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, 1999.
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 22, 1999 was
$19,031,065.
At December 22, 1999 there were 8,217,309 shares of the Registrant's
Common Stock outstanding.
<PAGE> 2
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 to other surgical disciplines. The Company sells
its products to or through national and international distributors,
which include affiliates of major medical products companies. The
Company was incorporated in the Commonwealth of Pennsylvania on
March 27, 1980.
The Company's principal products consist of bipolar
electrosurgical systems, disposable instrumentation and accessories,
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 a 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.
The Company has developed disposable 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, dentistry, arthroscopy, general and
laparoscopic surgery, plastic surgery, and ear, nose and throat and
maxillofacial surgery. These instruments are available in variety
of sizes, tip configurations and shapes, which allow the
practitioner to perform essentially bloodless procedures in each of
the foregoing disciplines. The disposable bipolar instruments are
connected to the bipolar electrosurgical generator through a
single-use bipolar cord or bipolar cord/irrigation tubing set ("C/T
Set"), which are sold by the Company.
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 irrigation system is connected to the bipolar
electrosurgical system and bipolar instrument through a single-use
C/T Set, which is sold by the Company.
The Company also manufactures and sells surgical magnifying
loupes, a microsurgical stool and titanium surgical mesh.
Of the Company's sales of $3,721,528 in fiscal 1999,
approximately 96% were made to Codman & Shurtleff, Inc. ("Codman"),
formerly known as Johnson & Johnson Professional, Inc., as compared
to 93% and 92% in fiscal 1998 and 1997, respectively. The bipolar
electrosurgical systems and the irrigation system accounted for
approximately 54% of the Company's sales in fiscal 1999 and
approximately 64% and 76%
* A registered trademark of Dr. Leonard I. Malis
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of the sales in fiscal 1998 and 1997, respectively. Sales of C/T Sets
and bipolar cord sets accounted for approximately 42% of the Company's
sales in fiscal 1999 and approximately 33% and 21% in 1998 and 1997,
respectively. Sales of disposable instruments accounted for approximately
5% of the Company's sales in fiscal 1999 and approximately 2% of the
Company's sales in fiscal 1998.
DEVELOPMENTS
The Company's sales for the fourth quarter of fiscal 1999 were
adversely affected by the Company and Codman not agreeing to an
extension to their existing distribution agreement until after the
end of fiscal 1999. In November 1999, the Company and Codman
entered into a second extension to the distribution agreement under
which: (i) the term was extended from December 31, 1999 to December
31, 2000; (ii) Codman agreed to make minimum purchases of the
Company's established products (excluding new products) in the
amount of $3,500,000 for calender year 2000; (iii) the minimum
purchase requirements for calendar 1999, which applied to both
established and new products, was modified to apply only to
established products, and the dollar amount of minimum purchases was
accordingly reduced from $5,000,000 to $3,500,000; and (iv) Codman
agreed to make purchases of the Company's new products, including
the lesion generator and its associated disposable electrodes
and disposable bipolar surgical instruments,
for the remainder of calendar year 1999 and calendar year 2000 in
quantities and in accordance with schedules and terms mutually
agreed upon by the parties.
In the fourth quarter of fiscal 1999, the Company completed
development of a high-precision bipolar lesion generator for the
treatment of Parkinson's disease, movement disorders and chronic
peripheral pain syndrome. The generator and its associated disposable
electrodes are considered new products under the extended distribution
agreement with Codman.
In October 1998, the Company entered into a supply and
distribution agreement with Bident International, L.L.C., an
affiliate of Garfield Refining Company, for the sale of the BIDENT
bipolar electrosurgical generator and related disposable
instrumentation and accessory products in the field of Dentistry. In
the third quarter of 1999, the Company commenced shipments of
samples of the generator and bipolar dental instruments. After
shipment of the samples, the Company made certain design changes to
the generator in order to better facilitate its use in dental offices.
These changes were completed subsequent to the end of fiscal 1999.
The Company amended its Articles of Incorporation on August
26, 1999 to increase the number of authorized shares of the
Company's common stock, no par value, from 10,000,000 shares to
20,000,000 shares. The amendment was approved by the shareholders at
the Annual Meeting of Shareholders held on June 30, 1999.
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 Codman in October 1991. 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.
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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. This unit is
marketed by Codman under an existing distribution agreement
VFS 200 Bipolar System. This system is now being marketed
under the MALIS* CMC- III- IEC trade name by Codman. 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.
MALIS* Bipolar Synergy System. A 50 watt coagulator for
neurosurgical use with updated coagulation technology. This system
is marketed by Codman 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.
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.
BIDENT Bipolar Electrosurgical System for Dentistry. This
generator has been developed for use by the dental practitioner, and
is being marketed by Bident International, L.L.C., an affiliate of
Garfield Refining Company, pursuant to a distribution agreement.
DISPOSABLE INSTRUMENTATION
Bipolar Electrosurgical Pen. The pen is a single-use
instrument for tissue dissection for use in all areas of surgery.
Bipolar Laparoscopic Instruments . The bipolar laparoscopic
instruments are single-use instruments for tissue dissection and
coagulation of blood vessels and tissue for use in the fields of
gynecology and general surgery.
Bipolar Loop Instruments. The bipolar loop instruments are
single-use instruments with modifications of the alloy to provide
faster and cleaner bipolar cutting for use in all areas of surgery.
Bipolar Ball Instruments. The bipolar ball instruments are
single use instruments used for coagulation of blood vessels and
soft tissue in wet or dry surgical fields for use in all areas of
surgery.
Bipolar Dental Instruments. The bipolar dental instruments
are single-use instruments in varying tip configurations designed
for specific dental procedures.
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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, which is marketed by Codman,
is used in conjunction with the Company's bipolar electrosurgical
systems, the irrigation system, and disposable instrumentation.
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 disposable bipolar
instruments.
Titanium Surgical Mesh. Interwoven titanium used in
neurosurgery for the repair of skull and spinal column defects,
which is marketed by Codman.
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.
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.
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 as well as in the orthopedic, laparoscopic, urology,
gynecology, ear nose and throat, maxillofacial, 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
United States Food and Drug Administration ("FDA") permission to market
the generator.
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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.
MALIS* Bipolar Lesion Generation System. The Company has
developed a bipolar lesion generation system which precisely
controls interruption of nervous system pathways in order to
alleviate symptoms of diseases such as Parkinsonism and other
movement disorders, trigeminal neuralgia, and the pain of
intractable cancer.
MALIS* Disposable Lesion Electrodes. The Company has
developed electrodes in various sizes and tip geometries for use in
conjunction with the MALIS* Bipolar Lesion Generation System.
MANUFACTURING AND SUPPLIES
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 operations of
Diversified. In 1998 and 1999, DEC concentrated its manufacturing
efforts almost exclusively on the Company's products.
The Company currently contracts the manufacturing of its
bipolar C/T Set, bipolar cord set, and disposable bipolar
instrumentation with third parties. Each product is currently
manufactured by a single contract manufacturer. The Company and its
contract manufacturers purchase product components from multiple
sources.
The Company's manufacturing process is subject to the
regulatory requirements of the Federal Good Manufacturing Practice
Regulations as promulgated by the FDA, which mandate detailed
quality assurance and record-keeping procedures and subjects the
Company to unscheduled periodic regulatory inspections. 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 does not directly market or sell its principal
products to end-users. Instead, the Company sells almost all of its
products to or through national or international distributors which
include affiliates of major medical products companies.
In May 1991, the Company entered into a distribution
agreement with Codman, under which Codman 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, Codman was required to purchase no less than $1,100,000
in 1994 and subsequent years. In September 1998, the term of this
distribution agreement was extended by the Company to December 31,
1999 in exchange for Codman agreeing to make minimum purchases of
all of the Company's products, both established and new, for
calendar year 1999 in the amount
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of $5,000,000. In November 1999,the Company and Codman entered into
a second extension to the distribution agreement under which: (i)
the term was extended from December 31, 1999 to December 31, 2000;
(ii) Codman agreed to make minimum purchases of the Company's established
products (excluding new products) in the amount of $3,500,000 for calender
year 2000; (iii) the minimum purchase requirements for calendar 1999, which
applied to both established and new products, was modified to apply
only to established products, and accordingly the dollar amount of
minimum purchases was reduced from $5,000,000 to $3,500,000; and
(iv) Codman agreed to make purchases of the Company's new products,
including the lesion generator and disposable bipolar surgical
instruments, for the remainder of calendar year 1999 and calendar
year 2000 in quantities and in accordance with schedules and terms
mutually agreed upon by the parties.
