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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 September 30, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. [FEE REQUIRED]
For the transition period from ____________________ to
________________
Commission File Number: 001-10382
VALLEY FORGE SCIENTIFIC CORP.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2131580
(State or other jurisdiction of (I.R.S.
employer
incorporation or organization) identification
no.)
136 Green Tree Road, Oaks, Pennsylvania 19456
(Address of principal executive offices and zip code)
Telephone: (610) 666-7500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
Common Stock, no par value Boston Stock
Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 non-affiliates of
the registrant, computed by reference to the
closing bid and ask prices as reported by the NASDAQ system on
December 16, 1997 as $17,714,332.
At December 16, 1997 there were 8,229,384 shares of the
Registrant's Common Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
As stated in Part III of this annual report on Form 10-K,
portions of the following documents are incorporated herein by reference:
Definitive Proxy Statement for the Annual Meeting of Stockholders of the
Registrant, or an Amendment to this Annual Report on Form 10-K, to be filed
within 120 days after the end of the fiscal year covered by this Annual ReporT
on Form 10-K.
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PART I
Item 1. BUSINESS
Nature of Business
Valley Forge Scientific Corp. and its subsidiaries (collectively
referred to as the "Company") is principally engaged in the development
and manufacture of medical devices and other health care products. The
Company is a leading manufacturer of bipolar electrosurgical
products. Through its new generation of products, the Company is broadening
the market for its products from neurosurgery and other microsurgery
disciplines into other surgical fields. The Company sells its products to or
through national and international distributors, which include affiliates of
major health care corporations. The Company was incorporated in the
Commonwealth of Pennsylvania on March 27, 1980.
The Company's principal products consist of bipolar electrosurgical
systems and related products and accessories. These bipolar electrosurgical
systems are based on patented circuitry and allow a surgeon to coagulate blood
vessels and/or cut tissue. Bipolar coagulation and cutting are conducted
through the use of a surgical hand-held instrument, which is connected via a
bipolar cord to the solid state microprocessor controlled generator.
In bipolar electrosurgery, the current flow occurs at the tips of a
bipolar instrument. This is quite different from conventional monopolar
electrosurgical systems, in which the current passes from an active pen
electrode through the patient to a grounding pad which acts as a dispersive
electrode. The Company's bipolar electrosurgical systems enable a surgeon to
bloodlessly cut, core and divide tissue without the use of a grounding
pad and its inherent safety hazards.
To provide irrigation for the bipolar electrosurgical systems, the
Company also manufactures and sells the MALIS* Irrigation System. The
irrigation system provides controlled irrigation for bipolar cutting and
coagulation in a wet surgical field. The disposable MALIS* bipolar
cord/irrigation tubing set ("C/T Set"), which is manufactured and sold by
the Company, is used to connect a surgical hand-held instrument to both the
irrigation module and the bipolar electrosurgical generator.
The Company has developed bipolar instruments which are to be
used with the Company's bipolar electrosurgical generators for hospital and
office procedures in the fields of neurosurgery, gynecology, urology,
arthroscopy, laparoscopy and plastic surgery. The bipolar instruments are
connected to the bipolar electrosurgical generator through a C/T Set or a
bipolar cord.
The Company also manufactures and sells a disposable cardiopulmonary
resuscitation (CPR) mask system, surgical magnifying loupes, a microsurgical
stool and titanium surgical mesh.
Of the Company's sales of $3,977,965 in fiscal 1997,approximately 92%
were made to Johnson & Johnson Professional, Inc. ("J & J"), formerly known
as Codman & Shurtleff, Inc., as compared to 89% and 76% in fiscal 1996 and
1995, respectively. The bipolar electrosurgical systems and the irrigation
system accounted for approximately 76% of the Company's sales in fiscal 1997
and approximately 54% and 69% of the sales in fiscal 1996 and 1995,
respectively. Sales of C/T Sets amounted to approximately 21% of the Company's
sales in fiscal 1997 and approximately 35% and 28% in 1995 and 1994,
respectively.
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Developments
During the second quarter of 1997, the Company's MALIS* CMC- III-IEC
received the CE Mark from the British Standards Institution. The CE Market
allows the MALIS* CMC- III-IEC to be marketed throughout the European
Community group of nations. The MALIS* CMC-III-IEC also received IEC
601-2-2 approval for marketing in Eastern and Western Europe, Australia,
China and the Pacific Rim.
In the third quarter of fiscal 1997, the Company modified its supply and
distribution agreement with Boston Scientific Corporation and extended the
term from March 1997 until March 2002.
In the fourth quarter of 1997, the Company entered into anexclusive,
five-year worldwide supply and distribution agreement with BEI Medical
Systems Company, Inc. ("BEI"). Under the agreement, BEI has agreed to
distribute new bipolar electrosurgical systems and instruments developed by
the Company for use in gynecology and gynecological laparoscopic surgery.
The systems are designed to be used in a variety of surgical applications
related to the cervix and uterus, providing the physician and patient with
an alternative to hysterectomy and offering a triage of medical applications
for the cervix.
Products
The Company's business constitutes a single business segment.
Bipolar Electrosurgical Systems
MALIS* CMC-III High Power Bipolar Cutting/Coagulation System. This third
generation system was first introduced into the neurosurgery market by J & J
in October 1991 and is marketed by J&J under an existing distribution
agreement. The MALIS* CMC-III High Power Cutting/Coagulation System provides
high power in the cutting mode and allows the surgeon to cut through any
tissue.
MALIS* CMC-III -IEC Bipolar Cutting/Coagulation System. This system
incorporates the same features as the MALIS* CMC-III, with certain modifications
in order to meet the current standards for marketing the unit worldwide. The
unit has received IEC-601 certification and bears the international "CE" mark.
MALIS* Bipolar Synergy System. A 50 watt coagulator for neurosurgical
use with updated coagulation technology. This system is marketed by J&J
under an existing distribution agreement.
Bipolar Endoscopic Coagulator. These generators are used as a coagulators
in endoscopic procedures, and are the subject of an existing distribution
agreement with Boston Scientific Corporation. The products are marketed by
the Microvasive division of Boston Scientific Corporation under its "Symmetry
Endo-Bipolar Generator" and "MINI-SYMM" trade names.
Padgett Bipolar Cutter/Coagulator for Plastic/Reconstructive Surgery.
This generator has been developed for use by plastic surgeons to minimize
blood loss and post-operative scarring of tissue. This generator is being
marketed by Padgett Instruments, Inc. pursuant to an existing distribution
agreement.
Bi-Safe-I Cutter/Coagulator for Office Gynecological Procedures. This
generator meets the need for the bipolar modality in the physician's office
and offers significant cost and time savings over other available equipment.
This generator is being marketed by BEI pursuant to an existing supply and
distribution agreement.
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VFS 200 Bipolar System. This system is now being marketed
under the MALIS* CMC- III- IEC trade name by J&J. The system is used in
magnetic imaging therapy, which uses magnetic resonance imaging equipment
in conjunction with operative procedures, generally a tumor biopsy. To the
Company's knowledge, the VFS 200, with its unique circuitry, is the only
electrosurgical system which can be used in the same room with MRI equipment.
Instrumentation
Bipolar Electrosurgical Pen. The pen is a hand-held single-use
instrument designed to be used with any of the Company's bipolar cutting
generators. This product is in production and being prepared for delivery
pursuant to existing distribution agreements.
Bipolar Myoma Coagulation Electrodes for Laparoscopic use. The bipolar
myoma coagulation electrodes are single-use instruments to be used in
conjunction with the Bi-Safe I and Bi-Safe-II Systems for gynecological
procedures. This product is in production and being prepared for delivery to
BEI pursuant to an existing supply and distribution agreement.
Bipolar Cutting Loop Electrodes. The bipolar loop electrodes are single
use instruments with modifications of the alloy to provide faster and
cleaner cutting. The loop electrodes are in production and being
prepared for delivery pursuant to existing distribution agreements. The loop
electrodes are to be used in conjunction with the Company's Bipolar
Cutting/Coagulation Systems.
Bipolar Coagulation Ball Electrodes. The bipolar ball electrodes are
single use instruments to be used for coagulation in conjunction with the
Company's bipolar cutting/coagulation systems in various surgical disciplines.
The Company has recently received United States Food and Drug Administration
( FDA") clearance to market this instrument.
MALIS* Irrigation System
The MALIS* Irrigation System is principally used in conjunction
with the Company's bipolar electrosurgical systems to provide controlled
irrigation for bipolar coagulation and cutting in a wet surgical field.
The system consists of an impulse pumped electrical generator which pumps
and regulates the flow of liquid through irrigation tubing, including,
the disposable MALIS* C/T Set, which is manufactured and sold by the
Company. The irrigation system may also be used as a stand-alone unit.
