedule, and the Office through
which it makes and receives payments or deliveries with respect to a Transaction
will be specified in the relevant Confirmation.
20
11. Expenses
A Defaulting Party will, on demand, indemnify and hold harmless the other party
for and against all reasonable out-of-pocket expenses, including legal fees and
Stamp Tax, incurred by such other party by reason of the enforcement and
protection of its rights under this Agreement or any Credit Support Document to
which the Defaulting Party is a party or by reason of the early termination of
any Transaction, including, but not limited to, costs of collection.
12. Notices
(a) Effectiveness. Any notice or other communication in respect of this
Agreement may be given in any manner set forth below (except that a notice or
other communication under Section 5 or 6 may not be given by facsimile
transmission or electronic messaging system) to the address or number or in
accordance with the electronic messaging system details provided (see the
Schedule) and will be deemed effective as indicated:-
(i) if in writing and delivered in person or by courier, on the date it is
delivered;
(ii) if sent by telex, on the date the recipient's answerback is received;
(iii) if sent by facsimile transmission, on the date that transmission is
received by a responsible employee of the recipient in legible form (it
being agreed that the burden of proving receipt will be on the sender and
will not be met by a transmission report generated by the sender's
facsimile machine);
(iv) if sent by certified or registered mail (airmail, if overseas) or the
equivalent (return receipt requested), on the date that mail is delivered
or its delivery is attempted; or
(v) if sent by electronic messaging system, on the date that electronic
message is received,
unless the date of that delivery (or attempted delivery) or that receipt, as
applicable, is not a Local Business Day or that communication is delivered (or
attempted) or received, as applicable, after the close of business on a Local
Business Day, in which case that communication shall be deemed given and
effective on the first following day that is a Local Business Day.
(b) Change of Addresses. Either party may by notice to the other change the
address, telex or facsimile number or electronic messaging system details at
which notices or other communications are to be given to it.
21
13. Governing Law and Jurisdiction
(a) Governing law. This Agreement will be governed by and construed in
accordance with the law specified in the Schedule.
(h) Jurisdiction. With respect to any suit, action or proceedings relating to
this Agreement ("Proceedings") each party irrevocably:
(i) submits to the jurisdiction of the English courts, if this Agreement is
expressed to be governed by English law, or to the non-exclusive
jurisdiction of the courts of the State of New York and the United States
District Court located in the Borough of Manhattan in New York City, if
this Agreement is expressed to be governed by the laws of the State of New
York; and
(ii) waives any objection which it may have at any time to the laying of
venue of any Proceedings brought in any such court, waives any claim that
such Proceedings have been brought in an inconvenient forum and further
waives the right to object, with respect to such Proceedings, that such
court does not have any jurisdiction over such party.
Nothing in this Agreement precludes either party from bringing Proceedings in
any other jurisdiction (outside, if this Agreement is expressed to be governed
by English law, the Contracting States, as defined in Section 1(3) of the. Civil
Jurisdiction and Judgments Act 1982 or any modification, extension or
re-enactment thereof for the time being in force) nor will the bringing of
Proceedings in any one or more jurisdictions preclude the bringing of
Proceedings in any other jurisdiction.
(c) Service of Process. Each party irrevocably appoints the Process Agent (if
any) specified opposite its name in the Schedule to receive, for it and on its
behalf, service of process in any proceedings. If for any reason any party's
Process Agent is unable to act as such, such party will promptly notify the
other party and within 30 days appoint a substitute process agent acceptable to
the other party. The parties irrevocably &consent to service of process given in
the manner provided for notices in Section 12. Nothing in this Agreement will
affect the right of either party to serve process in any other manner permitted
by law.
22
(d) Waiver of Immunities. Each party irrevocably waives, to the fullest extent
permitted by applicable law, with respect to itself and its revenues and assets
(irrespective of their use or intended use), all immunity on the grounds of
sovereignty or other similar grounds from (i) suit, (ii) jurisdiction of any
court, (iii) relief by way of injunction, order for specific performance or for
recovery of property, (iv) attachment of its assets (whether before or after
judgment) and (v) execution or enforcement of any judgment to which it or its
revenues or assets might otherwise be entitled in any Proceedings in the courts
of any jurisdiction and irrevocably agrees, to the extent permitted by
applicable law, that it will not claim any such immunity in any Proceedings.
14. Definitions
As used in this Agreement:--
"Additional Termination Event" has the meaning specified in Section 5(b).