For the 1999, 1998 and 1997 fiscal years, the Company had
sales to Codman of $3,576,589, $3,616,778, and $3,659,557,
respectively. Orders are generally filled on a current basis in
each calendar year. Approximately 96% of the Company's sales were
derived from sales to Codman in fiscal 1999 and approximately 93%
and 92% of sales were made to Codman in fiscal 1998 and 1997,
respectively. Under the terms of a development agreement with
Codman, the Company agreed to pay Codman 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.
The Company has entered into a supply and distribution
agreement with Bident International, L.L.C., an affiliate of
Garfield Refining Company, for the sale of the BIDENT bipolar
generator and disposable bipolar dental instruments and accessory
products in the field of Dentistry.
The Company has entered into a supply and distribution
agreement with Boston Scientific Corporation covering 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 through March 2002. Under the agreement, Boston
Scientific Corporation has agreed to purchase the "Symmetry
Endo-Bipolar Generator" and the new MINI-SYMMTM generator for
worldwide distribution.
In the fourth quarter of 1997, the Company entered into an
exclusive, five-year worldwide supply and distribution agreement
with BEI Medical Systems, 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 is currently evaluating its future relationship with BEI.
While the Company's products are sold in foreign markets by
Codman, 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
In the neurosurgery market, the Company believes that it is
the principal manufacturer of bipolar electrosurgical systems. In
other medical areas, the Company's generators and instruments will
compete with
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both bipolar and monopolar generators and instruments,
as well as products based on other technologies, such as laser
devices.
The Company believes the principal competitive factors are
product features, ease of use and cost. The Company believes that
the unique circuitry and patented waveform of the Company's bipolar
electrosurgical systems are distinguished from bipolar
electrosurgical systems sold by other entities. The Company also
believes that its bipolar electrosurgical products offer enhanced
capabilities and safety advantages as compared to monopolar
generators and instruments.
The medical device industry is intensely competitive in
almost all segments and tends to be dominated in large, more mature
markets by a relatively small group of large and well financed
companies. The Company also competes with smaller, entrepreneurial
companies. There can be no assurance that these or other companies
will not succeed in developing technologies or products that are
more effective than the Company's or that would render the Company's
technology or products obsolete or uncompetitive.
Monopolar Generators
The principal manufacturer of monopolar electrosurgical
systems (currently the standard electrosurgical device used in the
general surgery fields) are Valleylab, an affiliate of U.S. Surgical
Corporation (a subsidiary of Tyco Corporation).
Disposable Instrumentation
A number of major medical product companies, including U.S.
Surgical Corporation (a subsidiary of Tyco Corporation), Ethicon,
Inc. (a subsidiary of Johnson & Johnson), Bard Endoscopic (a
division of C.R. Bard) and CONMED Corporation are selling
laparoscopic or endoscopic instruments. For the most part, the
electrosurgical products sold by these companies are monopolar
devices. The Company also believes that a number of companies have
developed or are developing bipolar devices for laparoscopic and
other applications.
Due to expected rapid growth in the market for minimally
invasive surgical products, the Company anticipates that additional
competitors will enter into the market. It also expects that there
will be consolidation of existing competitors, including
acquisitions of small companies by large medical products companies.
This trend will mean increased competition for the Company.
RESEARCH AND DEVELOPMENT
For the 1999, 1998 and 1997 fiscal years, the Company
expended $301,078, $292,165, and $307,071, respectively, for
research and development. The Company anticipates that it will
continue to incur research and development costs in connection with
development of products.
As a result of the acquisition of Diversified, the Company's
research and development has been 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 2000 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
state and 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 United States patents for bipolar
electrosurgery relating to the circuitry employed by the Company's
bipolar electrosurgical systems. The first of the patents was issued
in 1986 and was expanded upon with a second patent issued in June
1994. The patents together cover 109 claims and are an important
aspect of the Company's bipolar electrosurgical systems.
On March 31, 1998, the Company was issued a United States
patent for its bipolar cutting loop electrodes, which are used in
the Company's disposable bipolar electrosurgical instruments.
The Company has applied for United States patents on
additional disposable instrumentation and electronic circuitry. The
Company's practice and experience is to apply for patents which are
important to the development or sale of a product.
In November 1995, the Company was issued a United States
patent for its CPR Mask System.
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 Codman.
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EMPLOYEES
At September 30, 1999, the Company and its subsidiaries had
30 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.
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.
FORWARD LOOKING STATEMENTS
The information provided in this report may contain forward
looking statements or statements which arguably imply or suggest
certain things about the Company's future. These include, but are
not limited to statements about: (1) any competitive advantage the
Company may have as a result of its installed base of
electrosurgical generators in the field of neurosurgery; (2) the
Company's belief that its products exceed industry standards or
favorably compete with other companies' new technological
advancements; and (3) the anticipated success of certain recently
introduced products or products scheduled to be released in the near
future for use in neurosurgery, other surgical disciplines, and the
dental market. These statements are based on assumptions that the
Company believes are reasonable, but a number of factors could cause
the Company's actual results to differ materially from those
expressed or implied by these statements. Investors are advised to
review the Additional Cautionary Statements section, which follows
the Management's Discussion and Analysis of Financial Condition and
Results of Operations section (Item 7) of this Report, for more
information about risks that could affect the financial results of
the Company.
ITEM 2. PROPERTIES.
The Company currently leases approximately 4,200 square feet
of office and warehouse space at a base monthly rent of $4,618 (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, 1999, 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 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
The Company's common stock, no par value, is quoted on the Boston Stock
Exchange under the symbol VLF, and traded in the over-the-counter
market, and is included in the Nasdaq - Small Cap Issues under the
symbol VLFG.
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The table below sets forth the range of high and low
closing bid quotations per share of Common Stock as reported on
Nasdaq. 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 1999:
First Quarter ...................$5-3/4 $3
Second Quarter................... 5-1/4 2-3/8
Third Quarter.................... 4-7/8 2-3/4
Fourth Quarter................... 4-13/16 2-1/2
Fiscal 1998:
First Quarter .................... 4-1/4 2-9/16
Second Quarter.................... 4-3/4 3-3/16
Third Quarter..................... 6-7/8 4-1/8
Fourth Quarter.................... 5-3/4 2-3/8
At December 20, 1999, the Company had 105 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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ITEM 6. SELECTED FINANCIAL DATA
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
<TABLE>
<S> <C> <C> <C> <C> <C>
Statement of Operations Data: 1999 1998 1997 1996 1995
- ----------------------------- ---- ---- ---- ---- ----
Net Sales $3,721,528 $3,879,977 $3,977,965 $3,424,589 $2,688,427
Income (loss) from Operations (197,810) (63,521) 19,701 (96,285) (368,415)
Net Income (loss) $(124,973) $(34,374) $6,533 $(75,116) ($215,574)
========== ========= ========= ========== ==========
Basic Earnings (loss) per share $(0.02) $(0.00) $0.00 $(0.01) $(0.03)
======= ======= ===== ======= =======
Diluted Earnings (loss) per share $(0.02) $(0.00) $0.00 $(0.01) $(0.03)
======= ======= ===== ======= =======
Balance Sheet Data:
At September 30, 1999 1998 1997 1996 1995
- --------------- ---- ---- ---- ---- ----
Current Assets $3,161,394 $3,216,510 $3,139,256 $2,987,502 $3,052,414
Total Assets 4,034,443 4,204,211 4,254,070 4,217,958 4,379,866
Current Liabilities 166,618 161,120 187,817 164,595 256,123
Long Term Liabilities 16,885 18,445 11,093 4,736 0
Retained Earnings (deficit) (155,885) (30,912) 3,462 (3,071) 72,045
Stockholders' Equity 3,850,940 4,024,646 4,055,160 4,048,627 4,123,743
</TABLE>
-13-
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1999 and 1998 Fiscal Year Compared
Sales of $3,721,528 for 1999 were $158,449 (4%) less than sales for
1998. Sales for the fourth quarter of 1999 and for 1999 were adversely
affected by the Company and Codman & Shurtleff, Inc. ("Codman") not
agreeing to an extension to their existing distribution agreement
until after the end of fiscal 1999. In 1999, Codman accounted for 96%
of the Company's sales, as compared to 93% and 92% of the sales in 1998
and 1997, respectively.