Other Products
MALIS* Bipolar Cord/Irrigation Tubing Set. A disposable coextruded bipolar
forceps cord combined with an irrigation tubing set which simultaneously
delivers electrical current and irrigation fluid to a surgical hand-held
instrument. A new C/T Set is used for each surgical procedure. The C/T Set
is used in conjunction with the Company's bipolar electrosurgical
systems and the irrigation system.
* A registered trademark of Dr. Leonard I. Malis.
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CPR Mask System. This is a single-use disposable cardiopulmonary
resuscitation (CPR) mask system. In 1996, the Company was granted a United
States patent on the mask system. The Company is currently marketing and selling
the mask and is also negotiating a licensing agreement with a third party for
the manufacture and marketing of the mask system.
Titanium Surgical Mesh. Interwoven titanium used in neurosurgery for the
repair of skull and spinal column defects.
Surgical Magnifying Loupes. The loupes enable the surgeon to magnify
the surgical field. The product's multi-lens design provides correction of
spherical and color aberrations and maximum depth of field. The loupes
are presently available at powers of 2.5x, 3.25x and 4.0x magnification.
The loupes are sold under the MALIS* and NEUROPTIC trademarks.
Surgical Stool. A battery operated electrically controlled stool
which allows the surgeon to adjust his seating position up or down as the
microscope is raised or lowered throughout the surgical procedure. The
product has been designed for surgeons in all disciplines who operate with
a microscope. The surgical stool is sold under the MALIS* and SCOPEMATE
trademarks.
New Products to be Introduced into the Market
The Company has developed several new bipolar generators,
which are based on the technology employed in the MALIS* High Power Bipolar
Cutting and Coagulation System, as well as a bipolar accessory products which
are to be used in conjunction with these new generators. These products are
designed to be sold in the neurosurgery, orthopedic, laparoscopic, urology,
gynecology and plastic surgery fields.
Bi-Safe-II High Power Bipolar Cutter/Coagulator for OB/GYN
Procedures. The Company has developed a unique high power bipolar
cutter/coagulator for use in OB/GYN hospital procedures. This generator
has features which are unique and are designed to reduce the time
required for surgical procedures. The Company has received FDA permission
to market the generator. This generator will be marketed by BEI through an
existing supply and distribution agreement.
VFS 300 High Power Bipolar Cutter/Coagulator. This unit has a technology
which enables the physician to cut tissue and/or coagulate blood vessels
while the electrodes are totally submerged in electrically conducted
fluids, such as saline. The Company has received FDA permission to market this
system and intends to market the system for use in arthroscopy and other
surgical disciplines.
Bipolar Cord Set. A single use bipolar cord set which provides
electrical current, without irrigation, from the Company's bipolar generators
to the Company's single use bipolar instruments.
Manufacturing and Supplies
For over 14 years, prior to August 31, 1994, the manufacturing,
assembly and packaging of the Company's electrosurgical products were
subcontracted to Diversified Electronic Corporation ("Diversified"),
a specialty electronics manufacturer, which provided contract manufacturing
and research and development to an established base of customers. On August
31, 1994, the Company vertically integrated the manufacturing,assembly and
packaging of its electrosurgical generators by acquiring Diversified. Since
August 31, 1994, Diversified Electronics Company, Inc. ("DEC"), a wholly owned
subsidiary of the Company, has conducted the
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operations of Diversified. In 1997, DEC concentrated its manufacturing efforts
almost exclusively on the Company's products.
The Company currently contracts the manufacturing ofits bipolar C/T Set,
bipolar instrumentation and CPR Mask System with third parties. Each product
is currently manufactured by a single contract manufacturer. The Company
and its contract manufacturers purchase product components from mutiple
sources.
The Company's manufacturing process is subject to the regulatory
requirements of the Federal Good Manufacturing Practice Regulations as
promulgated by the FDA. The Company conducts quality assurance audits
throughout the entire manufacturing process to ensure that all medical
products comply with the applicable government regulations.
Marketing and Sales
The Company sells almost all of its products to or through national or
international distributors which include affiliates of major health care
corporations.
In May 1991, the Company entered into a new distribution agreement with
J & J, under which J & J is granted the exclusive right to sell the Company's
bipolar electrosurgical systems, irrigation system, C/T Sets, titanium surgical
mesh and other products developed by the Company in the field of neurosurgery
through December 31, 1998. Under the terms of the distribution agreement,
J & J is required to purchase no less than $1,100,000 in 1994 and subsequent
years. For the 1997, 1996 and 1995 fiscal years, the Company had sales to
J & J of $3,659,557, $3,055,531 and $2,042,990, respectively. Orders are
generally filled on a current basis in each calendar year.
Approximately 92% of the Company's sales were derived from sales to
J & J in fiscal 1997 and approximately 89% and 76% of sales were made to
J & J in fiscal 1996 and 1995, respectively. Under the terms of a development
agreement with J & J, the Company has agreed to pay J & J through
December 31, 1998 a royalty of 2-1/2% of the net sales of the high power
bipolar electrosurgical system and 2% of the net sales of the C/T Sets
outside of the field of neurosurgery.
In the third quarter of fiscal 1997, the Company modified its supply
and distribution agreement with Boston Scientific Corporation and extended
the term from March 1997 to March 2002. The agreement covers the exclusive
sale of bipolar electrosurgical coagulators developed by the Company for use
in the fields of gastroenterology and endoscopy for hospital, outpatient clinic
and office based procedures involving flexible endoscopy. Under the agreement,
Boston Scientific Corporation has agreed to purchase the "Symmetry
Endo-Bipolar Generator" and, upon regulatory approval in Japan and Europe,
the new MINI-SYMMTM generator for worldwide distribution.
In the first quarter of 1995, the Company entered into a distribution
agreement with Padgett Instruments, Inc. for a bipolar coagulation and
cutting system to be sold in the plastic and reconstructive surgery market.
The Company has orders for generators and accessory products under
this agreement.
In the fourth quarter of 1997, the Company entered into an exclusive,
five-year worldwide supply and distribution agreement with BEI Medical
Systems Company, Inc. ("BEI"). Under the agreement, BEI has agreed to
distribute the Bi-Safe I and Bi-Safe II bipolar electrosurgical systems
and the Company's single use bipolar instruments for use in gynecology and
gynecological laparoscopic surgery in hospitals, outpatient clinics and
physician offices. BEI plans to market the system in the United States
through their internal sales force, its U.S. distribution network and direct
market catalogue and overseas through a network of overseas distributors that
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specialize in OB/GYN products. Initial shipments of generators and certain
disposable instruments under this agreement are planned to occur in December
1997 or January 1998.
While the Company's products are sold in foreign markets by J & J, the
Company is not aware of the amount of products which are sold in those markets.
Prior to sales in certain foreign markets, the Company will need to comply with
applicable foreign government regulations.
The Company currently markets the surgical magnifying loupes and the
surgical stool through independent distributors.
The Company's business is not affected to any material extent by
seasonal factors.
Competition
The unique circuitry and patented waveform of the Company's bipolar
electrosurgical systems are distinguished from bipolar electrosurgical systems
sold by other entities. In the neurosurgery market, the Company believes that
it is the principal manufacturer of bipolar electrosurgical systems. In other
medical areas, the Company's products will compete with monopolar
electrosurgical systems, as well as products based on other technologies,
such as laser devices. The Company believes that its bipolar electrosurgical
products offer enhanced capabilities and safety advantages as compared to
monopolar electrosurgical systems and laser devices.
The principal manufacturers of monopolar electrosurgical systems (currently
the standard electrosurgical device used in the general surgery fields) are
Valleylab, an affiliate of Pfizer, Inc., and Birtcher Medical Systems,
Inc. An ultrasound device is sold by Valleylab and laser devices are sold by
companies such as Surgical Laser Technology.
A number of major medical product suppliers, including U.S. Surgical
Corp., Ethicon, Inc. (a subsidiary of Johnson & Johnson), and Bard Endoscopic
(a division of C.R. Bard) are selling or preparing to sell laparoscopic or
endoscopic instruments for use with monopolar electrosurgical systems or other
modalities. Certain of the laser surgical devices currently marketed by such
firms as Surgical Laser Technology and Laserscope are also being used for
general surgery.
While there are currently several manufacturers of CPR masks, the
Company believes that its CPR Mask made of silicone, which folds into
a pocket portable size, yet deploys instantly for emergency use, offers
advantages over other products.
Research and Development
For the 1997, 1996, and 1995 fiscal years, the Company expended $307,071,
$87,536 and $125,775, respectively, for research and development. The Company
anticipates that it will continue to incur research and development costs in
connection with development of products.