"Affected Party" has the meaning specified in Section 5(b).
"Affected Transactions" means (a) with respect to any Termination Event
consisting of an Illegality, Tax Event or Tax Event Upon Merger, all
Transactions affected by the occurrence of such Termination Event and (b) with
respect to any other Termination Event, all Transactions.
"Affiliate" means, subject to the Schedule, in relation to any person, any
entity controlled, directly or indirectly, by the person, any entity that
controls, directly or indirectly, the person or any entity directly or
indirectly under common control with the person. For this purpose, "control" of
any entity or person means ownership of a majority of the voting power of the
entity or person.
"Applicable Rate" means:
(a) in respect of obligations payable or deliverable (or which would have been
but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate;
(b) in respect of an obligation to pay an amount under Section 6(e) of either
party from and after the date (determined in accordance with Section 6(d)(ii))
on which that amount is payable, the Default Rate;
(c) in respect of all other obligations payable or deliverable (or which would
have been but for Section 2(a)(iii)) by a Non-defaulting Party, the Non-default
Rate; and
(d) in all other cases, the Termination Rate.
23
"Burdened Party" has the meaning specified in Section 5(b).
"Change in Tax Law" means the enactment, promulgation, execution or ratification
of, or any change in or amendment to, any law (or in the application or official
interpretation of any law) that occurs on or after the date on which the
relevant Transaction is entered into.
"consent" includes a consent, approval, action, authorization, exemption,
notice, filing, registration or exchange control consent.
"Credit Event Upon Merger" has the meaning specified in Section 5(b).
"Credit Support Document" means any agreement or instrument that is specified as
such in this Agreement. "Credit Support Provider" has the meaning specified in
the Schedule. "Default Rate" means a rate per annum equal to the cost (without
proof or evidence of any actual cost) to the relevant payee (as certified by it)
if it were to fund or of funding the relevant amount plus l % per annum.
"Defaulting Party" has the meaning specified in Section 6(a).
"Early Termination Date" means the date determined in accordance with Section
6(a) or 6(b)(iv).
"Event of Default" has the meaning specified in Section 5(a) and, if applicable,
in the Schedule.
"Illegality" has the meaning specified in Section 5(b).
"Indemnifiable Tax" means any Tax other than a Tax that would not be imposed in
respect of a payment under this Agreement but for a present or former connection
between the jurisdiction of the government or taxation authority imposing such
Tax and the recipient of such payment or a person related to such recipient
(including, without limitation, a connection arising from such recipient or
related person being or having been a citizen or resident of such jurisdiction,
or being or having been organised, present or engaged in a trade or business in
such jurisdiction, or having or having had a permanent establishment or fixed
place of business in such jurisdiction, but excluding a connection arising
solely from such recipient or related person having executed, delivered,
performed its obligations or received a payment under, or enforced, this
Agreement or a Credit Support Document).
24
"Law" includes any treaty, law, rule or regulation (as modified, in the case of
tax matters, by the practice of any relevant governmental revenue authority) and
"lawful" and "unlawful" will be construed accordingly.
"Local Business Day" means, subject to the Schedule, a day on which commercial
banks are open for business (including dealings in foreign exchange and foreign
currency deposits) (a) in relation to any obligation under Section 2(a)(i), in
the place(s) specified in the relevant Confirmation or, if not so specified, as
otherwise agreed by the parties in writing or determined pursuant to provisions
contained, or incorporated by reference, in this Agreement, (b) in relation to
any other payment, in the place where the relevant account is located and, if
different, in the principal financial centre, if any, of the currency of such
payment, (c) in relation to any notice or other communication, including notice
contemplated under Section 5(a)(i), in the city specified in the address for
notice provided by the recipient and, in the case of a notice contemplated by
Section 2(b), in the place where the relevant new account is to be located and
(d) in relation to Section 5(a)(v)(2), in the relevant locations for performance
with respect to such Specified Transaction.