In November 1999, the Company and Codman entered into a second extension
to the distribution agreement under which: (i) the term was extended
from December 31, 1999 to December 31, 2000; (ii) Codman agreed to make
minimum purchases of the Company's established products (excluding new
products) in the amount of $3,500,000 for calender year 2000; (iii) the
minimum purchase requirements for calendar 1999, which applied to both
established and new products, was modified to apply only to established
products, and the dollar amount of minimum purchases was accordingly
reduced from $5,000,000 to $3,500,000; and (iv) Codman agreed to
make purchases of the Company's new products,including the lesion
generator and its associated disposable electrodes
and disposable bipolar surgical instruments, for the
remainder of calendar year 1999 and calendar year 2000 in quantities
and in accordance with schedules and terms mutually agreed upon by
the parties.
In October 1998, the Company entered into a supply and distribution
agreement with Bident International, L.L.C., an affiliate of Garfield
Refining Company, for the sale of the BIDENT bipolar electrosurgical
generator and related disposable instrumentation and accessory products
in the field of Dentistry. In the third quarter of 1999, the Company
commenced shipments of samples of the generator and bipolar dental
instruments. After shipment of the samples, the Company made certain
design changes to the generator in order to better facilitate its use in dental
offices. These changes were completed subsequent to the end of fiscal 1999.
Sales of disposable instrumentation accounted for approximately 5% of
the Company's sales in 1999 as compared to 2% of the Company's sales in 1998.
Sales of disposable bipolar instrumentation did not increase at anticipated
rates in 1999 due to the Company and Codman not agreeing to an extension to
their distribution agreement until after the end of the 1999 fiscal
year and design changes in the BIDENT bipolar generator, which delayed
sales of bipolar dental instruments.
Approximately 54% of the Company's 1999 sales related to sales of the
bipolar electrosurgical and irrigation systems as compared to approximately
64% and 76% of the sales in fiscal 1998 and 1997, respectively. Sales
of C/T Sets and bipolar cords accounted for approximately 42% of the
Company's sales in 1999 and approximately 33% and 21% in 1998 and 1997,
respectively.
The Company's gross profit margin was 45% for 1998 as compared to
gross profit margin of 48% and 51% for 1998 and 1997, respectively.
Selling, general and administrative expenses decreased by $68,257 (5%)
in 1999 as compared to the amounts for 1998. Research and development
expenses increased by $8,913 (3%) to $301,078 in 1999.
-14-
<PAGE> 15
The Company had a loss from operations of $197,810 for 1999 as compared
to a loss of $63,521 for 1998. The Company had a loss before taxes of
$162,462 in 1999 as compared to loss before taxes of $36,598 in 1998.
The Company had a benefit of income taxes of $37,489 in 1999 as compared to
$2,224 in 1998.
As a result of the foregoing, the Company had a net loss of $124,973
in 1999 as compared to a net loss of $34,374 for 1998. Basic and diluted
loss per share was ($.02) for 1999 compared to ($.00) per share for 1998.
1998 and 1997 Fiscal Year Compared
Sales of $3,879,977 for 1998 were $97,988 (2.5%) less than sales for
1997. The sales decrease was due to changes in sales patterns to Codman, the
Company's principal customer. In 1998, Codman accounted for 93% of the
Company's sales, as compared to 92% and 89% of the sales in 1997 and
1996, respectively.
Approximately 64% of the Company's 1998 sales related to sales of
the bipolar electrosurgical and irrigation systems as compared to
approximately 76% and 54% of the sales in fiscal 1997 and 1996,
respectively. Sales of C/T Sets and bipolar cords accounted for
approximately 33% of the Company's sales in 1998 and approximately 21% and
35% in 1997 and 1996, respectively. Sales of disposable instrumentation
for use in the field of gynecology accounted for approximately 2% of the
Company's sales in 1998.
The Company's gross profit margin was 48% for 1998 as compared to
gross profit margin of 51% and 46% for 1997 and 1996, respectively.
Selling, general and administrative expenses decreased by $78,492
(4.9%) in 1998 as compared to the amounts for 1997. Research and development
expenses decreased by $14,906 (4.9%) to $292,165 in 1998. The research and
development expense in 1998 reflects the Company's continued efforts in
developing additional disposable instrumentation and accessory products for
its bipolar generators as well as refining bipolar generators for
neurosurgery, dentistry, and the laparoscopic arthroscopic and general
surgery markets.
The Company had a loss from operations of $63,521 for 1998 as compared
to income from operations of $19,701 for 1997. The Company had a loss
before taxes of $36,598 in 1998 as compared to income before taxes of
$28,768 in 1997. The Company had a benefit of income taxes of $2,224 in
1998 as compared to a provision for income taxes of $22,235 in 1997.
As a result of the foregoing, the Company had a net loss of $34,374
in 1998 as compared to net income of $6,533 for 1997. Basic and diluted
loss per share was ($.00) for 1998 compared to earnings per share of $.00
for 1997.
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 1999, the Company's
working capital decreased by $60,614 to $2,994,776.
For 1999, the Company provided net cash of $352,213 from
operating activities, which primarily reflected a decrease in
accounts receivable of $370,702 due to reduced sales and a decrease in
inventory of $34,471. The Company also used $18,775 for the purchase
of property, plant and equipment.
The Company received $11,973 from the exercise of employee stock
options and used $60,706 for the repurchase of 17,200 shares of the Company's
common stock pursuant to a stock repurchase program
-15-
<PAGE> 16
announced on May 13, 1999. All 17,200 shares have been retired. In 1999, cash
increased $284,705 to $1,158,462 at September 30, 1999.
For 1998, the Company provided net cash of $248,524 from operating
activities, which primarily reflected a $205,547 decrease in inventory,
reduced by a $54,258 increase in accounts receivable and a $26,697 decrease
in accounts payable.
During 1998, the Company used $5,854 for the purchase of property,
plant, and equipment and $1,817 for intangible assets. Cash increased by
$240,853 to $873,757 at September 30, 1998.
The Company has a line of credit of $1,000,000 with First Union
National 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, 1999, there was no outstanding balance on this line.
At September 30, 1999, 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.
The Company amended its Articles of Incorporation on August 26, 1999
to increase the number of authorized shares of the Company's common
stock, no par value, from 10,000,000 shares to 20,000,000 shares. The
amendment was approved by the shareholders at the Annual Meeting of
Shareholders held on June 30, 1999.
YEAR 2000 COMPLIANCE
As has been widely reported, many computer systems process dates
based on two digits for the year of a transaction and are unable to process
dates in the Year 2000 and beyond. The Company primarily uses licensed
software products in its operations with a significant portion of processes
and transactions centralized in one particular software package. The
Company has completed an upgrade of this software package for Year 2000
compliance. Other systems have been assessed, and have been replaced,
modified or plans have been developed and implemented to make the necessary
modifications to be Year 2000 compliant. The financial impact of making the
required system changes for Year 2000 compliance are not expected to
have a material effect on the Company's financial statements.
The Company has made formal communication with its significant
suppliers, customers and service providers to quantify the effects of their
noncompliance. Any Year 2000 compliance problems with either the Company,
its suppliers, its service providers or its customers could result in a
material adverse effect on the Company's financial condition and operating
results. There can be no assurance that further assessment of the Company's
suppliers, data processing systems and customers will address all issues
of Year 2000 compliance.
FORWARD LOOKING STATEMENTS
The information provided in this report may contain "forward looking"
statements or statements which arguably imply or suggest certain things about
our future. Statements which express that Valley Forge Scientific Corp.
("Valley Forge") "believes", "anticipates", "expects", or "plans to"
as well as other statements which are not historical fact, are
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward looking statements include,
but are not limited to statements about: (1) any competitive advantage
we may have as a result of our installed base of electrosurgical generators
in the field of neurosurgery; (2) our belief that our products
exceed industry standards or favorably compete
-16-
<PAGE> 17
with other companies' new technological advancements; and (3) the anticipated
success of certain recently introduced products or products scheduled to be
released in the near future for use in neurosurgery, other surgical
disciplines, and the dental market. These statements are based on
assumptions that we believe are reasonable, but a number of factors
could cause our actual results to differ materially from those expressed
or implied by these statements. The Company does not intend to update
these forward looking statements. Investors are advised to review
the "Additional Cautionary Statements" section below for more information
about risks that could affect the financial results of Valley Forge.
