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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 September 30, 1998 Commission File Number 1-9897
VALLEY FORGE CORPORATION
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(Exact name of Registrant as specified in its charter)
DELAWARE 58-0833796
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(State of incorporation) (IRS Employer Identification Number)
100 Smith Ranch Road, Suite 326, San Rafael, California 94903-1994
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(Address of principal executive offices) (Zip code)
(415) 492-1500
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(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 November 10, 1998, was 4,138,839.
The Exhibit Index is located on Page 2.
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VALLEY FORGE CORPORATION AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended September 30, 1998
INDEX
<TABLE>
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Page
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<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Consolidated Statements of Income for the Three
and Nine Months Ended September 30, 1998 and 1997 3
b) Condensed Consolidated Balance Sheets at September 30, 1998,
and December 31, 1997 4
c) Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 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 10
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
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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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES $ 26,631 $ 22,366 $ 82,084 $ 69,398
Cost of goods sold 16,384 13,529 49,618 41,237
-------- -------- -------- --------
GROSS PROFIT 10,247 8,837 32,466 28,161
Selling and administrative 7,927 6,998 24,279 21,328
-------- -------- -------- --------
OPERATING INCOME 2,320 1,839 8,187 6,833
Other income (expense):
Interest expense (274) (282) (852) (910)
Other, net 19 38 271 182
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES
AND MINORITY INTERESTS 2,065 1,595 7,606 6,105
Income taxes 729 631 2,890 2,412
Minority interests 91 (1) 142 11
-------- -------- -------- --------
NET INCOME $ 1,245 $ 965 $ 4,574 $ 3,682
======== ======== ======== ========
Basic earnings per share $ .30 $ .24 $ 1.11 $ .92
DILUTED EARNINGS PER SHARE $ .30 $ .23 $ 1.08 $ .88
Basic weighted average shares outstanding 4,110 4,041 4,108 4,024
Diluted weighted average shares outstanding 4,233 4,249 4,252 4,197
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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VALLEY FORGE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS
Accounts receivable, net $13,851 $13,935
Inventories, net 23,547 19,121
Other current assets 2,506 2,258
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Total current assets 39,904 35,314
Property, plant, and equipment, net 11,491 10,683
Goodwill, net 11,098 11,762
Investment in and advances to affiliate 3,268 3,054
Other assets 1,213 1,137
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TOTAL ASSETS $66,974 $61,950
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Loans and notes payable $ 2,995 $ 1,065
Current portion of long-term debt 1,221 4,385
Accounts payable and accrued expenses 10,562 9,408
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Total current liabilities 14,778 14,858
Long-term debt 8,846 8,268
Deferred income taxes 889 815
Minority interests 1,440 1,375
Stockholders' equity 41,021 36,634
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $66,974 $61,950
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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VALLEY FORGE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
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<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,830 $ 4,495
INVESTING ACTIVITIES
Additions to property, plant, and equipment (2,661) (2,160)
Investment in and advances to affiliate -- (312)
Other, net (259) (148)
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Net cash used for investing activities (2,920) (2,620)
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FINANCING ACTIVITIES
Net borrowings (repayments) on line of credit 2,430 (120)
Proceeds from long-term obligations 1,755 --
Principal payments on long-term debt (4,340) (1,328)
Net payments on short-term notes (500) --
Stock options exercised 364 206
Dividends paid (619) (485)
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Net cash used for financing activities (910) (1,727)
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CHANGE IN CASH AND EQUIVALENTS -- 148
Cash and equivalents at beginning of year -- --
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CASH AND EQUIVALENTS AT END OF PERIOD $ -- $ 148
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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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>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
<S> <C> <C>
INVENTORIES
Raw materials $10,777 $ 9,395
Work-in-process 3,760 2,815
Finished goods 9,010 6,911
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Total Inventories, net $23,547 $19,121
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</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 total monthly payments of principal and interest of
approximately $14,000 through April 1, 2008. The remaining unpaid principal and
interest are due in full on May 1, 2008. 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------------ ------------------ ------------------ ------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income $1,245 $1,245 $ 965 $ 965 $4,574 $4,574 $3,682 $3,682
====== ====== ====== ====== ====== ====== ====== ======
Weighted average
shares outstanding 4,110 4,110 4,041 4,041 4,108 4,108 4,024 4,024
Common equivalent shares -- 123 -- 208 -- 144 -- 173
------ ------ ------ ------ ------ ------ ------ ------
Total shares 4,110 4,233 4,041 4,249 4,108 4,252 4,024 4,197
