EVA®

Two years ago, we introduced the Economic Value Added (EVA) philosophy to our Company. As you may remember, EVA is the after-tax operating profit that remains after subtracting the cost of capital employed to generate that profit. EVA continues to guide our daily business decisions from capital investment opportunities to cost saving strategies. In addition, all of our employees were converted to EVA-based incentive plans during fiscal 1999. We believe that this will encourage all of our employees to think and act like owners and identify those opportunities which create value.

Applying the EVA philosophy, on September 1, 1998, we sold Hirsh, the last of our under performing subsidiaries. We were disappointed in the fact that we were not able to correct the problems that Hirsh had encountered. However, we're now able to focus on the core business that made Knape & Vogt a great company. The sale of Hirsh generated over $18 million of cash. Initially, we utilized the cash to repay all of our outstanding debt. Not that we believe all debt is bad. If you look at the after-tax cost of debt and compare it to the expected return on capital provided by a shareholder, which we believe is significantly higher, it looks very good. That left us with three choices regarding what to do with the cash on hand and the debt levels that we were comfortable maintaining. One option would have been to channel the cash into acquisitions. At that time, however, we did not have any specific acquisition targets and felt we would have enough debt capacity available to us to fund any acquisitions identified at a later date. Our second option would have been to give the cash back to our shareholders in the form of a dividend. This option had several negatives, including the fact that we would be forcing the cash back to all shareholders at a potentially high tax rate. The third option was to use the cash to fund a stock buy-back. This was the option we selected. This gave the shareholder the option of taking the cash or leaving it in the Company to be reinvested. If you, as a shareholder, decided not to sell your shares, your ownership of the Company would go up by the percentage of the shares that we repurchased. If you did decide to sell some or all of your shares, you were the one making the decision, not us, and you would be taxed using the capital gains rate, which in most instances would be a more favorable tax rate. We were able to repurchase over 25% of the Company's outstanding shares during this past year.