ADDITIONAL CAUTIONARY STATEMENTS
Competition and Risk of Obsolescence from Technological Advances
The markets in which Valley Forge's products compete are characterized
by continuing technical innovation and increasing competition. Some
surgical procedures which utilize or could utilize our products could
potentially be replaced or reduced in importance by alternative medical
procedures or new drugs which may adversely affect our business.
Product Acceptance and New Products
Valley Forge's growth depends in part on the acceptance of our products
in the marketplace, the market penetration achieved by the companies which
we have contracted with, and rely on, to distribute our products, foregoing
alliances with companies to distribute our products and our ability to
introduce new and innovative products that meet the needs of medical
professionals. There can be no assurance that we will be able to
continue to introduce new and innovative products or that the products Valley
Forge introduces, or has introduced, will be widely accepted by the
marketplace, or that companies that do or could distribute the Company's
products will achieve market penetration in the surgical disciplines
and markets outside of neurosurgery. Our failure to penetrate markets
outside of neurosurgery and continue to introduce new products or gain
wide spread acceptance of our products would adversely affect our operations.
Government Regulation
The process of obtaining and maintaining required regulatory approvals
is lengthy, expensive and uncertain. Although we have not experienced any
substantial regulatory delays to date, there is no assurance that delays
will not occur in the future, which could have a significant adverse effect
on our ability to introduce new products on a timely basis. Regulatory
agencies periodically inspect Valley Forge's manufacturing facilities
to ascertain compliance with "good manufacturing practices" and can
subject approved products to additional testing and surveillance programs.
Failure to comply with applicable regulatory requirements can, among other
things, result in fines, suspensions of regulatory approvals, product
recalls, operating restrictions and criminal penalties. While we believe
that we are currently in compliance, if we fail to comply with regulatory
requirements, it could have an adverse effect on the our results of
operations and financial condition.
Uncertainties within the Health Care Markets
Political, economic and regulatory influences are subjecting the
health care industry in the United States to rapid, continuing and
fundamental change. Although Congress has not passed comprehensive health
care reform legislation to date, it is believed that Congress, state
legislatures and the private sector will continue to review and assess
alternative health care delivery and payment systems. Responding to
increased costs and to pressure from the government and from insurance
companies to reduce patient charges, health care providers have demanded,
and in many cases received, reduced prices on medical devices and
instrumentation. These customers are expected to continue to demand
lower prices in the future. Valley Forge cannot predict what impact
the adoption of any federal or state health care reform measures,
private sector reform or market forces
-17-
<PAGE> 18
may have on our business. However, pricing pressure is expected
to continue to adversely affect profit margins.
Product Liability Risk
Valley Forge's products involve a risk of product liability.
Although we maintain product liability insurance at coverage levels which we
believe are adequate, there is no assurance that, if we were to incur
substantial liability for product liability claims, insurance would provide
adequate coverage against such liability.
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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
-18-
<PAGE> 19
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.
-19-
<PAGE> 20
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 is indicated 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, Restated to include
Amendment to Articles of Incorporation dated
August 26, 1999
(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)).
-20-
<PAGE> 21
(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)).
(g) Distribution Agreement between Codman & Shurtleff, Inc.
(Johnson & Johnson Professional, 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))
(p) Promissory Note from Jerry L. Malis
to the Company(9) (Exhibit 10(p)).
(q) Extension of Distribution Agreement with
Codman & Shurtleff, Inc. (Johnson & Johnson
Professional, Inc.), dated September 2, 1998 (9)
(Exhibit 10(q)).
(r) Second Extension of Distribution Agreement
with Codman & Shurtleff, Inc. dated November 2, 1999.
(s) Demand Note from Bernard H. Shuman to the Company.
(21) SUBSIDIARIES OF REGISTRANT
Subsidiaries of Valley Forge Scientific Corp. (8) (Exhibit 21)
(23) CONSENT OF SAMUEL KLEIN & COMPANY
- -------------
(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.
-21-
<PAGE> 22
(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.
(8) Previously filed with the Company's Form 10-K for the
year ended September 30, 1997, and incorporated
herein by reference.
(9) Previously filed with the Company's Form 10-K for the year
ended September 30, 1998 and incorporated
herein by reference.
-22-
<PAGE> 23
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 28th day of December, 1999
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 28, 1999
Jerry L. Malis President (chief executive
officer and principal
financial and accounting
officer)
/s/ Thomas J. Gilloway Executive Vice President, December 28, 1999
Thomas J. Gilloway Secretary, Treasurer,
Director
/s/ Leonard I. Malis Director December 28, 1999
Leonard I. Malis
/s/ Bruce A. Murray Director December 28, 1999
Bruce A. Murray
/s/ Bernard H. Shuman Vice President-Technology, December 28, 1999
Bernard H. Shuman Director
/s/ Robert H. Dick Director December 28, 1999
Robert H. Dick
-23-
<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, 1999 and 1998 F-3
Statements of Operations - Years Ended September 30, 1999, 1998 F-4
and 1997
Statements of Stockholders' Equity - Years ended September 30, 1999 F-5
1998 and 1997
Statements of Cash Flows - Years ended September 30, 1999, 1998 F-6
and 1997
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, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended September 30,
1999. 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 audits 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, 1999 and 1998, and the results of operations
and cash flows for each of the three years in the period
ended September 30, 1999, in conformity with generally
accepted accounting principles.
SAMUEL KLEIN AND COMPANY
Newark, New Jersey
December 10, 1999
F-2
<PAGE> F-3
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
September 30,
ASSETS 1999 1998
---- ----
Current Assets:
Cash and cash equivalents $1,158,462 $ 873,757
Accounts receivable, net 540,456 911,158
Inventory 1,170,509 1,204,980
Prepaid items and other current assets 98,932 68,996
Recoverable income taxes - 4,636
Deferred income tax benefit 193,035 152,983
---------- ----------
Total Current Assets 3,161,394 3,216,510
Property, plant and equipment, net 205,443 229,687
Intangible assets, net 662,794 753,542
Other Assets 4,812 4,472
---------- ----------
Total Assets $4,034,443 $4,204,211
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 166,618 $ 160,607
Income taxes payable - 513
----------- ----------
Total Current Liabilities 166,618 161,120
Deferred Income Tax Liability 16,885 18,445
----------- ----------
Total Liabilities 183,503 179,565
----------- ----------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock - -
Common stock (no par, 20,000,000 shares
authorized, shares issued and outstanding
at September 30, 1999 - 8,217,309 and at
September 30, 1998 - 8,229,384) 4,006,825 4,055,558
Retained earnings (deficit) (155,885) (30,912)
--------- ---------
Total Stockholders' Equity 3,850,940 4,024,646
--------- ---------
Total Liabilities and Stockholders' Equity $4,034,443 $4,204,211
========= =========
____________________
The accompanying notes are an integral part of these financial statements.
F-3
</TABLE>
<PAGE> F-4
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<S> <S> <S> <S>
For the Years Ended September 30,
1999 1998 1997
---- ---- ----
Net Sales $3,721,528 $3,879,977 $3,977,965
Cost of Sales 2,064,586 2,029,145 1,951,342
--------- --------- ---------
Gross Profit 1,656,942 1,850,832 2,026,623
--------- --------- ---------
Other Costs:
Selling, general and administrative 1,462,926 1,531,183 1,609,615
Research and development 301,078 292,165 307,071
Amortization 90,748 91,005 90,236
--------- --------- ---------
Total Other Costs 1,854,752 1,914,353 2,006,922
--------- --------- ---------
Income (Loss) from Operations (197,810) (63,521) 19,701
Other Income (Expense):
Interest income 35,348 26,923 9,067
--------- --------- ---------
Income (Loss) before Income Taxes (162,462) (36,598) 28,768
Provision for (Benefit of) Income Taxes (37,489) (2,224) 22,235
--------- --------- ---------
Net Income (Loss) $ (124,973) $ (34,374) $ 6,533
========= ========== =========
Earnings (Loss) Per Share:
Basic earnings (loss) per common share $ (.02) $ (.00) $ .00
========= ========= =========
Diluted earnings (loss) per common share $ (.02) $ (.00) $ .00
========= ========= =========
Basic common shares outstanding 8,229,505 8,229,384 8,229,384
Diluted common shares outstanding 8,229,505 8,229,384 8,320,840
____________________
The accompanying notes are an integral part of these financial statements.
