<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1998 Commission File Number 1-9897
VALLEY FORGE CORPORATION
------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 58-0833796
-------- ----------
(State of incorporation) (IRS Employer Identification Number)
100 Smith Ranch Road, Suite 326, San Rafael, California 94903-1994
------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(415) 492-1500
--------------
(Registrant's telephone number, including area code)
Indicate by a 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 [ ]
The number of shares outstanding of Registrant's Common Stock, par value $.50
per share, at August 10, 1998, was 4,132,089.
The Exhibit Index is located on Page 2.
================================================================================
<PAGE> 2
VALLEY FORGE CORPORATION AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended June 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1998 and 1997 3
b) Condensed Consolidated Balance Sheets at June 30, 1998,
and December 31, 1997 4
c) Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997 5
d) Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 9
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
</TABLE>
2
<PAGE> 3
Part I Financial Information
Item 1. Financial Statements
VALLEY FORGE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES $ 29,180 $ 24,540 $ 55,453 $ 47,032
Cost of goods sold 17,585 14,382 33,234 27,708
-------- -------- -------- --------
GROSS PROFIT 11,595 10,158 22,219 19,324
Selling and administrative 8,486 7,475 16,352 14,330
-------- -------- -------- --------
OPERATING INCOME 3,109 2,683 5,867 4,994
Other income (expense):
Interest expense (287) (318) (578) (628)
Other, net 199 93 252 144
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES
AND MINORITY INTERESTS 3,021 2,458 5,541 4,510
Income taxes 1,178 971 2,161 1,781
Minority interests 20 (20) 51 12
-------- -------- -------- --------
NET INCOME $ 1,823 $ 1,507 $ 3,329 $ 2,717
======== ======== ======== ========
Basic earnings per share $ .44 $ .38 $ .81 $ .68
DILUTED EARNINGS PER SHARE $ .43 $ .36 $ .78 $ .65
Basic weighted average shares outstanding 4,120 4,018 4,107 4,015
Diluted weighted average shares outstanding 4,270 4,188 4,261 4,172
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
VALLEY FORGE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Accounts receivable, net $15,269 $13,935
Inventories 21,642 19,121
Other current assets 2,086 2,258
------- -------
Total current assets 38,997 35,314
Property, plant, and equipment, net 11,233 10,683
Goodwill, net 11,316 11,762
Investment in and advances to affiliate 3,238 3,054
Other assets 1,170 1,137
------- -------
TOTAL ASSETS $65,954 $61,950
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Loans and notes payable $ 3,195 $ 1,065
Current portion of long-term debt 1,565 4,385
Accounts payable and accrued expenses 10,079 9,408
------- -------
Total current liabilities 14,839 14,858
Long-term debt 8,853 8,268
Deferred income taxes 889 815
Minority interests 1,347 1,375
Stockholders' equity 40,026 36,634
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $65,954 $61,950
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
VALLEY FORGE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
------- -------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,060 $ 2,900
INVESTING ACTIVITIES
Additions to property, plant, and equipment (1,690) (1,655)
Investment in and advances to affiliate -- (312)
Other, net (181) (127)
------- -------
Net cash used for investing activities (1,871) (2,094)
------- -------
FINANCING ACTIVITIES
Net borrowings on line of credit 2,630 655
Proceeds from long-term obligations 1,755 --
Principal payments on long-term debt (3,990) (1,220)
Net payments on short-term notes (500) --
Stock options exercised 328 80
Dividends paid (412) (321)
------- -------
Net cash used for financing activities (189) (806)
------- -------
CHANGE IN CASH AND EQUIVALENTS -- --
Cash and equivalents at beginning of year -- --
------- -------
CASH AND EQUIVALENTS AT END OF PERIOD $ -- $ --
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
VALLEY FORGE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited, in thousands, except per share amounts)
BASIS OF PRESENTATION
All adjustments, which are in the opinion of management necessary to a fair
presentation of results for the interim periods, have been included herein. All
adjustments are of a normal and recurring nature. Certain reclassifications have
been made to the 1997 condensed consolidated financial statements to conform to
the 1998 presentation. These financial statements are presented in accordance
with the Securities and Exchange Commission disclosure requirements for Form
10-Q. Reference should be made to the Valley Forge Corporation Annual Report on
Form 10-K for the year ended December 31, 1997.