In the past, the Company's research and development was conducted
internally as well as subcontracted to third parties. As a result of the
acquisition of Diversified, the Company anticipates that its future research
and development will be conducted internally. Clinical testing of the products
is conducted by physicians, including, Dr. Leonard I. Malis, a principal
shareholder and director of the Company.
In the 1998 fiscal year, the Company anticipates that it will fund
all its research and development with current assets and revenues from
operations.
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Government Regulation
The marketing and sale of the Company's products is governed by the
Federal Food, Drug and Cosmetic Act (the "Act") administered by the FDA,
as well as varying degrees of regulation by a number of foreign governmental
agencies. The Act requires certain clearances from the FDA before medical
devices can be marketed.
All medical devices introduced into the market since 1976, which include
substantially all of the Company's products, are required by the FDA as a
condition of sale and marketing to secure either a 510(k) premarket notification
clearance or an approved Premarket Approval application ("PMA"). A 510(k)
premarket notification clearance indicates FDA agreement with an applicant's
determination that the product for which clearance has been sought is
substantially equivalent to another medical device that was on the market
prior to 1976 or that has received 510(k) premarketing notification clearance.
In general, the process of obtaining a 510(k) clearance typically takes several
months and involves the submission of limited clinical data and supporting
information while the PMA process typically will last more than a year and
requires the submission of significant quantities of clinical data and
manufacturing information.
To comply with the FDA regulations, the Company incurs substantial costs
relating to laboratory and clinical testing of new and existing products and
the preparation and filing of documents in formats required by the FDA. From
time to time, the Company may also encounter delays in bringing new or
existing devices to market as a result of being required by the FDA and
foreign governmental authorities to conduct and document additional
investigations of product safety and effectiveness.
The Company believes that it is in material compliance with regulations
promulgated by the FDA and foreign governmental authorities, and that such
compliance has been and is anticipated to be without adverse effect on its
business.
Patents and Trademarks
The Company owns two principal United States patents for bipolar
electrosurgery, one relating to the circuitry employed by the Company's
bipolar electrosurgical systems and the other relating to two products
under development. The patent for circuitry, which was first granted in
1986 and subsequently expanded upon in June 1994, covers 92 claims and is
an important aspect of the Company's bipolar electrosurgical systems.
In November 1995, the Company was granted a United States patent for its
CPR mask system. The Company's practice and experience is to apply for patents
which are important to the development or sale of a product.
In October 1997, the Company was notified by the United States Patent
and Trademark Office that its patent application for the bipolar cutting loop
electrodes has been allowed and will issue in due course.
Dr. Leonard Malis has entered into an agreement with the Company to license
the "MALIS" trademark to the Company, at no cost to the Company, to the
extent the name has not been licensed to Johnson & Johnson. The Company has
also registered or is in this process of registering other trademarks.
Employees
At September 30, 1997, the Company and its subsidiaries had 33 full-time
employees, including executive officers. The Company from time to time
retains part-time employees, engineering consultants, scientists and other
consultants. All full-time employees participate in the Company's health
benefit plan.
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None of the Company's employees are represented by a union or covered
by a collective bargaining agreement. The Company considers its relationship
with its employees to be satisfactory.
Item 2. PROPERTIES.
The Company currently leases approximately 4,200 square feet of office
and warehouse space at a base monthly rent of $4,362 (with increases based
on increases in the consumer price index) in an office building in Oaks,
Pennsylvania, approximately 12 miles northwest of Philadelphia, Pennsylvania.
The current lease is for a term of five years ending on June 30, 2000. On
August 31, 1994, the Company acquired a building with approximately 15,000
square feet of manufacturing and warehouse space in Philadelphia, Pennsylvania.
Item 3. LEGAL PROCEEDINGS.
As of September 30, 1997, there are no material pending legal proceedings
to which the Company is a party or to which any of its property is the subject.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.
No matters were submitted to a vote of the shareholders during
the fourth quarter of fiscal year 1997.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock is quoted on the Boston Stock Exchange under
the symbol VLF, and traded in the over-the-counter market, and is included
in the National Association of Securities Dealers Automated Quotation
(NASDAQ) System - Small Cap Issues under the symbol VLFG. The table below
sets forth the range of high and low closing bid quotations per share of
Common Stock as reported on the NASDAQ System. Quotations represent prices
between dealers and do not necessarily represent actual transactions. None
of the prices shown reflect retail mark-ups, mark-downs, or commissions.
COMMON STOCK High-Bid Low-Bid
Fiscal 1996:
First Quarter............................... $4 $2
Second Quarter.............................. 2 5/8 1 17/16
Third Quarter................................ 3 1 13/16
Fourth Quarter.............................. 3 5/16 1 7/8
Fiscal 1997:
First Quarter .............................. $3 3/8 $2
Second Quarter............................... 3 5/8 2 1/16
Third Quarter................................ 5 1/16 2 1/8
Fourth Quarter............................... 5 1/16 3-1/8
At December 16, 1997, the Company had 119 shareholders of record. The
Company believes that there are in excess of 1,000 beneficial shareholders of
its Common Stock.
The Company has not paid any dividends to date, nor does it expect to do
so in the foreseeable future.
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<TABLE>
<CAPTION>
Item 6. SELECTED FINANCIAL DATA
<S> <C> <C> <C> <C> <C>
Statement of
Operations Data: 1997 1996 1995 1994(1) 1993
_________________ _____ _____ _____ _______ _____
Net Sales $3,977,965 $3,424,589 $2,688,427 $3,587,379 $2,401,651
Income (loss)
from Operations 19,701 (96,285) (368,415) 694,159 249,003
Net Income (loss) $6,533 $(75,116) ($215,574) $547,615 $234,160
======= ======== ========== ======== ========
Primary Earnings
(loss) per share $.00 $(.01) $(.03) $.07 $.03
==== ====== ====== ==== ====
Fully Diluted Earnings
(loss) per share $.00 $(.01) $(.03) $.07 $.03
===== ====== ====== ==== ====
Balance Sheet Data:
At September 30, 1997 1996 1995 1994 1993
__________________ ____ ____ ____ ____ ____
Current Assets $3,139,256 $2,987,502 $3,052,414 $3,429,443 $3,007,457
Total Assets 4,254,070 4,217,958 4,379,866 4,884,525 3,754,205
Current Liabilities 187,817 164,595 256,123 353,891 220,629
Long Term Liabilities 11,093 4,736 0 170,775 0
Retained Earnings
(deficit) 3,462 (3,071) 72,045 287,619 (259,996)
Stockholders' Equity 4,055,160 4,048,627 4,123,743 4,359,859 3,553,576
</TABLE>
(1) On August 31, 1994, the Company acquired Diversified Electronic
Corporation pursuant to an Agreement and Plan of Merger. After September
1, 1994, the operations of Diversified Electronic Corporation were
conducted by the Company's Diversified Electronics Company, Inc., wholly
owned subsidiary. The results of operations of Diversified Electronics
Company, Inc. from September 1, 1994 are included in the results of
operations of the Company.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
1997 and 1996 Fiscal Year Compared
Sales of $3,977,965 for 1997 were 16% greater than sales for 1996. The
sales increase primarily resulted from increased sales to Johnson & Johnson
Professional, Inc. ("J&J"), the Company's principal customer with whom the
Company has an existing distribution agreement. In 1997, J&J accounted for
92% of the Company's sales, as compared to 89% and 76% of the sales in 1996
and 1995, respectively. The sales gains reflect increased shipments of the
Company's bipolar generators, including the two newest neurosurgical generators.
During 1997, the Company's wholly-owned subsidiary Diversified Electronics
Company, Inc. ("DEC") concentrated its manufacturing efforts almost exclusively
on the Company's products. In 1998, the Company anticipates this trend to
continue as the Company newest generators for use in the fields of gynecology,
plastic and reconstructive surgery and orthopedic surgery enter production.
Approximately 76% of the Company's 1997 sales related to sales of
the bipolar electrosurgical and irrigation systems as compared to
approximately 54% and 69% of the sales in fiscal 1996 and 1995, respectively.
Sales of C/T Sets in 1997 accounted for approximately 21% of the Company's
sales in 1997 and approximately 35% and 28% in 1996 and 1995, respectively.
The Company's gross profit margin was 51% for 1997 as compared to gross
profit margin of 46% and 47% for 1996 and 1995, respectively. Selling, general
and administrative expenses increased by 7% in 1997 as compared to the
amounts for 1996. Selling, general and administrative expenses were impacted
by higher sales levels. Research and development expenses increased by 251%
to $307,071 in 1997. The Company's research and development included the
further development and refinement of generators and instrumentation in
preparation for their introduction into the gynecology market and other
markets.