F-4
</TABLE>
<PAGE> F-5
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<S> <C> <C> <C> <C>
Common Stock
No Par Value
------------------------------
Number Common Retained Total
of Stock Earnings Stockholders'
Shares Amount (Deficit) Equity
------ ------ -------- ------------
Balances, October 1, 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
Issuance of Nonqualified Options
to a Consultant - 3,860 - 3,860
Net Loss for the Year Ended
September 30, 1998 - - (34,374) (34,374)
--------- --------- -------- ---------
Balances, September 30, 1998 8,229,384 4,055,558 (30,912) 4,024,646
Retirement of Shares (17,200) (60,706) - (60,706)
Exercise of Employee Stock
Options 5,125 11,973 - 11,973
Net Loss for the Year Ended
September 30, 1999 - - (124,973) (124,973)
--------- --------- -------- ---------
Balances, September 30, 1999 8,217,309 $4,006,825 $(155,885) $3,850,940
========= ========= ========= =========
____________________
The accompanying notes are an integral part of these financial statements.
F-6
</TABLE>
<PAGE> F-6
<TABLE>
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C> <C> <C>
For the Years Ended September 30,
1999 1998 1997
---- ---- ----
Cash Flows from Operating Activities:
Net income (loss) $ (124,973) $(34,374) $ 6,533
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 133,767 134,784 140,095
Stock options issued to a consultant - 3,860 -
Changes in assets and liabilities, net
of effect from:
(Increase) decrease in accounts
receivable 370,702 (54,258) 14,748
(Increase) decrease in inventory 34,471 205,547 277,270
(Increase) decrease in recoverable
income taxes 4,636 3,716 4,537
(Increase) decrease in deferred income
tax benefit (40,052) (13,803) 25,969
(Increase) decrease in other assets (340) - (100)
(Increase) decrease in prepaid items
and other current assets (29,936) 22,397 (4,135)
Increase (decrease) in accounts payable
and accrued expenses and
income taxes payable 5,498 (26,697) 23,222
Increase in deferred tax liability (1,560) 7,352 6,357
------- ------ ------
Net cash provided by operating
activities 352,213 248,524 494,496
------- ------- -------
Cash Flows from Investing Activities:
Increase in intangible assets - (1,817) (10,296)
Purchase of property, plant and equipment (18,775) (5,854) (14,057)
-------- ------- --------
Net cash used in investing activities (18,775) (7,671) (24,353)
-------- ------- --------
Cash Flows from Financing Activities:
Proceeds from exercise of employee
stock options 11,973 - -
Repurchase of common stock (60,706) - -
-------- ------- --------
Net cash used in financing activities (48,733) - -
-------- ------- --------
Net Increase in Cash and Cash Equivalents 284,705 240,853 470,143
Cash and Cash Equivalents, beginning
of year 873,757 632,904 162,761
------- ------- -------
Cash and Cash Equivalents, end of year $1,158,462 $873,757 $632,904
========= ======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ - $ - $ -
========= ======= =======
Income taxes $ - $ - $ 2,500
========= ======= =======
____________________
The accompanying notes are an integral part of these financial statements.
F-6
</TABLE>
<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. As referred
to in Note 2, during 1998 the Company entered into a license
agreement for the manufacture and distribution of the CPR
Mask. 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.
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.
Revenue Recognition
The Company currently sells its products to or through
national or international distributors which include
affiliates of major medical products companies. A
significant part of the Company's sales are made pursuant to
a distribution agreement, as amended on September 2, 1998,
and again on November 2, 1999, in the field of neurosurgery
effective through December 31, 2000. Revenues from sales are
recorded on the accrual basis of accounting, when goods are
shipped or when services are provided. Revenues from license
and royalty fees are recorded when earned.
Inventory
Inventory is stated at the lower of cost, determined by the
moving average cost method, or market.
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)
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.
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.
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 pretax cash flows associated with the
asset to the asset's carrying value to determine if a
write-down to market value or discounted pretax cash flow
value would be required.
Research and Development
Costs associated with development of new products are charged
to operations as incurred.
Advertising Costs
Advertising expenditures relating to the manufacturing and
marketing of the Company's products and services are expensed
in the period the advertising costs are incurred.
Substantially all cost of such advertising has been borne by
the Company's major distributors.
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.
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)
Comprehensive Income
Effective for the year ended September 30, 1998, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130).
This statement establishes rules for the reporting of
comprehensive income and its components which require that
certain items such as foreign currency translation
adjustments, unrealized gains and losses on certain
investments in debt and equity securities, minimum pension
liability adjustments and unearned compensation expense
related to stock issuances to employees be presented as
separate components of stockholders' equity. The adoption of
SFAS 130 had no impact on total shareholders' equity for any
of the years presented in these financial statements.
Earnings (Loss) per Share
As of December 31, 1997, the Financial Accounting Standards
Board issued Statement No. 128 "Earnings Per Share" (SFAS
128) replacing the calculation of primary and fully diluted
earnings per share with Basic and Diluted earnings per share.
Unlike primary earnings per share, basic earnings per share
excludes the dilutive effects of options, warrants and
convertible securities and thus is computed by dividing
income available to common stockholders by the weighted
average number of common shares outstanding. Diluted
earnings per share is similar to the previously fully diluted
earnings per share. Diluted earnings per share reflects the
potential dilution that could occur if securities or other
agreements to issue common stock were exercised or converted
into common stock. Dilutive earnings per share is computed
based upon the weighted average number of common shares and
dilutive common equivalent shares outstanding.
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.
In accounting for options granted to persons other than
employees (as defined under SFAS 123), the provisions under
SFAS 123 were applied. According to SFAS 123, the fair value
of these options was estimated at the grant date using the
Black-Scholes option pricing model.
Reclassifications
Certain reclassifications have been made to the prior year
balances to conform to the current year's presentation.
F-9
<PAGE> F-10
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. LICENSE AGREEMENT
On February 18, 1998, as amended on March 30, 1998, the
Company entered into a license agreement with Medical
Products Manufacturing, LLC ("MPM"), a manufacturer and
distributor of emergency medical equipment, whereby the
Company granted to MPM an exclusive, nontransferable license
to use the Company's equipment and technology of the
Company's CPR Masks. In connection with this agreement the
Company sold its remaining CPR Mask inventory to MPM. The
Company will receive a license fee equal to 10% of gross
sales of any and all products that MPM or its affiliates sell
utilizing the mask technology with a minimum annual license
fee. As of September 30, 1999, the Company did not receive
any fees and pursuant to their rights contained in the
agreement, the Company terminated the agreement.
3. ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following:
September 30,
1999 1998
---- ----
Accounts receivable $549,004 $1,029,456
Less: Allowance for doubtful accounts
and contractual allowances 8,548 118,298
------- ---------
$540,456 $ 911,158
======== ==========
4. INVENTORY
Inventory consists of the following:
September 30,
1999 1998
---- ----
Finished goods $ 83,653 $ 21,080
Work-in-process 642,978 757,468
Materials and parts 443,878 426,432
----------- -----------
$ 1,170,509 $ 1,204,980
=========== ===========
F-10
<PAGE> F-11
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. PROPERTY, PLANT AND EQUIPMENT
September 30,
1999 1998
---- ----
Land $ 11,953 $ 11,953
Buildings and improvements 86,917 86,917
Furniture and fixtures 16,669 16,669
Laboratory equipment 370,774 369,579
Office equipment 114,744 97,164
Leasehold improvements 9,413 9,413
--------- ---------
610,470 591,695
Less: Accumulated depreciation
and amortization 405,027 362,008
--------- ---------
$205,443 $229,687
======== ========
Depreciation is reflected in both cost of sales and selling,
general and administrative expenses. Total depreciation for
the years ended September 30, 1999, 1998 and 1997 is $43,019,
$43,779 and $49,859, respectively.