"Loss" means, with respect to this Agreement or one or more Terminated
Transactions, as the case may be, and a party, the Termination Currency
Equivalent of an amount that party reasonably determines in good faith to be its
total losses and costs (or gain, in which case expressed as a negative number)
in connection with this Agreement or that Terminated Transaction or group of
Terminated Transactions, as the case may be, including any loss of bargain, cost
of funding or, at the election of such party but without duplication, loss or
cost incurred as a result of its terminating, liquidating, obtaining or
reestablishing any hedge or related trading position (or any gain resulting from
any of them). Loss includes losses and costs (or gains) in respect of any
payment or delivery required to have been made (assuming satisfaction of each
applicable condition precedent) on or before the relevant Early Termination Date
and not made, except so as to avoid duplication, if Section 6(e)(i)(I) or (3) or
6(e)(ii)(2)(A) applies. Loss does not include a party's legal fees and
out-of-pocket expenses referred to under Section Il. A party will determine its
Loss as of the relevant Early Termination Date, or, if that is not reasonably
practicable, as of the earliest date thereafter as is reasonably practicable. A
party may (but need not) determine its Loss by reference to quotations of
relevant rates or prices from one or more leading dealers in the relevant
markets.
"Market Quotation" means, with respect to one or more Terminated Transactions
and a party making the determination, an amount determined on the basis of
quotations from Reference Market-makers. Each quotation will be for an amount,
if any, that would be paid to such party (expressed as a negative number) or by
such party (expressed as a positive number) in consideration of an agreement
between such party (taking into account any existing Credit Support Document
with respect to the obligations of such party) and the quoting Reference
Market-maker
25
to enter into a transaction (the "Replacement Transaction") that would have the
effect of preserving for such party the economic equivalent of any payment or
delivery (whether the underlying obligation was absolute or contingent and
assuming the satisfaction of each applicable condition precedent) by the parties
under Section 2(a)(i) in respect of such Terminated Transaction or group of
Terminated Transactions that would, but for the occurrence of the relevant Early
Termination Date, have been required after that date. For this purpose, Unpaid
Amounts in respect of the Terminated Transaction or group of Terminated
Transactions are to be excluded but, without limitation, any payment or delivery
that would, but for the relevant Early Termination Date, have been required
(assuming satisfaction of each applicable condition precedent) after that Early
Termination Date is to be included. The Replacement Transaction would be subject
to such documentation as such party and the Reference Market-maker may, in good
faith, agree. The party making the determination (or its agent) will request
each Reference Market-maker to provide its quotation to the extent reasonably
practicable as of the same day and time (without regard to different time zones)
on or as soon as reasonably practicable after the relevant Early Termination
Date. The day and time as of which those quotations are to be obtained will be
selected in good faith by the party obliged to make a determination under
Section 6(e), and, if each party is so obliged, after consultation with the
other. If more than three quotations are provided, the Market Quotation will be
the arithmetic mean of the quotations, without regard to the quotations having
the highest and lowest values. If exactly three such quotations are provided,
the Market Quotation will be the quotation remaining after disregarding the
highest and lowest quotations. For this purpose, if more than one quotation has
the same highest value or lowest value, then one of such quotations shall be
disregarded. If fewer than three quotations are provided, it will be deemed that
the Market Quotation in respect of such Terminated Transaction or group of
Terminated Transactions cannot be determined.
"Non-default Rate" means a rate per annum equal to the cost (without proof or
evidence of any actual cost) to the Non-defaulting Party (as certified by it) if
it were to fund the relevant amount.
"Non-defaulting Party" has the meaning specified in Section 6(a).
"Office" means a branch or office of a party, which may be such party's head or
home office.
"Potential Event of Default " means any event which, with the giving of notice
or the lapse of time or both, would constitute an Event of Default.
"Reference Market-makers" means four leading dealers in the relevant market
selected by the party determining a Market Quotation in good faith (a) from
among dealers of the highest credit standing which satisfy all the criteria that
such party applies generally at the time in deciding whether to offer or to make
an extension of credit and (b) to the extent practicable, from among such
dealers having an office in the same city.
26
"Relevant Jurisdiction" means, with respect to a party, the jurisdictions (a) in
which the party is incorporated, organised managed and controlled or considered
to have its seat, (b) where an Office through which the party is acting for
purposes of this Agreement is located, (c) in which the party executes this
Agreement and (d) in relation to any payment, from or through which such payment
is made.
"Scheduled Payment Date" means a date on which a payment or delivery is to be
made under Section 2(a)(i) with respect to a Transaction.
"Set-off" means set-off, offset, combination of accounts, right of retention or
withholding or similar right or requirement to which the payer of an amount
under Section 6 is entitled or subject (whether arising under this Agreement,
another contract, applicable law or otherwise) that is exercised by, or imposed
on, such payer.