In the fourth quarter of 1997, the Company entered into an exclusive,
five-year worldwide supply and distribution agreement with BEI Medical
Systems Company, Inc. ("BEI"). Under the agreement, BEI has agreed to
distribute the Bi-Safe I and Bi-Safe II bipolar electrosurgical
systems and the Company's single-use bipolar instruments for use in gynecology
and gynecological laparoscopic surgery in hospitals, outpatient clinics and
physician offices.
The Company plans to commence initial shipments of generators and certain
disposable instruments under the supply and distribution agreement with BEI in
December 1997 or January 1998. In addition, in the second quarter of fiscal
1998, the Company plans to commence shipments of other disposable instruments
for use in the fields of neurosurgery, gynecology and plastic and reconstructive
surgery.
The Company had income from operations of $19,701 for 1997 as compared
to a loss from operations of $96,285 for 1996. The Company had income before
taxes of $28,768 in 1997 as compared to a loss before taxes of $88,095 in 1996.
The Company made a provision for income taxes of $22,235 in 1997 as compared
to a tax benefit of $12,979 in 1996.
As a result of the foregoing, the Company had a net income of $6,533 in
1997 as compared to a net loss of $75,116 for 1996. Primary and fully
diluted earnings per share was $.00 for 1997 compared to loss per share
of $.01 for 1996.
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1996 and 1995 Fiscal Year Compared
Sales of $3,424,589 for 1996 were 27% greater than sales for 1995. The
sales increase primarily resulted from increased sales to J&J. In 1996, J&J
accounted for 89% of the Company's sales, as compared to 76% and 90% of the
sales in 1995 and 1994, respectively. The sales gains reflect increased
shipments of the Company's surgical generators.
Approximately 54% of the Company's 1996 sales related to sales of the
bipolar electrosurgical and irrigation systems as compared to approximately 6
69% and 67% of the sales in fiscal 1995 and 1994, respectively. Sales of C/T
Sets in 1996 accounted for approximately 35% of the Company's sales in 1996
and approximately 28% and 27% in 1995 and 1994, respectively. DEC accounted
for approximately 8% of the Company's sales in 1996 as compared to 11% in 1995.
The Company's gross profit margin was 46% for 1996 as compared to gross
profit margin of 47% and 55% for 1995 and 1994, respectively. Selling,
general and administrative expenses increased by 7% in 1996 as compared to
the amounts for 1995. Selling, general and administrative expenses were
impacted by costs related to the assimilation of Diversified Electronic
Corporation as a result of the August 1994 merger. Research and development
expenses decreased by 30% to $87,536 in 1996, reflecting the completion of
development of new generators in 1995.
In March 1996, the Company modified its distribution agreement for the
CPR mask system with CDX Corporation from an exclusive distribution agreement
to a nonexclusive agreement. The Company also commenced marketing the CPR
mask system directly with other customers and distributors.
The Company had a loss from operations of $96,285 for 1996 which was 74%
less than the loss from operations of $368,415 for 1995. The Company had a
loss before taxes of $88,095 in 1996 as compared to a loss before taxes of
$363,965 in 1995. The Company's tax benefit was $12,979 in 1996 as compared
to $148,391 in 1995.
As a result of the foregoing, the Company had a net loss of $75,116 in
1996 as compared to a net loss of $215,574 for 1995. Primary and fully
diluted loss per share was $.01 for 1996 compared to loss per share of
$.03 for 1995.
Liquidity and Capital Resources
The primary measures of the Company's liquidity are cash balances
(including short-term investments), accounts receivable and inventory
balances, as well as its borrowing ability. During 1997, the Company's
working capital increased by $128,532 to $2,951,439.
For the 1997 fiscal year, the Company provided net cash of $494,496 from
operating activities , which primarily reflected a decrease in inventory of
$277,270 and the Company's net income from operations as adjusted for noncash
charges relating to depreciation and amortization of $146,628. The increase
in accounts receivable and decrease in inventory was primarily due to higher
sales levels.
- 13 -
<PAGE> 14
Investing activities for 1997 used $24,353 for an increase in
intangible assets of $10,296 and for the purchase of equipment in the amount
of $14,057. Cash increased by $470,143 in 1997 leaving a balance of $632,904
in the Company's cash and cash equivalents at September 30, 1997.
For the 1996 fiscal year, the Company used net cash of $126,102 in
operating activities which reflected an increase in accounts receivable
and inventory and prepaid items of $166,636, $239,432 and $27,014 respectively,
less the net loss from operations as adjusted for noncash charges relating
to depreciation and amortization of $67,159, a decrease in recoverable income
taxes of $157,482 and an increase of accounts payable of $89,150. The increase
in inventory and accounts receivable was primarily due to higher sales levels.
Investing activities for 1996 used $45,693 for an increase in intangible
assets of $14,508 and for the purchase of equipment in the amount of $31,185.
Financing activities used $180,678 for the payment of a note payable originally
issued in connection with the merger of Diversified Electronic Corporation
into the Company. Cash decreased by $352,473 in 1996 leaving a balance of
$162,761 in the Company's cash and cash equivalents at September 30, 1996.
On March 1, 1996, the Company and Bernard H. Shuman, a director and Vice
President- Technology of the Company, modified the payments terms of a note
originally issued to Mr. Shuman in connection with the Company's merger with
Diversified Electronic Corporation in August 1994, and which was due on March
1, 1996. Pursuant to the modification, the Company paid Mr. Shuman $100,000
to reduce the principal balance for the note on March 1, 1996, $15,000 in April,
1996 and $70,000 on August 1, 1996. On August 1, 1996, the note was canceled.
The Company has a line of credit of $1,000,000 with CoreStates
Bank which calls for interest to be charged at the bank's national commercial
rate. The credit accommodation is unsecured and requires the Company to have
a tangible net worth of no less than $3,000,000. At September 30, 1997, there
was no outstanding balance on this line.
At September 30, 1997, the Company' had no debt. The Company believes it
has available all funds needed for operations, research and development and
capital expenditures as they may arise in the future. However, should it be
necessary, the Company believes it could borrow adequate funds at competitive
rates and terms.
Acquisition of Diversified
On August 31, 1994, the Company acquired Diversified Electronic
Corporation ("Diversified"), a company wholly owned by Bernard H. Shuman,
pursuant to a Merger Agreement, in which the Company was the surviving
corporation. After the merger, Diversified Electronics Company, Inc., a
wholly owned subsidiary of the Company, conducted the operations of Diversified.
In the Merger Agreement, the Company issued the following consideration:
(i) cash in the amount of $161,500; (ii) a noninterest bearing note in the
amount of $185,000 payable on March 1, 1996; (iii) a noninterest bearing note
in the amount of $47,188 which was paid upon the collection of certain accounts
receivable of Diversified; and (iv) 139,334 shares of unregistered commonstock
of the Company. The cash portion of the consideration was funded with the
Company's available cash on hand. The assets of Diversified consisted primarily
of equipment, fixtures, inventory, and intellectual property. Prior to the
merger, Diversified Electronics Company, Inc., a wholly owned subsidiary of
the Company, acquired the real property and building, which constituted
Diversified's manufacturing facility, for $95,000 in cash.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
A. Quarterly Results of Operations.
Not applicable.
B. Financial Statements and Financial Statement Schedules.
See Index to Financial Statements and Financial Statement
Schedules on page F-1 herein.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
- 14 -
<PAGE> 15
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning directors and officers called for by
Item 10 of Form 10-K will be set forth either: (i) in the Company's Definitive
Proxy Statement for its Annual Meeting of Stockholders, or (ii) in an
amendment to this Annual Report on Form 10-K, which in either case will be
filed within 120 days after the end of the fiscal year covered by this Annual
Report on Form 10-K, and is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by Items 11, 12 and 13 of Form 10-K will be
set forth either: (i) in the Company's Definitive Proxy Statement for its
Annual Meeting of Stockholders, or (ii) in an amendment to this Annual Report
on Form 10-K, which in either case will be filed within 120 days after the end
of the fiscal year covered by this Annual Report on Form 10-K, and is
incorporated herein by reference.
- 15 -
<PAGE> 16
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a. and d. Financial Statements and Financial Statement
Schedules.
See Index to Financial Statements and Financial Statement
Schedules on Page F-1, herein.
b. Reports on Form 8-K.
None.
c. Exhibits
The following is a list of exhibits filed as part of this annual
report on Form 10-K. Where so indicated by footnote, exhibits which were
previously filed are incorporated by reference. For exhibits incorporated by
reference, the location of the exhibit in the previous filing isindicated in
parentheses.
(2) Agreement and Plan of Merger.
(a) Agreement and Plan of Merger between Valley Forge Scientific
Corp. and Diversified Electronic Corporation dated August 31, 1994.
(4)
(3) Articles of Incorporation and By-Laws.