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
September 30,
1999 1998
---- ----
Patents/trademarks/licensing agreements $ 558,972 $ 558,972
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
--------- ---------
1,418,418 1,418,418
Less: Accumulated amortization 755,624 664,876
--------- ---------
$ 662,794 $ 753,542
========= =========
F-11
<PAGE> F-12
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. RELATED PARTY TRANSACTIONS
Loans Receivable
On July 6, 1998, Jerry L. Malis, a principal shareholder,
director and officer of the Company, borrowed $15,015 from
the Company. The note is payable on demand and has a stated
rate of interest of 5.42%, the then current "Applicable
Federal Rate" as set forth under the Internal Revenue Code.
The Company has additional loans due from Jerry L. Malis
payable on demand with similar interest terms as stated above
ranging from 4.83% to 6.97%. The collective loans are
secured by 5,833 shares of common stock of the Company.
On July 7, 1999, Bernard H. Shuman, a principal shareholder,
director and officer of the Company, borrowed $12,000 from
the Company. The note is payable on demand and has a stated
rate of interest of 5.32%, the then current "Applicable
Federal Rate" as set forth under the Internal Revenue Code.
On December 17, 1999 the principal balance plus accrued
interest was paid in full.
The balance of these loans is reflected in other current
assets and as of September 30, 1999 and 1998 was $57,761 and
$41,921, respectively, including accrued interest of $7,926
and $4,086, respectively.
Consulting Services
During 1998, the Company entered into an agreement with R.H.
Dick and Company, Inc., a corporation owned by Robert Dick, a
director of the Company, under which R.H. Dick and Company,
Inc. agreed to provide certain investment banking and
consulting services for the years 1998 and 1999. During
October 1998, the Company paid R.H. Dick and Company, Inc.
$10,000 for these services of which $5,000 was expensed for
each of the years ended September 30, 1999 and 1998.
8. LINE OF CREDIT
The Company has a line of credit of $1,000,000 with First
Union Bank (formerly Meridian Bank) which calls for interest
to be charged equal to the bank's national commercial rate.
The unsecured loan is 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 calls for a minimum tangible net worth of no less
than $3,000,000 during the term of the loan. At September
30, 1999 and 1998 there were no outstanding balances on this
line.
9. COMMITMENTS AND CONTINGENCIES
The Company is subject from time to time to litigation
arising from the normal course of business. In management's
opinion, any such contingencies would be covered under its
existing insurance policies or would not materially affect
the Company's financial position.
F-12
<PAGE> F-13
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. 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 expiring September 30, 1999. 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. On September 30, 1999, the
Company amended the employment agreements with Messrs. Malis
and Gilloway, to extend the terms for an additional year
effective October 1, 1999. Under the extended terms, the
agreements provide for an annual base salary of $198,950 for
Jerry L. Malis and $90,000 for Thomas J. Gilloway, commencing
October 1, 1999. In addition, the agreements allow for
Thomas J. Gilloway to provide part-time services during the
term of his agreement. For the year ending September 30,
1998 the officers waived their right to a full 10% increase
of base salary, opting to reduce the annual base salary
increase from 10% to 5% for 1998, and for the year ending
September 30, 1999 waived their right to the 10% increase of
base salary in 1999. The base salaries for the years ended
September 30, 1999, 1998 and 1997 were $188,222, $188,949 and
$179,951 for Jerry L. Malis and $100,013, $161,278 and
$153,598 for Thomas J. Gilloway, respectively. The reduction
of Mr. Gilloway's base salary for the year ended September
30, 1999 was due to the reduction of services to part-time
effective January 1, 1999.
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.
Although the agreement has not been extended, the Company
continues to provide compensation on an annual bases of
$105,000. 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 each of the years ended
September 30, 1999, 1998 and 1997 was approximately $105,000.
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 pretax
basis not to exceed the current Federal limitation of $10,000
per year (as adjusted for cost of living increase). Amounts
contributed to the 401(k) Plan are nonforfeitable.
-13-
<PAGE> F-14
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. COMMITMENTS AND CONTINGENCIES (Continued)
401(k) Plan and Profit Sharing Plan (Continued)
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 nonqualified 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
nontransferrable and expire if not exercised after ten years
from the date of grant 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 as of the
date of grant.
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 within
ten years, commencing October 24, 1994.
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 $2.38 per
share (the closing bid price on the Nasdaq small-cap market
on December 22, 1994). Options granted expire if not
exercised within 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 within 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 within five years,
commencing July 26, 1996.
On November 14, 1997, the Company granted to two directors
and one consultant stock options to each to purchase 2,000
shares of Common Stock pursuant to the plan at $3.38 per
share (the closing bid price on the Nasdaq small-cap market
on November 14, 1997). In accordance with SFAS 123 the fair
value of the 2,000 options issued to the consultant was
estimated at the grant date using the Black-Scholes Value
option pricing model resulting in the recording of $3,860 as
consulting expense.
On November 2, 1998, the Company granted to two Directors,
stock options to each to purchase 2,000 shares of Common
Stock pursuant to the plan at $3.75 per share (the closing
bid price on the Nasdaq small-cap market on November 2, 1998).
-14-
<PAGE> F-15
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. COMMITMENTS AND CONTINGENCIES (Continued)
Stock Option Plan (Continued)
During the year ended September 30, 1999, 5,125 stock option
shares were exercised at prices ranging from $2.13 to $2.50
per share in accordance with the terms of the options. In
addition, during the year ended September 30, 1999, 3,100
stock option shares expired at prices ranging from $4.12 -
$5.13 per share in accordance with the terms of the options.
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 nonqualified employee
stock option plan:
Weighted
Exercise Average Remaining
Price Exercise Life
Shares Per Share Price (Years)
------ --------- -------- ---------
Options outstanding
at October 1, 1996 395,400 $1.56 - $5.13 $2.54 6.70
Granted - - - -
Exercised - - - -
Surrendered, forfeited
or expired (4,500) 2.31 - 2.50 2.39 8.06
------- ------------ ---- ----
Options outstanding at
September 30, 1997 390,900 1.56 - 5.13 2.54 5.66
Granted 6,000 3.38 3.38 9.79
Exercised - - - -
Surrendered, forfeited
or expired - - - -
------ ------------- ---- ----
Options outstanding at
September 30, 1998 396,900 1.56 - 5.13 2.56 4.61
Granted 4,000 3.75 3.75 9.08
Exercised 5,125 2.13 - 2.50 2.34 -
Surrendered, forfeited
or expired 3,100 4.12 - 5.13 4.49 -
------- ------------- ---- ----
Options outstanding at
September 30, 1999 392,675 $1.56 - $5.13 $2.56 3.72
======= ============== ===== ====
All options outstanding for each of the years ended September 30, 1999,
1998 and 1997 were exercisable.
F-15
<PAGE> F-16
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. 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 options granted during the years ended September
30, 1999, 1998 and 1997 was estimated at the date of grant.
The fair value of these options was estimated using a
Black-Scholes option pricing model with the following
weighted average assumptions:
September 30,
1999 1998 1997
---- ---- ----
Risk-Free interest (based on
U.S. Government strip bonds
on the date of grant with
maturities approximating the
expected option term) 5.28% 5.82% -
Dividend yields 0% 0% -
Volatility factors of the expected
market price of the Company's
Common Stock (based on historical
data) 65.6% 60.5% -
Expected life of options 10 Years 5 Years -
The weighted average fair value of options granted during the
years ended September 30, 1999, 1998 and 1997 were $2.90,
$1.93 and $ - .
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.
F-16
<PAGE> F-17
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. COMMITMENTS AND CONTINGENCIES (Continued)
Stock Option Plan (Continued)
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 SFAS 123, only
stock options granted after September 30, 1995 have been
included for the Company's pro forma information as follows:
September 30,
1999 1998 1997
---- ---- ----
Additional compensation expense,
net of tax effect $ (6,892) $ (4,586) $ -
Pro forma net loss (131,865) (38,960) -
Pro forma loss per share:
Basic (.02) (.00) -
Diluted (.02) (.00) -
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 calls
for a monthly base rent of $4,618 (with increases based on
increases in the consumer price index) which include costs
associated with real estate taxes, maintenance and utilities.