"Settlement Amount" means, with respect to a party and any Early Termination
Date, the sum of:- -
(a) the Termination Currency Equivalent of the Market Quotations (whether
positive or negative) for each Terminated Transaction or group of Terminated
Transactions for which a Market Quotation is determined; and
(h) such party's Loss (whether positive or negative and without reference to any
Unpaid Amounts) for each Terminated Transaction or group of Terminated
Transactions for which a Market Quotation cannot be determined or would not (in
the reasonable belief of the party making the determination) produce a
commercially reasonable result.
"Specified Entity" has the meaning specified in the Schedule.
"Specified Indebtedness" means, subject to the Schedule, any obligation (whether
present or future, contingent or otherwise, as principal or surety or otherwise)
in respect of borrowed money.
"Specified Transaction" means, subject to the Schedule, (a) any transaction
(including an agreement with respect thereto) now existing or hereafter entered
into between one party to this Agreement (or any Credit Support Provider of such
party or any applicable Specified Entity of such party) and the other party to
this Agreement (or any Credit Support Provider of such other patty or any
applicable Specified Entity of such other parry) which is a rate swap
transaction, basis swap, forward rate transaction, commodity swap, commodity
option, equity or equity index swap, equity or equity index option, bond option,
interest rate option, foreign exchange
27
transaction, cap transaction, floor transaction, collar transaction, currency
swap transaction, cross-currency rate swap transaction, currency option or any
other similar transaction (including any option with respect to any of these
transactions), (b) any combination of these transactions and (c) any other
transaction identified as a Specified Transaction" in this Agreement or the
relevant confirmation.
"Stamp Tax" means any stamp, registration, documentation or similar tax.
"Tax" means any present or future tax, levy, impost, duty, charge, assessment or
fee of any nature (including interest, penalties and additions thereto) that is
imposed by any government or other taxing authority in respect of any payment
under this Agreement other than a stamp, registration, documentation or similar
tax.
"Tax Event" has the meaning specified in Section 5(b).
"Tax Event Upon Merger" has the meaning specified in Section 5(b).
"Terminated Transactions" means with respect to any Early Termination Date (a)
if resulting from a Termination Event, all Affected Transactions and (b) if
resulting from an Event of Default, all Transactions (in either case) in effect
immediately before the effectiveness of the notice designating that Early
Termination Date (or, if "Automatic Early Termination" applies, immediately
before that Early Termination Date).
"Termination Currency" has the meaning specified in the Schedule.
"Termination Currency Equivalent" means, in respect of any amount denominated in
the Termination Currency, such Termination Currency amount and, in respect of
any amount denominated in a currency other than the Termination Currency (the
"Other Currency"), the amount in the Termination Currency determined by the
party making the relevant determination as being required to purchase such
amount of such Other Currency as at the relevant Early Termination Date, or, if
the relevant Market Quotation or Loss (as the case may be), is determined as of
a later date, that later date, with the Termination Currency at the rate equal
to the spot exchange rate of the foreign exchange agent (selected as provided
below) for the purchase of such Other Currency with the Termination Currency at
or about 11:00 am. (in the city in which such foreign exchange agent is located)
on such date as would be customary for the determination of such a rate for the
purchase of such Other Currency for value on the relevant Early Termination Date
or that later date. The foreign exchange agent will, if only one party is
obliged to make a determination under Section 6(e), be selected in good faith by
that party and otherwise will be agreed by the parties.
28
"Termination Event" means an Illegality, a Tax Event or a Tax Event Upon Merger
or, if specified to be applicable, a Credit Event Upon Merger or an Additional
Termination Event.
"Termination Rate" means a rate per annum equal to the arithmetic mean of the
cost (without proof or evidence of any actual cost) to each party (as certified
by such party) if it were to fund or of funding such amounts.
"Unpaid Amounts" owing to any party means, with respect to an Early Termination
Date, the aggregate of (a) in respect of all Terminated Transactions, the
amounts that became payable (or that would have become payable but for Section
2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early
Termination Date and which remain unpaid as at such Early Termination Date and
(b) in respect of each Terminated Transaction, for each obligation under Section
2(a)(i) which was (or would have been but for Section 2(a)(iii)) required to be
settled by delivery to such party on or prior to such Early Termination Date and
which has not been so settled as at such Early Termination Date, an amount equal
to the fair market value of that which was (or would have been) required to be
delivered as of the originally scheduled date for delivery, in each case
together with (to the extent permitted under applicable law) interest, in the
currency of such amounts, from (and including) the date such amounts or
obligations were or would have been required to have been paid or performed to
(but excluding) such Early Termination Date, at the Applicable Rate. Such
amounts of interest will be calculated on the basis of daily compounding and the
actual number of days elapsed. The fair market value of any obligation referred
to in clause (b) above shall be reasonably determined by the party obliged to
make the determination under Section 6(e) or, if each party is so obliged, it
shall be the average of the Termination Currency Equivalents of the fair market
values reasonably determined by both parties.