(a) Articles of Incorporation, as amended - (1) (Exhibit 3(a)).
(b) By-Laws of the Company, as amended - (1) (Exhibit 3(b)).
(4) Instruments defining the Rights of Security Holders, including
Indentures.
(a) Form of Common Stock Certificate - (1) (Exhibit 4(a)).
(10) Material Contracts.
(a) Non-Qualified Employee Stock Option Plan - (1) (Exhibit 10(a)).
(b) Assignment of Know-How Agreement, dated June 30,1989 - (1)
(Exhibit 10(g)).
(c) Assignment of Patents - Bipolar Electrosurgical Systems,
June 30, 1989 - (1) (Exhibit 10(h)).
(d) Assignment of Patents - Binocular Magnification
System, June 30, 1989 -(1) (Exhibit 10(i)).
(e) Assignment of Malis trade name, dated June 30, 1989 -
(1) (Exhibit 10(j)).
(f) 401(k) and Profit-Sharing Plan - (2) (Exhibit 10(x)).
- 16 -
<PAGE> 17
(g) Distribution Agreement between Codman & Shurtleff,
Inc. and the Company (3)(Exhibit 10(b)).
(h) Amended and Restated Registration Rights Agreement,
dated April 3, 1991 - (3)(Exhibit 10(g)).
(i) Promissory Note from Jerry L. Malis to the Company.
(6) (Exhibit 10(k))
(j) Promissory Note from the Company to Bernard H.
Shuman. (6) (Exhibit 10(l))
(k) Employment Agreement Jerry L. Malis. (6) (Exhibit
10(m))
(l) Employment Agreement Thomas J. Gilloway. (6) (Exhibit 10(n))
(m) Employment Agreement Bernard H. Shuman. (6) (Exhibit 10(o))
(n) Registration Rights Agreement between the Company and Bernard
H. Shuman (6) (Exhibit 10(p))
(o) Commercial Lease Agreement between GMM Associates and the
Company dated July 1, 1995 (7) (Exhibit 10(p))
(21) Subsidiaries of Registrant
Subsidiaries of Valley Forge Scientific Corp.
(27) Financial Data Schedule
Financial Data Schedule
(1) Previously filed with the Registration Statement of the
Company on Form S-18, Registration No. 33-31008-NY, and
incorporated herein by reference.
(2) Previously filed with the Registration Statement of the
Company on Form S-18, Registration No. 33-35668-NY, and
incorporated herein by reference.
(3) Previously filed with the Registration Statement of the
Company on Form S-1, Registration No. 33-40545, and incorporated
herein by reference.
(4) Previously filed with the Company's Form 8-K dated August
31, 1994, and incorporated herein by reference.
(5) Previously filed with the Company's Form 10-K for the year
ended September 30, 1993, and incorporated herein by reference.
(6) Previously filed with the Company's Form 10-K for the year
ended September 30, 1994, and incorporated herein by reference.
(7) Previously filed with the Company's Form 10-K for the year
ended September 30, 1995, and incorporated herein by reference.
- 17 -
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the 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 on this 22nd day of December, 1997.
VALLEY FORGE SCIENTIFIC CORP.
By: /s/ Jerry L. Malis
Jerry L. Malis, President
Pursuant to the requirements of the Securities Act of 1934, this
report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature Title Date
/s/ Jerry L. Malis Chairman of the Board, December 22, 1997
Jerry L. Malis President (chief executive
officer and principal
financial and accounting
officer)
/s/ Thomas J. Gilloway Executive Vice President, December 22, 1997
Thomas J. Gilloway Secretary, Treasurer, Director
/s/ Leonard I. Malis Director
Leonard I. Malis December 22, 1997
/s/ Bruce A. Murray Director December 22, 1997
Bruce A. Murray
/s/ Bernard H. Shuman Vice President -Technology,
Bernard H. Shuman Director December 22, 1997
/s/ Robert H. Dick Director December 22, 1997
Robert H. Dick
- 18 -
<PAGE> F-1
VALLEY FORGE SCIENTIFIC CORP.
Index to Financial Statements and Financial Statement Schedules
Independent Auditor's Report F-2
Balance Sheets - September 30, 1997 and 1996 F-3
Statements of Operations - Years Ended September 30, 1997, 1996 F-4
and 1995
Statements of Stockholders' Equity - Years ended September 30, 1997 F-5
1996 and 1995
Statements of Cash Flows - Years ended September 30, 1997, 1996 and 1995 F-6
Notes to Financial Statements F-7
___________________
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been
omitted.
F-1
<PAGE> F-2
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Valley Forge Scientific Corp. and Subsidiaries
Oaks, Pennsylvania
We have audited the accompanying consolidated balance sheets of
Valley Forge Scientific Corp. and Subsidiaries as of September 30, 1997
and 1996 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended
September 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these 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 financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Valley Forge Scientific Corp.
and Subsidiaries as of September 30, 1997 and 1996, and the results of
operations and cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.
SAMUEL KLEIN AND COMPANY
Newark, New Jersey
December 1, 1997<PAGE>
F-2
<PAGE> F-3
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
BALANCE SHEETS
<TABLE>
<S> <C> <C>
September 30,
ASSETS 1997 1996
Current Assets: ---- ----
Cash and cash equivalents $ 632,904 $ 162,761
Accounts receivable, net 856,900 871,648
Inventory 1,410,527 1,687,797
Prepaid items and other current assets 91,393 87,258
Recoverable income taxes 8,352 12,889
Current portion of deferred income tax benefit 139,180 165,149
--------- ---------
Total Current Assets 3,139,256 2,987,502
Property, Plant and Equipment, net 267,612 303,414
Intangible Assets, net 842,730 922,670
Other Assets 4,472 4,372
--------- ---------
Total Assets $4,254,070 $4,217,958
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
____________________________________
Current Liabilities:
Accounts payable and accrued expenses $ 187,817 $ 164,595
------- -------
Total Current Liabilities 187,817 164,595
Deferred Income Taxes Payable 11,093 4,736
------- -------
Total Liabilities 198,910 169,331
------- -------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock - -
Common stock (no par, 10,000,000 shares
authorized, 8,229,384 shares issued
and outstanding at September 30,
1997 and 1996) 4,051,698 4,051,698
Retained earnings (deficit) 3,462 (3,071)
--------- ---------
Total Stockholders' Equity 4,055,160 4,048,627
--------- ---------
Total Liabilities and Stockholders' Equity $4,254,070 $4,217,958
========= =========
The accompanying notes are an integral part of these financial statements.
F-3
</TABLE>
<PAGE> F-4
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
<TABLE>
<S> <C> <C> <C>
For the Years Ended September 30,
1997 1996 1995
--------- --------- ---------
Net Sales $3,977,965 $3,424,589 $2,688,427
Cost of Sales 1,951,342 1,840,130 1,431,466
--------- --------- ---------
Gross Profit 2,026,623 1,584,459 1,256,961
--------- --------- ---------
Other Costs:
Selling, general and administrative 1,609,615 1,503,000 1,409,246
Research and development 307,071 87,536 125,775
Amortization 90,236 90,208 90,355
---------- ---------- ---------
Total Other Costs 2,006,922 1,680,744 1,625,376
---------- ---------- ---------
Income (Loss) from Operations 19,701 (96,285) (368,415)
Other Income (Expense):
Interest income (expense) 9,067 8,190 2,205
Gain on sale of equipment - - 2,245
---------- ---------- ----------
Income (Loss) Before Income Taxes 28,768 (88,095) (363,965)
Provision for (Benefit of) Income Taxes 22,235 (12,979) (148,391)
--------- --------- ---------
Net Income (Loss) $ 6,533 $ (75,116) $ (215,574)
========= ======== =========
Earnings (Loss) Per Share:
Primary earnings (loss)
per share of common stock $ .00 $ (.01) $ (.03)
========== ======== =========
Fully diluted earnings
(loss) per share $ .00 $ (.01) $ (.03)
========== ========= =========
Primary common shares outstanding 8,293,667 8,269,203 8,318,675
Fully diluted common
shares outstanding 8,320,840 8,308,428 8,318,675
The accompanying notes are an integral part of these financial statements.