====== ====== ====== ====== ====== ====== ====== ======
Earnings per share $ .30 $ .30 $ .24 $ .23 $ 1.11 $ 1.08 $ .92 $ .88
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
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NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net income $ 1,245 $ 965 $ 4,574 $ 3,682
Other comprehensive loss-- foreign currency
translation adjustments (98) (1) (160) (47)
------- ------- ------- -------
Comprehensive income $ 1,147 $ 964 $ 4,414 $ 3,635
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</TABLE>
In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 132 "Employers' Disclosures about Pension and Other Post-Retirement
Benefits," which standardizes the disclosure requirements for pensions and other
post-retirement benefits and expands disclosures on changes in benefit
obligations and fair values of plan assets. Adoption of this statement will not
impact the Company's consolidated financial position, results of operations or
cash flows, and any effect will be limited to the form and content of its
disclosures. This statement is effective for the Company's fiscal year ending
December 31, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which standardizes the accounting for
derivatives, requiring recognition as either assets or liabilities on the
balance sheet and measurement at fair value. Currently, the Company does not
have any derivative instruments or hedging activities. This statement is
effective for the Company's fiscal year ending December 31, 2000.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
VALLEY FORGE CORPORATION AND SUBSIDIARIES
September 30, 1998
Any forward-looking statements contained in the following discussion or
elsewhere in this document involve risks and uncertainties that 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 ($2.4 million, net), net cash provided
by operations ($3.8 million, net) and proceeds from long-term obligations ($1.8
million) to invest in property, plant and equipment ($2.7 million) and make
payments on its long-term obligations ($4.3 million). Management believes that
cash flow from operations and bank borrowings will be adequate to meet the
Company's working capital needs for the ensuing year.
RESULTS OF OPERATIONS
REVENUES AND RELATED COSTS
Consolidated revenues increased $4.3 million (19.1%) in the quarter ended
September 30, 1998, over the same quarter in the prior year, with recreational
products segment sales increasing 16.1% and the industrial products segment
increasing 22.2%. Revenues for the first nine months of 1998 increased $12.7
million (18.3%) over the first nine months of 1997, with the recreational
products segment increasing 15.9% and the industrial products segment increasing
21.2%.
Gross profits for the quarter and nine months ended September 30, 1998 increased
$1.4 million (16.0%) and $4.3 million (15.3%), respectively, over the comparable
periods in 1997. The increase in sales and related gross profits for the quarter
and nine months ended September 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 1.0
percentage point from 39.5% in 1997 to 38.5% in 1998 and for the nine-month
period decreased 1.0 percentage point from 40.6% in 1997 to 39.6% 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. In addition, the gross margin percentage in the recreational segment
was lower for the quarter ended September 30, 1998 compared to the same quarter
in the prior year due mainly to sales price reductions at one subsidiary to
maintain market share.
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SELLING AND ADMINISTRATIVE EXPENSES
Consolidated selling and administrative expenses increased $0.9 million (13.3%)
for the quarter and $3.0 million (13.8%) for the first nine 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 from
31.3% for the third quarter of 1997 to 29.8% for the third quarter of 1998. For
the first nine months, selling and administrative expenses as a percentage of
sales decreased from 30.7% for 1997 to 29.6% 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
The Company uses computer hardware and software to maintain financial and
business records. Some of the Company's subsidiaries employ computer and related
technology in the manufacturing process. Mechanical, support, and other services
employed by the Company use software and embedded microprocessor technology. All
of these computers, software, and embedded technologies are susceptible to the
"Year 2000" problem, which means that software and microprocessors may report
January 1, 2000, as January 1, 1900, or other incorrect twentieth century dates.
Incorrect dating would make it difficult and costly for the Company to conduct
business.
The Company began assessing the Year 2000 readiness of its computer hardware and
software in early 1998. Based upon the assessments, subsidiaries began upgrading
their hardware and software, and as of September 30, 1998, the corporate office
and 2 of the subsidiaries believed that their essential business and production
hardware and software was Year 2000 compliant. Through that date, the Company
had expended approximately $30,000 in the effort to become Year 2000 compliant.
The Company expects that by December 31, 1998, an additional 5 subsidiaries will
have achieved Year 2000 readiness of essential business and production hardware
and software, and that the remaining subsidiaries will have installed upgraded
computer hardware and software by June 30, 1999. Each of the subsidiaries will
conduct full system tests of mission critical systems during 1999, as early in
the year as is feasible.
The Company has begun the process of identifying and assessing its embedded
technology Year 2000 readiness and anticipates that the assessment will be
completed by the majority of its subsidiaries by March 31, 1999. The Company is
not now able to estimate the costs it will incur to assess, upgrade and test
embedded technology. The costs expended will consist primarily of the use of
internal personnel to assess and test any embedded technology that exists.