The related expense for this lease for the years ended
September 30, 1999, 1998 and 1997 was $55,707, $54,899 and
$52,937, respectively. As of September 30, 1999, 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
------- ---------
2000 $42,448 $20,538
2001 - -
2002 - -
2003 - -
2004 - -
------ ------
$42,448 $20,538
======= =======
F-17
<PAGE> F-18
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. COMMITMENTS AND CONTINGENCIES (Continued)
Year 2000 Compliance
As has been widely reported, many computer systems process
dates based on two digits for the year of a transaction and
are unable to process dates in the year 2000 and beyond. The
Company primarily uses licensed software products in its
operations with a significant portion of processes and
transactions centralized in one particular software package.
During 1999, management upgraded to the most current version
of this software package which, among other things, is Year
2000 compliant. In addition, the Company has previously
replaced or modified other systems that were not Year 2000
compliant.
The Company processed formal communication with all of its
significant suppliers and customers to determine the extent
to which the Company is vulnerable to potential third parties
failure to remediate their own year 2000 issued. The Company
can give no guarantee that the systems of other companies on
which the Company's system relies will be remedied for the
year 2000 issues on time or that a failure to remedy the
problem by another company would not have a material adverse
effect on the company.
10. MAJOR CUSTOMERS
For the years ended September 30, 1999, 1998 and 1997, 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. This agreement was extended through December 31, 1999
at a minimum purchase requirement of $5,000,000. This
agreement was subsequently modified and extended through
December 31, 2000 and the minimum purchase requirement for
1999 was reduced to $3,500,000. In addition, the agreement
established a minimum purchase requirement for the calendar
year 2000 at $3,500,000. Revenues derived from this customer
are as follows:
Year ended September 30, 1999 $3,576,589 96%
Year ended September 30, 1998 $3,616,778 93%
Year ended September 30, 1997 $3,659,557 92%
At September 30, 1999 and 1998, this customer accounted for
approximately 95% and 69%, respectively, of the Company's
accounts receivable and at September 30, 1998 two other
customers represented approximately 22%.
11. STOCKHOLDERS' EQUITY
Common Stock
On August 26, 1999, the Company filed an amended and restated
Certificate of Incorporation increasing the authorized shares
of Common Stock the Company is authorized to issue from
10,000,000 to 20,000,000 shares with no stated par value.
F-18
<PAGE> F-19
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. STOCKHOLDERS' EQUITY (Continued)
Common Stock (Continued)
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 May 9, 1999, the Board of Directors of the Company
approved a stock repurchase program superceding the October
14, 1992 program whereby the Company may, from time to time,
repurchase on the open market up to 200,000 shares of the
Corporation's Common Stock. During the fiscal year ended
September 30, 1999, the Company repurchased for retirement
17,200 shares at a price of $60,706.
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. For each of the years September 30, 1999,
1998 and 1997, there were no issued or outstanding preferred
shares, and the Company has no intention to issue any
preferred stock in the immediate future.
12. EARNINGS (LOSS) PER SHARE
September 30,
1999 1998 1997
---- ---- ----
Basic Earnings (Loss) Per Share:
Income (loss) available to common
shareholders $ (124,973) $ (34,374) $ 6,533
========= ========= =========
Weighted average shares outstanding 8,229,505 8,229,384 8,229,384
========= ========= =========
Basic Earnings (Loss) Per Share $ (.02) $ (.00) $ .00
========= ========= =========
Diluted Earnings (Loss) Per Share:
Income (loss) available to common
shareholders $ (124,973) $ (34,374) $ 6,533
========= ========= =========
Weighted average shares outstanding 8,229,505 8,229,384 8,229,384
========= ========= =========
Dilutive shares issuable in connection with
stock plans - - 91,456
--------- --------- ---------
Total shares 8,229,505 8,229,384 8,320,840
========= ========= =========
Diluted Earnings (Loss) Per Share $ (.02) $ (.00) $ .00
========= ========= =========
F-19
<PAGE> F-20
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. EARNINGS (LOSS) PER SHARE (Continued)
Options to purchase 7,400 shares of common stock at exercise
prices ranging from $4.25 to $5.13 per share were outstanding
during the year ended September 30, 1997 but were not
included in the computation of diluted earnings per share
because the options' exercise prices were greater than the
average market price of the common shares.
Options to purchase 392,675 and 396,900 shares of common
stock at exercise prices ranging from $1.56 to $5.13 per
share were outstanding during the years ended September 30,
1999 and 1998, respectively, and were not included in the
computation of diluted earnings per share in accordance with
SFAS 128, as the potential shares are considered
anti-dilutive due to the Company's loss from continuing
operations.
13. PROVISION FOR (BENEFIT OF) INCOME TAXES
Provision for (benefit of) income taxes is as follows:
1999 1998 1997
---- ---- ----
Current:
Federal $ - $ - $(8,911)
State - 45 -
------ ------ -------
- 45 (8,911)
------ ------ -------
Deferred:
Federal (24,975) (295) 27,104
State (12,514) (1,974) 4,042
-------- ------- -------
(37,489) (2,269) 31,146
-------- ------- -------
$(37,489) $(2,224) $22,235
======== ======= =======
In accordance with SFAS 109, tax credits arising from net
operating losses, which previously were reported as
extraordinary items, have now been restated as offsets
against the provision for income taxes.
The Company's effective tax rate was (23.1)%, (6.1)% and
77.3% for the years ended September 30, 1999, 1998 and 1997,
respectively. Reconciliation of income tax at the statutory
rate to the Company's effective rate is as follows:
September 30,
1999 1998 1997
---- ---- ----
Computed at the expected statutory rate (28.7)% (15.0)% 34.0%
State taxes net of federal tax benefit (6.1) (6.1) 8.5
Nondeductible expenses 11.7 15.0 24.5
Other - - 10.3
---- ---- ----
(23.1)% (6.1)% 77.3%
===== ==== ====
F-20
<PAGE> F-21
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. PROVISION FOR (BENEFIT OF) INCOME TAXES (Continued)
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 and deferred income tax
liability are as follows:
September 30,
1999 1998 1997
---- ---- ----
Deferred Tax Asset:
Difference in capitalization of
inventory cost $ 76,515 $ 75,995 $ 73,463
Difference in reporting bad debts 3,470 48,022 48,059
Federal and State of Pennsylvania net
operating loss carryforward 109,839 23,208 22,603
Tax credits and other current assets 8,156 10,703 -
------- ------- -------
Total deferred tax asset 197,980 157,928 144,125
Valuation allowance (4,945) (4,945) (4,945)
------- ------- -------
Total net deferred tax asset $193,035 $152,983 $139,180
======= ======= =======
Deferred Tax Liability:
Difference in reporting depreciation $ 16,885 $ 18,445 $ 11,093
------- ------- -------
Total Deferred Tax Liability $ 16,885 $ 18,445 $ 11,093
======= ======= =======
The Company has federal and state net operating loss
carryforwards of approximately $231,000 and $592,000,
respectively, available to reduce future taxable income which
expires through the year ended September 30, 2014.
14. 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 money market accounts and U.S. Treasury Securities. At
September 30, 1999 and 1998 the balances the company held in
these securities was approximately $1,060,000 and $805,000,
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-21
VALLEY FORGE SCIENTIFIC CORP.
FORM 10-K FOR THE YEAR ENDED
SEPTEMBER 30, 1999
INDEX TO EXHIBITS*
<TABLE>
<S> <C> <C>
Exhibit Number Description Page Number
3(b) Articles of Incorporation, restated to
include Amendment to Articles of
Incorporation dated August 26, 1999
10(r) Second Extension of Distribution Agreement with Codman &
Shurtleff, Inc., dated November 2, 1999
10(s) Demand Note from Bernard H. Shuman of the Company
23 Consent of Samuel Klein & Company
27 Financial Data Schedule
</TABLE>
* Only exhibits actually filed are listed. Exhibits
incorporated by reference are set forth in the
exhibit listing in Item 14 on the Report on Form 10-K
VALLEY FORGE SCIENTIFIC CORP.
RESTATED TO INCLUDE AMENDMENT TO ARTICLES OF INCORPORATION DATED
AUGUST 26, 1999
In compliance with the requirements of section 204 of the
Business Corporation Law, act of May 1933 (P.L. 364) (15
P.S.Section1204) the undersigned, desiring to be incorporated as a
business corporation, hereby certifies (certify) that:
1. The name of the corporation is: Valley Forge Scientific Corp.
2. The location and post office address of the registered office
of the corporation in this Commonwealth is: 136 Green Tree
Road, Oaks, Pennsylvania 19546.