F-4
</TABLE>
<PAGE> F-5
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<S> <C> <C> <C> <C>
Common Stock
No Par Value
----------------- Retained Total
Number of Common Earnings Stockholders'
Shares Stock Amount (Deficit) Equity
----------- -------------- ---------- -------------
Balances, October 1, 1994 8,239,384 $4,072,240 $287,619 $4,359,859
Retirement of Shares (10,000) (20,542) - (20,542)
Net Loss for the Year
Ended September 30, 1995 - - (215,574) (215,574)
----------- --------- ---------- -------------
Balances, September 30, 1995 8,229,384 4,051,698 72,045 4,123,743
Net Loss for the Year
Ended September 30, 1996 - - (75,116) (75,116)
----------- --------- ---------- ------------
Balances, September 30, 1996 8,229,384 4,051,698 (3,071) 4,048,627
Net Income for the Year
Ended September 30, 1997 - - 6,533 6,533
----------- ---------- ---------- ------------
Balances, September 30, 1997 8,229,384 $4,051,698 $ 3,462 $4,055,160
=========== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> F-6
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
<TABLE>
For the Years Ended September 30,
1997 1996 1995
----- ---- ----
Cash Flows from Operating Activities:
Net income (loss) $ 6,533 $ (75,116) $ (215,574)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 140,095 142,275 143,202
Gain on disposition of assets - - (2,245)
Changes in assets and liabilities, net of
effect from:
(Increase) decrease in accounts
receivable 14,748 (166,636) 480,514
(Increase) decrease in inventory 277,270 (239,432) 43,340
(Increase) decrease in recoverable
income taxes 4,537 157,482 (170,371)
(Increase) decrease in deferred income
tax benefit 25,969 (11,547) (88,004)
(Increase) decrease in other assets (100) - 425
(Increase) decrease in prepaid items and
other current assets (4,135) (27,014) (4,477)
Increase (decrease) in accounts payable
and accrued expenses 23,222 89,150 (145,159)
Increase (decrease) in income taxes
payable - - (86,099)
Increase in deferred taxes payable 6,357 4,736 -
------- ------- --------
Net cash provided by (used in)
operating activities 494,496 (126,102) (44,448)
-------- ------- -------
Cash Flows from Investing Activities:
Increase in intangible assets (10,296) (14,508) (945)
Purchase of property, plant and equipment (14,057) (31,185) (45,556)
Proceeds from sale of equipment - - 4,000
-------- -------- --------
Net cash used in investing
activities (24,353) (45,693) (42,501)
-------- -------- ---------
Cash Flows from Financing Activities:
Net reduction in notes payable - (180,678) (37,285)
Purchase and retirement of common stock - - (20,542)
---------- ---------- ---------
Net cash used in financing activities - (180,678) (57,827)
---------- ---------- ---------
Net Increase (Decrease) in Cash and
Cash Equivalents 470,143 (352,473) (144,776)
Cash and Cash Equivalents,
beginning of year 162,761 515,234 660,010
--------- --------- --------
Cash and Cash Equivalents, end of year $632,904 $ 162,761 $ 515,234
======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ - $ 14,225 $ -
======= ======== =======
Income taxes $ 2,500 $ - $ 199,814
======= ======== =======
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> F-7
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Valley Forge Scientific Corp. ("VFSC") was incorporated on March 27, 1980
in the Commonwealth of Pennsylvania and is engaged in the business of
developing, manufacturing and selling medical devices and products. On
August 18, 1994, VFSC formed a wholly-owned subsidiary, Diversified
Electronics Company, Inc. ("DEC"), a Pennsylvania corporation,
in order to continue the operations of Diversified Electronic Corporation,
a company which was merged with and into VFSC on August 31, 1994. In January
1993, VFSC formed a wholly - owned subsidiary, Valley Consumer Products, Inc.
("VCP") to market specific product lines. During 1996, VCP commenced initial
operations and began marketing the CPR mask system developed by VFSC.
Collectively, VFSC, DEC and VCP are referred to herein as the "Company".
Cash and Cash Equivalents
The Company considers cash equivalents to be all highly liquid investments with
original maturities of three months or less.
Principals of Consolidation and Basis of Presentation
The accompanying financial statements consolidate the accounts of the parent
company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
The Company currently sells its products to or through national or international
distributors which include affiliates of major health care corporations. A
significant part of the Company's sales are made pursuant to a distribution
agreement in the field of neurosurgery effective through December 31, 1998.
Revenues from sales are recorded on the accrual basis of accounting, when goods
are shipped or when services are provided.
Use of Management Estimates
The preparation of financial statements in conformity 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.
Inventory
Inventory is stated at the lower of cost, determined by the moving average
cost method, or market.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is
computed by the straight-line method over the estimated useful lives of
the assets, which vary from three to forty years. Leasehold improvements
are being amortized over the related lease term or estimated useful lives,
whichever is shorter.
Upon retirement or other disposition of these assets, the cost and related
accumulated depreciation are removed from the accounts and the resulting gains
or losses are reflected in the results of operations. Routine maintenance and
repairs are charged to expense as incurred.
F-7
<PAGE> F-8
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangible Assets
Intangible assets, consisting of patents, licensing agreements, proprietary
know-how, cost of acquisition and goodwill are amortized to operations under
the straight-line method over their estimated useful lives or statutory lives,
whichever is shorter. Goodwill representing the excess of the purchase price
paid over the fair market value of net assets acquired is being amortized over
20 years. Acquisition costs have been capitalized and are being amortized over
5 years.
Research and Development
Costs associated with development of new products are charged to
operations as incurred.
Earnings per Share
Primary earnings per common and common equivalent share are computed on the
basis of the weighted average number of common shares outstanding during each
year and include shares assumed issued on the exercise of all common stock
equivalents, such as, dilutive stock options and warrants and the purchase of
treasury stock with the proceeds at the average market price for the period.
Fully diluted earnings per share assumes the exercise of all dilutive common
stock equivalents and all other potentially dilutive securities and the
purchase of treasury stock, at the higher of the market price at the end of
the year or the average market price during the year.
Income Taxes
Tax provisions and credits are recorded at enacted tax rates for taxable items
included in the consolidated statements of operations regardless of the period
for which such items are reported for tax purposes. Deferred tax assets and
liabilities are determined based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Deferred
tax assets are reduced by a valuation allowance when the determination can be
made that it is more likely than not that some portion or all of the related
tax asset will not be realized.
Impairment of Long-Lived Assets
Effective October 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." SFAS 121 requires
that if facts and circumstances indicate that the cost of fixed assets
or other assets may be impaired, an evaluation of recoverability would be
performed by comparing the estimated future undiscounted pre-tax cash flows
associated with the asset to the asset's carrying value to determine if a
write-down to market value or discounted pre-tax cash flow value would be
required.
Accounting for Stock-Based Compensation
Effective for the year ending September 30, 1997, the Company adopted the
disclosure provisions of Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-Based Compensation." As permitted under
SFAS 123, the Company has continued to apply accounting prescribed by
Accounting Principle Board Opinion No. 25 ("APB 25"). Under APB 25,
compensation expense is determined on the measurement date, that is, the
first date on which both the number of shares the employee is entitled to
receive and the exercise price, if any, are known. Compensation expense,
if any, is the excess of the market price of the stock over the exercise price
on the measurement date.
F-8
<PAGE> F-9
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassifications
Certain reclassifications have been made to the prior year balances
to conform to the current year's presentation.
2. ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following at
September 30,
1997 1996
---- ----
Accounts receivable $ 975,292 $1,105,255
Less: Allowance for doubtful
accounts and contractual
allowances 118,392 233,607
------- -------
$ 856,900 $ 871,648
======= =======
3. INVENTORY
Inventory consists of the
following: September 30,
1997 1996
---- ----
Finished goods $ 32,958 $ 34,279
Work-in-process 1,098,436 1,129,495
Materials and parts 279,133 524,023
--------- ---------
1,410,527 $ 1,687,797
========= =========
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
September 30,
1997 1996
---- ----
Land $ 11,953 $ 11,953
Building and improvements 86,917 81,332
Furniture and fixtures 16,669 15,369
Laboratory equipment 364,744 359,062
Office equipment 96,145 94,655
Leasehold improvements 9,413 9,413
-------- -------
585,841 571,784
Less: Accumulated depreciation
and amortization 318,229 268,370
-------- -------
$267,612 $303,414
======== =======
Depreciation is reflected in both cost of sales and selling, general and
administrative expenses. Total depreciation for the years ended September 30,
1997, 1996 and 1995 is $49,859, $52,067 and $53,036, respectively.
F-9
<PAGE> F-10
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
September 30,
1997 1996
---- ----
Patents/trademarks/licensing
agreements $ 557,155 $546,859
Proprietary know-how 452,354 452,354
Acquisition costs 55,969 55,969
Excess of purchase price over net
assets acquired in connection with
the acquisition of Technical
Medical Industries, Inc. 351,123 351,123
------- -------
1,416,601 1,406,305
Less: Accumulated amortization 573,871 483,635
------- ---------
$ 842,730 $ 922,670
======= =========
6. RELATED PARTY TRANSACTIONS
On May 24, 1994, Jerry L. Malis, a principal shareholder, director
and officer of the Company borrowed $17,500 from the Company. The note
is payable on demand and is secured by 5,833 shares of common stock of the
Company and has a stated rate of interest of 4.83%, the then current "applicable
federal rate" as set forth under the Internal Revenue Code. On January 30,
1995, Jerry L. Malis borrowed an additional $5,320 from the Company. The
balance of the note and loan including accrued interest is reflected in other
current assets and as of September 30, 1997 and 1996 was $25,092 and
$24,925, respectively.