A few of the Company's subsidiaries have begun to confirm the readiness of their
major suppliers, customers, banking institutions, and other service providers to
determine their Year 2000 readiness and the remainder will initiate the
assessment during the first half of 1999. The Company is unable at this time to
evaluate the accuracy of the information it has received from third parties
during the assessment process that has taken place to date. The Company could be
adversely affected if its suppliers' and customers' systems, including their
ordering, billing, and inventory systems, cannot function properly. The Company
would also be adversely affected if public utilities, telephone companies, and
other service providers were unable to provide reliable service beginning
January 1, 2000.
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The Company has not yet prepared contingency plans to deal with third parties'
failure to achieve Year 2000 compliance. The Company expects that it will begin
developing such plans in early 1999, where such contingency planning is
feasible. The effectiveness of these plans will, however, depend on the
magnitude and effects of Year 2000 noncompliance in the business community and
elsewhere.
The Company estimates that through December 31, 1999, it will spend between
$150,000 and $200,000 (including the approximately $30,000 spent through
September 30, 1998) to prepare its computer hardware and software for Year 2000
compliance. The Company has not included any allocated employee compensation,
benefit, and overhead expense in this estimate, nor amounts for the upgrades of
embedded technology, which are not fully identified. Total costs to achieve Year
2000 compliance could, therefore, exceed the $200,000 estimated above.
In summary, the Company expects that the computer hardware and software that it
uses for production and business record keeping will be substantially Year 2000
compliant by early 1999. The Company is unable today to determine when its
embedded technology will be compliant and it is unable to estimate the extent
and effect of third parties' noncompliance. As a result, there is a risk that
the Company will be materially and adversely affected, particularly if third
parties do not achieve compliance.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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VALLEY FORGE CORPORATION AND SUBSIDIARIES
Part II Other Information
For the Quarter Ended September 30, 1998
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits required by Item 601 of Registration S-K:
Exhibit 3.1 - Certificate of Incorporation (incorporated by reference to
Exhibit B to Proxy Statement filed on Form DEF 14A dated May 1, 1997,
Commission File No. 001-09897)
Exhibit 3.2 - Certificate of Amendment of Certificate of Incorporation
Exhibit 3.3 -- By-Laws of the Corporation (incorporated by reference to
Exhibit C to Proxy Statement filed on Form DEF 14A dated May 1, 1997,
Commission File No. 001-09897)
b) Reports on Form 8-K:
None
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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: November 13, 1998 /s/
-----------------------------------------
Monica J. Burke
CFO and Vice President Finance
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Exhibit 3.2
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
VALLEY FORGE CORPORATION
VALLEY FORGE CORPORATION, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify:
The amendment to the Corporation's Certificate of Incorporation set
forth in the following resolution approved by the Corporation's Board of
Directors and Stockholders on April 15, 1998 and June 10, 1998, respectively,
was duly adopted in accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware:
RESOLVED, that Article IV of the Corporation's Certificate of
Incorporation be, and hereby is, amended to read as follows:
The Corporation is authorized to issue two classes of capital
stock, designated Common Stock and Preferred Stock. The total number of
shares of stock which the Corporation shall have authority to issue is
Eleven Million (11,000,000) shares, consisting of Ten Million
(10,000,000) shares of Common Stock, par value $.50 (the "COMMON
STOCK") and One Million (1,000,000) shares of Preferred Stock, par
value $.01 (the "PREFERRED STOCK"). Shares of Common Stock and
Preferred Stock are referred to herein as the "SHARES."
IN WITNESS WHEREOF, Valley Forge Corporation has caused this
Certificate to be signed by its duly authorized officer, this 20th day of
August, 1998.
VALLEY FORGE CORPORATION
By: /s/
-------------------------------------
David R. Brining, President
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 14,164
<ALLOWANCES> 313
<INVENTORY> 23,547
<CURRENT-ASSETS> 39,904
<PP&E> 27,756
<DEPRECIATION> 16,265
<TOTAL-ASSETS> 66,974
<CURRENT-LIABILITIES> 14,778
<BONDS> 0
0
0
<COMMON> 2,073
<OTHER-SE> 38,948
<TOTAL-LIABILITY-AND-EQUITY> 66,974
<SALES> 82,084
<TOTAL-REVENUES> 82,084
<CGS> 49,618
<TOTAL-COSTS> 49,618
<OTHER-EXPENSES> 24,279
<LOSS-PROVISION> 59
<INTEREST-EXPENSE> 852
<INCOME-PRETAX> 7,606
<INCOME-TAX> 2,890
<INCOME-CONTINUING> 4,574
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,574
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.08
</TABLE>