IN WITNESS WHEREOF the parties have executed this document on the respective
dates specified below with effect from the date specified on the first page of
this document.
________________________ __________________________
(Name of Party) (Name of Party)
By:_____________________ By:___________________
Name: Name:
Title: Title:
Date: Date:
29
s:\oper\tal\isda.agr
SCHEDULE
to the
MASTER AGREEMENT
dated as of May 21, 1999
between
KNAPE & VOGT MANUFACTURING CO.,
a corporation
organized or formed under the laws of the State of Michigan
("Party A")
and
BANK ONE, MICHIGAN (fka, NBD Bank), a
banking corporation organized under the laws of the State
of Michigan
with its main office located in Detroit, Michigan
("Party B")
Part 1. Termination Provisions and Certain Other Matters
In this Agreement:
(a) "Specified Entity" will apply to Party A and will mean, for purposes of
Sections 5(a)(v), 5(a)(vi), 5(a)(vii) and 5 (b)(ii) of this Agreement, any
Affiliate of Party A and will not apply to Party B.
(b) "Specified Transaction" includes (solely with Party A as a potential
Defaulting Party) with respect to Party A, in addition to the transactions
specified in Section 12 of this Agreement, any transaction between Party A
(or any Affiliate of Party A), on the one hand, and Party B (or any
Affiliate of Party B), on the other, and with respect to Party B shall have
the meaning specified in Section 12 of this Agreement.
(c) "Cross Default" will apply to Party A and shall not have its meaning as
defined in Section 5(a)(vi) of this Agreement but shall instead mean any
default (however described) under the Credit Agreement (hereinafter
defined).
(d) The "Credit Event upon Merger" provisions of Section 5(b)(ii) will apply to
Party A and will not apply to Party B.
(e) The "Automatic Early Termination" provision of Section 6(a) will not apply
to Party A or Party B.
(f) Payments on Early Termination. For the purpose of Section 6(e):
"Market Quotation" and the "Second Method" will apply if the Early
Termination Date results from a Termination Event, provided that "Market
Quotation" in respect of any Terminated Transaction that is, or is subject
to, an unexercised option shall be determined such that the quotation
obtained from Reference
S-1
Market-makers for a Replacement Transaction takes into account, or is made
in respect of, the economic equivalent of the right or rights granted
pursuant to such option.
"Loss" and the "Second Method" will apply if the Early Termination Date
results from an Event of Default.
Part 2. Agreement to Deliver Documents
Documents to be delivered by Party A:
(a) upon execution of this Agreement:
(i) evidence reasonably satisfactory to Party B of Party A's authority to
execute, deliver and perform under this Agreement;
(ii) evidence reasonably satisfactory to Party B of the authority and
genuine signature of the individual(s) executing this Agreement on
behalf of Party A; and
(iii) upon demand by Party B, an opinion of counsel in relation to the
representations made by Party A under Section 3(a), in form and
substance reasonably satisfactory to Party B.
(b) within thirty days after demand by Party B:
(i) evidence reasonably satisfactory to Party B of the authority and
genuine signature of the individual(s) executing any Confirmations
entered into from time to time hereunder on behalf of Party A; and
(ii) copies of audited, publicly available financial statements or call
reports (1) of Party A or, as appropriate, (2) in which Party A's
financial position is consolidated and reported together with that of
certain of its Affiliates.
Part 3. Miscellaneous
(a) Addresses for Notices. For the purpose of Section 10(a) of this Agreement:
Address for notices or communications to Party A:
KNAPE & VOGT MANUFACTURING CO.