7. NOTES PAYABLE
In connection with the Company's 1994 acquisition of Diversified, the Company
issued two promissory notes to the sole shareholder of Diversified Electronics
Corporation who is a current officer, director and shareholder of the Company.
On March 1, 1996, the Company modified the payment terms of the note. Pursuant
to the modification, the Company paid $100,000 on March 1, 1996, $15,000 on
April 11, 1996 and the remaining $70,000 on August 1, 1996. As of September
30, 1996 the loan was paid in full.
The Company had a line of credit of $750,000 with Meridian Bank which called
for interest to be charged equal to the bank's national commercial rate. The
unsecured loan was payable on demand requiring monthly interest payments on
the unpaid principal and reduction of the loan balance to zero for a minimum
of thirty consecutive days during each twelve month period. In addition the
loan covenant called for a minimum tangible net worth of no less than $3,000,000
during the term of the loan. On September 11, 1997, the Company amended the
loan agreement to increase the line of credit to $1,000,000 based on all the
same terms of the original agreement. At September 30, 1997 and 1996 there
were no outstanding balances on this line.
8. COMMITMENTS AND CONTINGENCIES
The Company is subject to litigation arising from the normal course of business.
In management's opinion, any such contingencies are covered under its existing
insurance policies or do not materially affect the Company's financial position.
F-10
<PAGE> F-11
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. COMMITMENTS AND CONTINGENCIES (Continued)
The Company is subject to regulatory requirements throughout the world.
In the normal course of business, these regulatory agencies may require
companies in the medical industry to change their products or operating
procedures, which could affect the Company. The Company regularly incurs
expenses to comply with these regulations and may be required to incur
additional expenses. Management is not able to estimate any additional
expenditure outside the normal course of operations which will be incurred
by the Company in future periods in order to comply with these regulations.
Employment Agreements
Effective July 1, 1994, the Company entered into employment agreements with
Jerry L. Malis and Thomas J. Gilloway, for terms of 63 months. The agreements
provided for annual base salaries to Mr. Malis and Mr. Gilloway of $148,720 and
$126,940, respectively, with annual base salary increases at 10% commencing
October 1, 1994. In addition the agreements provide that Messrs. Malis and
Gilloway may each receive such other cash and stock bonuses and benefits as
may be determined from time to time by the Board of Directors. For the year
ended September 30, 1996, the officers waived their right to the 10%
increase of base salary for that year. The base salaries for the years
ended September 30, 1996 and 1995 were $163,592 for Jerry L. Malis and $139,634
for Thomas J. Gilloway. The base salaries for Jerry L. Malis and Thomas J.
Gilloway for the year ended September 30, 1997 were $179,951 and $153,598,
respectively.
On August 31, 1994, pursuant to the merger agreement with Diversified, the
Company entered into an employment agreement with Bernard H. Shuman, the
former President of Diversified and a current Vice President of the Company,
for a term of 59 months commencing September 1, 1994. The agreement provided
for a salary of $50,000 per annum through July 31, 1995 and thereafter at
$105,000 per annum through July 31, 1999. In addition, the agreement provided
that Mr. Shuman may receive such other compensation and benefits as the Board
of Directors of the Company may decide. The employment agreement may be
terminated for cause. The base salary for Bernard H. Shuman for the years
ended September 30, 1997, 1996 and 1995 was $105,000, $105,000 and $59,170,
respectively.
401(k) Plan and Profit Sharing Plan
The Company's 401(k) Plan and Profit Sharing Plan cover full-time employees
who have attained the age of 21 and have completed at least one year of service
with the Company. Under the 401(k) Plan, an employee may contribute an amount
up to 25% of his compensation to the 401(k) Plan on a pre-tax basis not to
exceed the current Federal limitation of $9,500 per year (as adjusted for
cost of living increase). Amounts contributed to the 401(k) Plan are
nonforfeitable.
Under the Profit Sharing Plan, a participant in the plan participates in the
Company's contributions to the Plan as of December 31 in any year, with
allocations to individual accounts based on annual compensation. An employee
does not fully vest in the plan until completion of three years of employment.
The Board of Directors determine the Company's contributions to the plan
on a discretionary basis. The Company has not made any contributions to date.
Stock Option Plan
On July 6, 1988, the Company adopted a non-qualified employee stock option
plan (the "Plan") pursuant to which 500,000 shares of Common Stock have been
reserved for issuance to employees, officers, directors or consultants of the
Company. Options granted pursuant to this plan will be non-transferrable and
expire if not exercised after ten years or for such lesser term as approved by
the board of directors. Options may be granted in such amounts and at such
prices as determined by the Board of Directors, but the price per share shall
not be less than the fair market value of the Company's Common Stock.
On October 24, 1994, the Company granted to employees and a board member stock
options to purchase 20,000 shares of common stock pursuant to the plan, at
$2.50 per share (the closing bid price on the NASDAQ small-cap market on
October 24, 1994). Options granted expire if not exercised after ten years,
commencing October 24, 1994.
F-11
<PAGE> F-12
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. COMMITMENTS AND CONTINGENCIES (Continued)
Stock Option Plan (continued)
On December 22, 1994, the Company granted to each of Jerry L. Malis and
Thomas J. Gilloway stock options to purchase 50,000 shares of Common Stock
pursuant to the Plan at $2.375 per share (the closing bid price on the
NASDAQ small-cap market on December 22, 1994). Options granted expire if
not exercised after ten years, commencing December 22, 1994.
On December 22, 1995, the Company granted to its employees stock options
to purchase a total of 8,000 shares of Common Stock pursuant to the Plan
at $2.13 per share (the closing bid price on the NASDAQ small-cap market on
December 22, 1995). Options granted expire if not exercised after ten years,
commencing December 22, 1995.
On July 26, 1996, the Company granted to its employees stock options to
purchase a total of 44,000 shares of Common Stock pursuant to the Plan at
$2.31 per share (the closing bid price on the NASDAQ small-cap market on
July 26, 1996). Options granted expire if not exercised after five years,
commencing July 26, 1996.
At September 30, 1997, no stock options have been exercised.
As referred to in Note 1, the Company has adopted the disclosure provisions of
SFAS 123, "Accounting for Stock Based Compensation." As permitted under this
statement the Company retained its current method of accounting for stock
compensation in accordance with APB 25.
Following is a summary of the Company's non-qualified employee stock option
plan:
Weighted
Exercise Average
Price Exercise
Shares Per Share Price
------- ---------- ---------
Options outstanding at
October 1, 1994 223,400 $1.56 - $5.13 $2.68
Granted 120,000 $2.37 - $2.50 2.40
Exercised - - -
Surrendered, forfeited or expired - - -
-------- -------------- -------
Options outstanding
September 30, 1995 343,400 $1.56 - $5.13 2.58
Granted 52,000 $2.13 - $2.31 2.28
Exercised - - -
Surrendered, forfeited or expired - - -
--------- -------------- ------
Options outstanding at
September 30, 1996 395,400 $1.56 - $5.13 2.54
Granted - - -
Exercised - - -
Surrendered, forfeited or expired (4,500) $2.31 - $2.50 2.39
--------- -------------- -------
Options outstanding at
September 30, 1997 390,900 $1.56 - $5.13 $ 2.54
======== ============ =====
F-12
<PAGE> F-13
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. COMMITMENTS AND CONTINGENCIES (Continued)
Stock Option Plan (continued)
Pro forma information regarding net income and earnings per share is required
by FASB 123, and has been determined as if the Company had accounted for the
employee stock options under the fair value method of that statement. The
fair value for these options granted during the respective years ending
September 30, 1997 and 1996 was estimated at the date of implementation
of FASB 123 using a Black-Scholes option pricing model with the following
weighted average assumptions:
Risk-Free interest (based on U.S. Government
strip bonds on the date of grant with maturities
approximating the expected option term) 5.47% to 6.61%
Dividend yields 0%
Volatility factors of the expected market price
of the Company's Common Stock (based on
historical data) 50.9% to 59.7%
Expected life of options 5.5 years
Fair values for future options are to be estimated at the date of
grant.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in subjective input
assumptions can materially affect the fair value estimated, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options. In management's opinion
existing stock option valuation models do not provide a reliable single
measure of the fair value of employee stock options that have vesting
provisions and are not transferable. In addition, option pricing models
require the input of highly subjective assumptions, including expected stock
price volatility.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. In accordance with
FASB 123, only stock options granted during the years ended September 30, 1997
and 1996 have been included for the Company's pro forma information as follows:
1997 1996
---- ----
Additional compensation expense, net of tax effect $ - $ (41,445)
Pro forma net loss $ - $ (116,561)
Pro forma loss per share:
Primary $ - $ (.01)
Fully diluted $ - $ (.01)
The weighted average fair value of options granted during the years
ended September 30, 1997 and 1996 were $ - and $1.34. (Continued)
F-13
<PAGE> F-14
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. COMMITMENTS AND CONTINGENCIES (Continued)
Operating Leases
The Company currently leases approximately 4,200 square feet of office and
warehouse space in an office building in Oaks, Pennsylvania, from GMM
Associates, a Pennsylvania general partnership, whose partners are Jerry L.