3. The corporation is incorporated under the Business Corporation
Law of the Commonwealth of Pennsylvania for the following
purposes:
To engage in and to do any lawful act concerning any or all
lawful business, including manufacturing, processing, research
and development, for which corporations may be incorporated
under the Pennsylvania Business Corporation Law.
4. The term for which the corporation is to exist is: perpetual.
5. The aggregate number of shares which this corporation shall
have authority to issue is, and the relative rights or
preferences pertaining thereto shall be, as follows:
(a) Twenty Million (20,000,000) shares of no par value voting
common stock ("Common Stock"); the special rights or
preferences of which shall be set forth in (c), (d), (e),
and (f) of this Article 5;
(b) Four Hundred and Eighty-Seven (487) shares of One Thousand
($1,000) Dollar par value Preferred Stock ("Preferred
Stock"): the special rights or preferences of which shall
be set forth in (c), (d), (e) and (f) of this Article 5;
(c) The holders of Preferred Stock shall have no right to vote
upon any matter and the holders of Common Stock shall have
the right to vote on all matters except that they shall
not have the right to alter the preferences or other
rights pertaining to the Preferred Stock;
(d) The holders of Preferred Stock will not have preemptive
rights;
(e) The Preferred Stock preference is that upon the
liquidation of the Corporation, a $1,000 per share
liquidating dividend must be paid upon each of the issued
and outstanding shares of Preferred Stock before a
liquidating dividend may be paid upon any share of Common
Stock. Next a $10 per share liquidating dividend must be
paid upon each issued and outstanding share of Common
Stock. If any sum shall remain for the payment of any
further liquidation dividend it shall be paid upon all of
the issue and outstanding shares of Preferred Stock and
Common Stock pro rata as if the Preferred and Common Stock
were one class; and
(f) In the event that the Corporation shall transfer its
assets to another corporation or shall merge with another
corporation and the holders of Common Stock of this
corporation shall have taken or shall have become
obligated to take the Common Stock of such successor
corporation in exchange for their shares and the Preferred
Stock of such acquiring or merging corporation shall be
entitled to all the preferences, rights, benefits and
protection to which the Preferred Stock of this
corporation is entitled, then the holders of Preferred
Stock of this corporation then outstanding shall be
obligated to take in exchange for their shares an equal
number of shares of Preferred Stock of the acquiring or
merging corporation.
6. The name and post office address of each incorporator and the
number and class of shares subscribed by such incorporator is:
Name Address Number and
Class of Shares
Ellie Truax 800 North Third St. 1
Harrisburg, PA 17102
7. The date of incorporation was March 27, 1980.
SECOND
LETTER OF EXTENSION
DISTRIBUTION AGREEMENT DATED 9/17/91
AS EXTENDED ON SEPTEMBER 2, 1998
1. The term of the Distribution Agreement dated September 17,
1991, by and between Codman and Shurtleff, Inc. and Valley
Forge Scientific Corp. as set forth in Paragraph 16 of that
Agreement and as extended in the "Letter of Extension"dated
September 2, 1998 is hereby extended until December 31, 2000.
2. Distributor's minimum purchases of Established Products for
calendar year 1999 are reduced from five million ($5,000,000)
to three and a half million ($3,500,000). The minimum
purchases of Established Products for calendar year 2000 will
also be three and a half million ($3,500,000).
3. Distributor shall make such purchases of New Products during
the remaining term as mutually agreed upon by Valley Forge
Scientific Corp. and Distributor.
4. Capitalized terms not defined herein shall have the meaning
ascribed to them in the Distribution Agreement.
5. All other terms of the Distribution Agreement shall remain in
full force and effect.
6. This second Letter of Extension supercedes the Letter of
Extension dated September 2, 1998.
Dated: 11/2/99 Codman & Shurtleff, Inc.
By: /s/ Codman & Shurtleff, Inc.
Dated: 11/2/99 Valley Forge Scientific Corp.
By: /s/ Valley Forge Scientific Corp.
DEMAND PROMISSORY NOTE
$12,000.00 OAKS,
PENNSYLVANIA
JULY 7, 1999
FOR VALUE RECEIVED, Bernard H. Shuman, an individual having an
address at 329 Cypress Street, Philadelphia, Pennsylvania, 19106
("Obligor") promises to pay to the order of Valley Forge Scientific
Corp., having an address at 136 Green Tree Road, Suite 100, Oaks,
Pennsylvania 19456 (hereinafter "Payee"), the principal sum of
Twelve Thousand Dollars ($12,000.00) at the times hereinafter
stated, under the following terms:
1. Payment of Principal and Interest. Principal and
interest, computed at the "applicable federal rate" as set forth
under the Internal Revenue Code of 1986, as amended, and the
applicable regulations thereunder, shall be payable by Obligor to
Payee on Demand.
2. Event of Default. An "Event of Default" shall occur upon
the failure of Payee to make the payments set forth in paragraph 1,
on the date set forth therein.
Upon the occurrence of an Event of Default, a late charge of
five (5%) percent of the amount due shall be added to the amount
which is in default and Payee shall be entitled to all remedies
available at law.
3. Waiver. Obligor waives presentment for payment, demand
for payment, notice of protest, protest and notice of dishonor of
this Note, and authorizes the Payee without notice to or consent of
Obligor to grant extensions in the time of payment of and reduction
in the rate of interest on any money owing on this Note.
4. Prepayment. This Note may be prepaid in whole or in part
at any time without penalty.
5. No Additional Waiver Implied by One Waiver. The Payee
shall not by any act be deemed to have waived any of its rights or
remedies hereunder unless such waiver is in writing and signed by
the Payee, and then only to the extent set forth therein. A waiver
as to any one event shall in no way be construed as continuing or as
preventing waiver of such rights or remedy on a subsequent event.
6. Tender of Payment. All payments due under this Note shall
be paid to Payee at the address set forth on the first page of this
Note, or such other address as Payee may inform the undersigned in
writing. All payments on this Note shall be applied first to the
payment of interest with any balance to the payment and reduction of
principal.
7. Time of Payment. Whenever any payment to be made by
Obligor to the Payee pursuant to the terms of this Note (i) shall be
tendered by Obligor to the Payee in immediately available funds,
during normal banking hours on any banking business day, then such
payment shall be considered to have been made on that business day,
or (ii) shall be stated to be due on a day which is not a banking
business day, such payment may be made on the next succeeding
banking business day.
8. Pennsylvania Law Governs. This Note and all matters
relating thereto shall be governed by and construed and interpreted
in accordance with the laws of the State of Pennsylvania.
IN WITNESS WHEREOF, Obligor has caused this Note to be duly
executed, attested and delivered by its authorized and empowered
officer, as of the day and year first written above.
WITNESS:
/s/ Bernard H. Shuman
------------------
Bernard H. Shuman
CONSENT OF SAMUEL KLEIN & COMPANY
INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the
registration statement of Valley Forge
Scientific Corp. on Form S-8 (file No. 333-63637) of our report
dated December 10, 1999, on our audits of the financial statements
of Valley Forge Scientific Corp. as of September 30, 1999 and 1998,
and for each of the three years in the period ended September 30,
1999, which reports are included in this Annual Report on Form 10-K.
SAMUEL KLEIN & COMPANY
Newark, New Jersey
December 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from
the Company's Form 10-K for the year ended September 30, 1999
and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,158,462
<SECURITIES> 0
<RECEIVABLES> 540,456
<ALLOWANCES> 0
<INVENTORY> 1,170,509
<CURRENT-ASSETS> 3,161,394
<PP&E> 205,443
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,034,443
<CURRENT-LIABILITIES> 166,618
<BONDS> 0
0
0
<COMMON> 4,006,825
<OTHER-SE> (155,885)
<TOTAL-LIABILITY-AND-EQUITY> 4,034,443
<SALES> 3,721,528
<TOTAL-REVENUES> 3,721,528
<CGS> 2,064,586
<TOTAL-COSTS> 1,854,752
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (162,462)
<INCOME-TAX> (37,489)
<INCOME-CONTINUING> (124,973)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (124,973)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