2700 Oak Industrial Dr.
Grand Rapids, MI 49505-6083
Attention: Mr. Jack Poindexter, Chief Financial Officer
Telephone No.: (616) 459-3311
Facsimile No.: (616) 459-3467
Address for notices or communications to Party B:
BANK ONE, MICHIGAN (fka, NBD Bank)
c/o The First National Bank of Chicago
One First National Plaza
Chicago, Illinois 60670
Attention: Risk Insurance Division
Suite 0045
Facsimile No.: (312) 732-5645
S-2
(b) Calculation Agent. The Calculation Agent is Party B, unless otherwise
specified in a Confirmation in relation to the relevant Transaction.
(c) Credit Support Document. means, in relation to either party: none
specified.
(d) Credit Support Provider. means, in relation to either party: none
specified.
(e) Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of New York (without reference to
choice of law doctrine).
(f) Waiver of Jury Trial. EACH PARTY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO
TRIAL BY JURY IN ANY LEGAL PROCEEDING IN CONNECTION WITH THIS AGREEMENT OR
ANY TRANSACTION.
(g) Netting of Payments. Section 2(c)(ii) shall apply; provided that either
party may cause payments due on the same day in the same currency (between
the same Offices) but under different Transactions to be discharged and
replaced with a single, netted payment obligation by providing the other
party with a written statement detailing the calculation of such net amount
payable not later than two Business Days prior to the relevant due date.
(h) "Affiliate" means, with respect to each party, any entity that, directly or
indirectly, controls, is controlled by, or is under common control with
such party. For this purpose, a person shall be deemed to "control" any
entity if such person, directly or indirectly or acting through one or more
other persons, (a) owns, controls or has the power to vote 50% or more of
any class of voting securities of such entity, (b) is a general partner of
such entity, (c) controls in any manner the election of a majority of the
directors, trustees or other similar officials of such entity, or (d)
otherwise exercises a controlling influence over the management or policies
of such entity.
Part 4. Other Provisions
(a) Additional Representations. In addition to the representations made in
Section 3 of the Agreement, each party hereby represents and warrants to
the other party (which representations will be deemed to be repeated by
each party on each date on which a Transaction is entered into) as follows:
(i) It qualifies as an "eligible swap participant" under 17 C.F.R. ss.
35.1;
(ii) It is not relying (for purposes of making any investment decision or
otherwise) upon any advice, counsel or representations (whether
written or oral) of the other party to this Agreement, other than the
representations expressly set forth in this Agreement, each Credit
Support Document and in any Confirmation;
(iii) It has consulted with its own legal, regulatory, tax, business,
investment, financial and accounting advisors to the extent it has
deemed necessary, and has made its own investment, hedging and trading
decisions (including decisions regarding the suitability of any
Transaction pursuant to this Agreement) based upon its own judgment
and upon any advice from such advisors as it has deemed necessary and
not upon any view expressed by the other party to this Agreement;
S-3
(iv) It has a full understanding of all the terms, conditions and risks
(economic and otherwise) of this Agreement, each Credit Support
Document and each Transaction, and is capable of assuming and willing
to assume (financially and otherwise) such risks;
(v) It is entering into this Agreement, each Credit Support Document and
each Transaction for the purposes of managing its borrowings or
investments, hedging its underlying assets or liabilities or in
connection with a line of business, and not for purposes of
speculation; and
(vi) It is entering into this Agreement and will enter into all
Transactions as principal and in connection with its business or the
management of its business, and not as agent or in any other capacity,
fiduciary or otherwise.
(b) Set-Off.
(i) Any amount (the "Early Termination Amount") payable to one party (the
"Payee") by the other party (the "Payer") under Section 6(e), in
circumstances where there is a Defaulting Party or one Affected Party
in the case where a Termination Event under Section 5(b)(ii) has
occurred, will, at the option of the party ("X") other than the
Defaulting Party or the Affected Party (and without prior notice to
the Defaulting Party or the Affected Party), be reduced by its set-off
against an amount(s) (the "Other Agreement Amount") payable (whether
at such time or in the future or upon the occurrence of a contingency)
by the Payee to the Payer or any of the Payer's Affiliates
(irrespective of the currency, place of payment or booking office of
the obligation, the "Other Payee") under any other agreement(s)
between the Payee and the Other Payee or instrument(s) or
undertaking(s) issued or executed by one such entity to, or in favor
of, the other (and the Other Agreement Amoun will be discharged
promptly and in all respects to the extent it is so set-off). X will
give notice to the other party of any set-off effected under this Part
4 (b).
(ii) If an obligation is unascertained, X may in good faith estimate that
obligation and set-off in respect of an estimate, subject to the
relevant party accounting to the other when the obligation is
ascertained.