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
INVENTORIES
Raw materials $10,449 $ 9,395
Work-in-process 3,835 2,815
Finished goods 7,358 6,911
------- -------
Total Inventories $21,642 $19,121
======= =======
</TABLE>
LONG-TERM OBLIGATIONS
In April 1998, the Company arranged for long-term financing at 7.66% on
borrowings totaling $1,755,000 secured by two operating facilities. The two
mortgages require monthly payments including interest, are due in 2008, and
require balloon payments upon maturity. The proceeds from the loans were used to
pay down a term loan due in June 1998.
EARNINGS PER SHARE
Basic and diluted earnings per share are calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------ ------------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income $1,823 $1,823 $1,507 $1,507 $3,329 $3,329 $2,717 $2,717
====== ====== ====== ====== ====== ====== ====== ======
Weighted average
shares outstanding 4,120 4,120 4,018 4,018 4,107 4,107 4,015 4,015
Common equivalent shares -- 150 -- 170 -- 154 -- 157
------ ------ ------ ------ ------ ------ ------ ------
Total shares 4,120 4,270 4,018 4,188 4,107 4,261 4,015 4,172
====== ====== ====== ====== ====== ====== ====== ======
Earnings per share $ .44 $ .43 $ .38 $ .36 $ .81 $ .78 $ .68 $ .65
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
6
<PAGE> 7
NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" which requires that all items
required to be recognized as components of comprehensive income be reported in
the financial statements. The Company's total comprehensive income was as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 1,823 $ 1,507 $ 3,329 $ 2,717
Other comprehensive loss - foreign
currency translation adjustments (59) (19) (66) (46)
------- ------- ------- -------
Comprehensive income $ 1,764 $ 1,488 $ 3,263 $ 2,671
======= ======= ======= =======
</TABLE>
7
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
VALLEY FORGE CORPORATION AND SUBSIDIARIES
June 30, 1998
Any forward-looking statements contained in the following discussion or
elsewhere in this document involve risks and uncertainties which may cause
actual results to differ materially from those discussed. A wide range of
factors could contribute to those differences, including but not limited to
general business conditions; actions of competitors; changes in laws and
regulations, including changes in accounting standards; inventory risks due to
shifts in market demand and/or product mix; price volatility in the cost of
purchased components; and the risk factors listed from time to time in the
Company's SEC reports.
Due to seasonal variations, the results of operations for the periods reported
are not necessarily indicative of the entire year.
FINANCIAL CONDITION
The Company used its bank line of credit ($2.6 million, net), net cash provided
by operations ($2.1 million, net) and proceeds from long-term obligations ($1.8
million) to invest in property, plant and equipment ($1.7 million) and make
payments on its long-term obligations ($4.0 million). Management believes that
cash flow from operations and bank borrowings will be adequate to meet the
Company's working capital needs for the foreseeable future.
RESULTS OF OPERATIONS
REVENUES AND RELATED COSTS
Consolidated revenues increased $4.6 million (18.9%) in the quarter ended June
30, 1998, over the same quarter in the prior year, with recreational products
segment sales increasing 18.2% and the industrial products segment increasing
19.8%. Revenues for the first half of 1998 increased $8.4 million (17.9%) over
the first half of 1997, with the recreational products segment increasing 15.8%
and the industrial products segment increasing 20.6%.
Gross profits for the quarter and six months ended June 30, 1998 increased $1.4
million (14.1%) and $2.9 million (15.0%), respectively, over the comparable
periods in 1997. The increase in sales and related gross profits for the quarter
and six months ended June 30, 1998, respectively, was due principally to
increased unit volume on existing products and in part due to new product
introductions.