Malis, Thomas J. Gilloway and Leonard I. Malis, principal shareholders,
directors and/or officers of the Company. The lease is for a term of five
years which commenced on July 1, 1995 and call for a base rent of $4,362
(with increases based on increases in the consumer price index) plus costs
associated with real estate taxes, maintenance and utilities. The related
expense for this lease for the years ended September 30, 1997, 1996 and 1995
was $52,937, $51,565 and $51,244, respectively. As of September 30, 1997
the Company was current on all rental obligations due the related party.
The Company has also entered into leases for certain equipment under operating
lease agreements with terms ranging between two and three years.
A schedule of future minimum payments under operating leases is as follows:
Year ending September 30,
------------------------
Related Other
Party Operating
------- ---------
1998 $ 52,340 $23,371
1999 52,340 20,609
2000 39,255 10,234
2001 - -
2002 - -
------- --------
$143,935 $ 54,214
======= ========
9. MAJOR CUSTOMERS
For the years ended September 30, 1997, 1996 and 1995, a significant part of
the Company's revenues were derived from one major customer pursuant to
distribution agreements under which the Company granted the exclusive
right to sell its electrosurgical systems and other products developed by the
Company in the field of neurosurgery through December 31, 1998. Revenues
derived from this customer are as follows:
Year ended September 30, 1997 $3,659,557 92%
Year ended September 30, 1996 $3,055,531 89%
Year ended September 30, 1995 $2,042,990 76%
At September 30, 1997 and 1996, this customer accounted for approximately 80%
and 76%, respectively, of the Company's accounts receivable while one other
customer represented approximately 19% and 22%, respectively.
F-14
<PAGE> F-15
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. STOCKHOLDERS' EQUITY
Common Stock
The holders of Common Stock have no preemptive rights and the Common Stock has
no redemption, sinking fund or conversion provisions. Each share of Common
Stock is entitled to one vote on any matter submitted to the holders and
to equal rights in the assets of the Company upon liquidation. All of the
outstanding shares of Common Stock are fully paid and nonassessable.
On October 14, 1992, the Board of Directors of the Company approved a stock
repurchase plan whereby the Company may, from time to time, repurchase on the
open market up to 100,000 shares of the Company's Common Stock. During the
fiscal year ended September 30, 1995, the Company repurchased for retirement
10,000 shares at a price of $20,542 resulting in a total of 27,500 shares
repurchased since the inception of the repurchase plan at an aggregate price of
$99,924.
Preferred Stock
The Company is authorized to issue 487 shares of preferred stock, $1,000 par
value. The holders of the preferred stock would have no voting rights or
preemptive rights. Upon liquidation of the Company, a $1,000 per share
liquidating dividend must be paid upon each issued and outstanding share of
preferred stock before any liquidating dividend is paid on the Common Stock.
As of September 30, 1997, there were no issued or outstanding preferred shares,
and the Company has no intention to issue any preferred stock in the immediate
future.
11. PROVISION FOR (BENEFIT OF) INCOME TAXES
Provision for (benefit of) income taxes is as follows:
For the Years Ended September 30,
1997 1996 1995
---- ---- ----
Current:
Federal $ (8,911) $ 1,736 $(67,196)
State - - -
-------- ------ --------
(8,911) 1,736 (67,196)
-------- ------ --------
Deferred:
Federal 27,104 (49,413) (39,198)
State 4,042 11,304 (41,997)
-------- ------- --------
31,146 (38,109) (81,195)
-------- ------ ------
Adjustment of deferred tax asset for state
income tax rate changes and expired net
operating loss carryforwards net of
Federal tax effect - 23,394 -
-------- ------ -------
- 23,394 -
-------- ------ -------
$ 22,235 $ (12,979) $(148,391)
========= ======== ========
In accordance with FASB 109, tax credits arising from net operating losses,
which previously were reported as extraordinary items, have now been restated
as offsets against the provision (benefit) for income taxes.
F-15
<PAGE> F-16
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. PROVISION FOR (BENEFIT OF) INCOME TAXES (Continued)
The Company's effective tax rate was 77.3%, (14.7)% and (40.8)% in 1997, 1996
and 1995, respectively. Reconciliation of income tax at the statutory rate to
the Company's effective rate is as follows:
For the Years Ended September 30,
1997 1996 1995
---- ---- ----
Computed at the expected
statutory rate 34.0% (15.0)% (34.0)%
State taxes net of
federal tax benefit 8.5 8.4 (7.6)
Reduction in state tax rate
resulting from utilization
of tax loss carryforwards - (8.4) -
Non-deductible expenses 24.5 9.3 2.9
Other 10.3 (9.0) (2.1)
---- ---- -----
77.3% (14.7)% (40.8)%
==== ==== ====
Certain items of income and expense are recognized in different years for
financial reporting and income tax purposes. Deferred income taxes are provided
in recognition of these temporary differences. The items that give rise to the
deferred income tax benefit are as follows:
September 30,
1997 1996
Deferred Tax Asset: ---- ----
Difference in capitalization of inventory cost $ 73,463 $ 54,106
Difference in reporting bad debts 48,059 94,829
State of Pennsylvania net operating loss
carryforward 22,603 21,159
------ ------
Total deferred tax asset 144,125 170,094
Valuation allowance (4,945) (4,945)
------- -------
Net deferred tax asset $139,180 $165,149
======= =======
Deferred Tax Liability:
Difference in reporting depreciation $ 11,190 $ 4,736
------- -------
Total Deferred Tax Liability $ 11,190 $ 4,736
======= =======
The Company has net operating loss carryforwards of approximately $343,800
available to reduce future state taxable income of which $143,300 and
$197,500 expire in the years ended September 30, 1998 and September 30, 2000,
respectively.
12. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of short-term cash investments and trade
receivables. The Company maintains substantially all of its banking activities
with one bank and cash balances throughout the year generally exceed the
federally insured limit of $100,000. The Company invests overnight these
cash balances which exceed $100,000 in U.S. Treasury Securities. At September
30, 1997 and 1996 the balances the company held in these securities was $477,000
and $119,000, respectively. Management believes that the risk associated with
trade receivables, which are principally due from two customers, is adequately
provided for in the allowance for doubtful accounts.
F-16
<PAGE>
VALLEY FORGE SCIENTIFIC CORP.
REPORT ON FORM 10-K
FOR YEAR ENDED SEPTEMBER 30, 1997
INDEX TO EXHIBITS*
EXHIBIT
NUMBER EXHIBIT NAME
_____________________________________________________________________________
<S> <C>
21 Subsidiares of Valley Forge Scientific
27 Financial Data Schedule
* Only the exhibits actually filed are listed. Exhibits incorporated
by reference are set forth in the exhibit listing in Item 14 of the
Report on Form 10-K.
<PAGE>
</TABLE>
<SEQUENCE 2>
EXHIBIT 21
SUBSIDIARIES OF VALLEY FORGE SCIENTIFIC CORP.
1. Diversified Electronics Company, Inc., a Pennsylvania
corporation.
2. Valley Consumer Products, Inc., a New Jersey corporation.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from
the Company's Form 10-K for the year ended September 30, 1997
and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 632,904
<SECURITIES> 0
<RECEIVABLES> 856,900
<ALLOWANCES> 0
<INVENTORY> 1,410,527
<CURRENT-ASSETS> 3,139,256
<PP&E> 267,612
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,254,070
<CURRENT-LIABILITIES> 187,817
<BONDS> 0
0
0
<COMMON> 4,051,698
<OTHER-SE> 3,462
<TOTAL-LIABILITY-AND-EQUITY> 4,254,070
<SALES> 3,977,965
<TOTAL-REVENUES> 3,977,965
<CGS> 2,163,840
<TOTAL-COSTS> 1,794,424
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 28,768
<INCOME-TAX> 22,235
<INCOME-CONTINUING> 6,533
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,533
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