(iii) Nothing in this Part 4 (b) shall be effective to create a security
interest. This Part 4 (b) shall be without prejudice and in addition
to any right of set-off, combination of accounts, lien or other right
to which any party is at any time otherwise entitled (whether by
operation of law, contract or otherwise).
(iv) If the Payer is a Non-defaulting Party and the Payee is a Defaulting
Party, then it shall be a condition precedent to the Payer's
obligation to pay the Early Termination Amount to the Payee that all
Other Agreement Amounts have been paid in full or satisfied by offset
as set forth above.
(c) Recorded Conversations. Each party may electronically record any and all
telephone conversations between itself and the other party in connection
with this Agreement (including any Transaction) and agrees that any such
recordings may be submitted in evidence to any court or in any proceeding
for the purpose of establishing any matters pertinent thereto.
S-4
(d) Incorporation. Each Transaction entered into under this Agreement will be
subject to, and governed by the provisions of, the 1991 ISDA Definitions
(as published by the International Swaps and Derivatives Association, Inc.,
and as supplemented by the 1998 Supplement thereto, the "Definitions"),
without regard to any amendments to the Definitions subsequent to the date
hereof.
(e) Inconsistency. In the event of any inconsistency between the provisions of
this Schedule and the Definitions, this Schedule shall prevail. In the
event of any inconsistency between the provisions of a Confirmation and the
Definitions, the Confirmation shall prevail for purposes of the Transaction
evidenced thereby.
Part 5. Additional Terms
Credit Agreement. Until all of Party A's obligations (whether absolute or
contingent) under this Agreement have been satisfied in full, Party A will at
all times perform, comply with and observe all covenants and agreements of the
Credit Agreement applicable to it, which covenants and agreements, together with
related definitions and ancillary provisions, are hereby incorporated by
reference and, for the avoidance of doubt, shall be construed to apply hereunder
for the benefit of Party B as though (i) all references therein to the party or
parties making loans, extensions of credit or financial accommodations
thereunder or commitments therefor ("Financings") were to Party B and (ii) to
the extent that such covenants and agreements are conditioned on or relate to
the existence of such Financings or Party A having any obligations arising out
of or in connection therewith, all references to such Financings or obligations
were to Party A's obligations under this Agreement.
"Credit Agreement" means that certain Loan Agreement, dated as June 1, 1999,
among Party A, as the Borrower, and Old Kent Bank, as the Bank, as the same
exists on the date of execution of this Agreement and without regard to (i) any
termination or cancellation thereof, whether by reason of payment of all
indebtedness incurred thereunder or otherwise, or (ii) unless consented to in
writing by Party B, any amendment, modification, addition, waiver or consent
thereto or thereof.
IN WITNESS WHEREOF, the parties have executed this Schedule by their duly
authorized officers as of the date hereof.
KNAPE & VOGT MANUFACTURING CO. BANK ONE, MICHIGAN (fka, NBD Bank)
By: _______________________ By: ____________________________
Name: _____________________ Name: __________________________
Title: ____________________ Title: _________________________
S-5
TO: KNAPE & VOGT MANUFACTURING CO.
ATTN: Swaps Administration
FAX NO.: 616-459-3467
FROM: BANK ONE, MI
DATE: 21 May 1999
RE. OUR REF: 21377
The purpose of this letter agreement is to confirm the terms and conditions of
the Transaction entered into between KNAPE & VOGT MANUFACTURING CO and BANK ONE,
MI on the Trade Date specified below. This Transaction shall be governed by the
International Swaps and Derivatives Association Inc. ((a)ISDA) Master Agreement
((a)Master Agreement) with a first draft of a Schedule thereto to be provided by
BANK ONE, MI. This letter shall evidence a binding Agreement between the parties
until such time as the Master Agreement is executed, and upon its execution
shall become a Confirmation thereunder. Terms used and not otherwise defined
herein shall have their meaning defined in the 1991 ISDA Definitions (as
supplemented by the 1998 Supplement and further amended and supplemented by the
1998 ISDA Euro Definitions) (the "Definitions"), as published by the
International Swaps and Derivatives Association Inc. The definitions and
provisions contained in the 1991 ISDA Definitions are incorporated into this
Confirmation. In the event of any inconsistency between the Definitions and
provisions and this Confirmation, this Confirmation will govern.