The consolidated gross profit margin percentage for the quarter decreased 1.7
percentage points from 41.4% in 1997 to 39.7% in 1998 and for the six-month
period decreased 1.0 percentage point from 41.1% in 1997 to 40.1% in 1998. The
main reason for the decrease in both the quarter and year to date periods is the
change in product mix in the industrial products segment to lower margin
products.
SELLING AND ADMINISTRATIVE EXPENSES
Consolidated selling and administrative expenses increased $1.0 million (13.5%)
for the quarter and $2.0 million (14.1%) for the first six months of 1998 over
the same periods in the prior year primarily as a result of increased sales.
Selling and administrative expenses as a percentage of sales decreased
8
<PAGE> 9
from 30.5% for the second quarter of 1997 to 29.1% for the second quarter of
1998. For the first six months, selling and administrative expenses as a
percentage of sales decreased from 30.5% for 1997 to 29.5% for 1998. Overall the
company's selling expenses have generally varied with sales, whereas
administrative expenses have a more fixed cost component and have not increased
proportionately with sales.
YEAR 2000 COMPLIANCE
During the first six months of 1998, the Company has not incurred significant
costs (less than $25,000) for either its internal information technology (IT)
systems or non-IT systems that would include embedded technology such as
microcontrollers. As disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, the Company expects to spend between $150,000
to $200,000 during 1998 and 1999 on software upgrades and a system replacement
to make its core systems Year 2000 compliant. There has been no change in
management's estimate of such costs.
With respect to its internal information technology, the majority of the
subsidiaries in the Valley Forge group will make their main system upgrades
during the last half of 1998. These subsidiaries have already identified with
their software suppliers the availability and cost of upgrades and plan to
install them as soon as they are available. One subsidiary plans to convert to a
Year 2000 compliant system at the end of the first quarter of 1999. All the
subsidiaries in the Valley Forge group either have already, or plan to, assess
their non-IT systems for potential Year 2000 problems during the last half of
1998.
Approximately half of the Valley Forge subsidiaries have already made an
assessment of the Year 2000 readiness with respect to third parties with which
they have a material relationship. The remainder of our subsidiaries plan to
complete this process during the last half of 1998. However, there can be no
assurance that the systems of other parties upon which the Company's businesses
rely will be converted on a timely basis. Furthermore, no assurance can be given
that any or all of the Company's systems are or will be Year 2000 compliant, or
that the ultimate costs required to address the Year 2000 issue or the impact of
any failure to achieve substantial Year 2000 compliance will not have a material
adverse effect on the Company's financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
9
<PAGE> 10
VALLEY FORGE CORPORATION AND SUBSIDIARIES
Part II Other Information
For the Quarter Ended June 30, 1998
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits required by Item 601 of Registration S-K:
None
b) Reports on Form 8-K:
None
10
<PAGE> 11
VALLEY FORGE CORPORATION AND SUBSIDIARIES
Signatures
Pursuant to the requirements 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.
VALLEY FORGE CORPORATION
Registrant
Date: August 12, 1998 /s/
-----------------------------------------
Monica J. Burke
CFO and Vice President Finance
11
<PAGE> 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------ ----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 15,573
<ALLOWANCES> 304
<INVENTORY> 21,642
<CURRENT-ASSETS> 38,997
<PP&E> 27,074
<DEPRECIATION> 15,841
<TOTAL-ASSETS> 65,954
<CURRENT-LIABILITIES> 14,839
<BONDS> 0
0
0
<COMMON> 2,073
<OTHER-SE> 37,953
<TOTAL-LIABILITY-AND-EQUITY> 65,954
<SALES> 55,453
<TOTAL-REVENUES> 55,453
<CGS> 33,234
<TOTAL-COSTS> 33,234
<OTHER-EXPENSES> 16,352
<LOSS-PROVISION> 49
<INTEREST-EXPENSE> 578
<INCOME-PRETAX> 5,541
<INCOME-TAX> 2,161
<INCOME-CONTINUING> 3,329
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,329
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.78
</TABLE>