If you and we are not parties to a Master Agreement, then you and we agree to
use our best efforts to negotiate promptly, execute and deliver a Master
Agreement including a standard form of Schedule attached thereto and made a part
thereof, with such modifications as you and we shall in good faith agree. Upon
execution and delivery by you and us of a Master Agreement, this Confirmation
shall supplement, form a part of and be subject to such Master Agreement. Until
you and we execute and deliver a Master Agreement, this Confirmation shall
supplement, form part of and be subject to the Master Agreement published by the
International Swap and Derivatives Association Inc., as if you and we had
executed that Agreement (but without any Schedule thereto). However,
notwithstanding the foregoing, until such Master Agreement is executed, the
Termination Currency shall be United States Dollars and the Governing Law shall
be the laws of England. After such Master Agreement is executed the Termination
Currency and Governing Law shall be those stated within the Schedule to the
Master Agreement.
TERM
- - ----
TRADE DATE: 21 May 1999
EFFECTIVE DATE: 1 June 1999
TERMINATION DATE: 1 June 2006, subject to adjustment in accordance
with the Modified Following Business Day Convention.
NOTIONAL AMOUNT: The following amounts corresponding to the following
respective periods (dates subject to the Business Day
Convention specified below):
Period(from and including to but excluding) Amount
1 June 1999 1 September 1999 USD 17,000,000.00
1 September 1999 1 June 2006 USD 20,000,000.00
FIXED AMOUNTS
- - -------------
FIXED RATE PAYER: KNAPE & VOGT MANUFACTURING CO
FIXED RATE PAYER
PAYMENT DATES: Each 1 March, 1 June, 1 September, 1 December from
and including 1 September 1999, to and including 1 June
2006, subject to adjustment in accordance with the
Modified Following Business Day Convention.
FIXED RATE: 6.25%
FIXED RATE DAY
COUNT FRACTION: Actual/360
ROUNDING CONVENTION: As per ISDA
FLOATING AMOUNTS
- - ----------------
FLOATING RATE PAYER: BANK ONE, MI
FLOATING RATE PAYER
PAYMENT DATES: Each 1 March, 1 June, 1 September, 1 December
from and including 1 September 1999, to and
including 1 June 2006, subject to adjustment
in accordance with the Modified Following
Business Day Convention.
FLOATING RATE FOR INITIAL
CALCULATION PERIOD: 5.05125%
FLOATING RATE OPTION: USD-LIBOR-BBA
DESIGNATED MATURITY: 3 Months
FLOATING RATE DAY COUNT
FRACTION: Actual/360
RESET DATES: The first day of each Calculation Period
ROUNDING CONVENTION: As per ISDA
BUSINESS DAYS: London, New York
ADDITIONAL PROVISIONS
- - ---------------------
NEGATIVE INTEREST RATES: Applicable
ACCOUNT DETAILS
- - ---------------
Payments to KNAPE & VOGT MANUFACTURING CO in USD:
***TO BE ADVISED***
Payments to BANK ONE, MI in USD:
PAY TO: BANK ONE, DETROIT
ABA NUMBER: 072000326
FOR THE ACCOUNT OF: BANK ONE
ACCOUNT NUMBER: 1059907270
ATTN OR REF:
OFFICES
- - -------
(a) The Office of BANK ONE in Detroit
(b) The Office of KNAPE & VOGT MANUFACTURING CO in
Dealing with Confirmations on our behalf:
Kevin Doyle 312-732-2148
Dealing with Settlements on our behalf:
Matt Ruona 312-732-4333
Please confirm that the foregoing correctly sets forth the terms of our
agreement by executing this letter and returning it via facsimile to
312-336-4403.
Yours sincerely,
BANK ONE, MI
By: __________________________
Name: Dianne Schuyler
Title: Assistant Vice President
By: __________________________
Name: ________________________
Title: _______________________
Confirmed as of the date first above written:
KNAPE & VOGT MANUFACTURING CO
By: _______________________________
Name: _____________________________
Title: ____________________________
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)
EXHIBIT 23
Consent of Independent Certified Public Accountants
We hereby consent to the incorporation by reference of our reports dated July
30, 1999, 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, 1999, in that corporation's
previously filed Form S-8 Registration Statements (file numbers 33-20227,
33-43704, 33-88206 and 33-88212).
BDO Seidman, LLP
Grand Rapids, Michigan
September 15, 1999