SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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
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 _____
At May 10, 1999 there were 8,234,509 shares outstanding of the
Registrant's no par value Common Stock.
VALLEY FORGE SCIENTIFIC CORP.
INDEX TO FORM 10-Q
March 31, 1999
Page
Number
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Balance Sheets - March 31, 1999 and September 30, 1998. 1
Statements of Operations for the three and six months
ended March 31, 1999 and March 31, 1998. 2
Statements of Cash Flows for the six months
ended March 31, 1999 and March 31, 1998. 3
Notes to Financial Statements. 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 5
PART II - OTHER INFORMATION 8
(i)
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<TABLE>
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
BALANCE SHEETS
<S> <C> <C>
MARCH 31, SEPTEMBER 30,
1999 1998
(UNAUDITED) (AUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 433,766 $ 873,757
Accounts receivable - trade (net) 1,317,938 911,158
Inventory 1,315,887 1,204,980
Prepaid items and other current assets 129,973 68,996
Recoverable income taxes - 4,636
Current portion of deferred income tax benefit 169,380 152,983
--------- ---------
Total Current Assets 3,366,944 3,216,510
Property, Plant and Equipment, net of
Accumulated Depreciation 222,697 229,687
Intangible Assets, net of Accumulated Amortization 707,700 753,542
Other Assets 4,472 4,472
--------- ---------
Total Assets $4,301,813 $4,204,211
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 274,103 $ 160,607
Income taxes payable 4,775 513
--------- ---------
Total Current Liabilities 278,878 161,120
Deferred Income Taxes Payable 19,370 18,445
--------- ---------
Total Liabilities 298,248 179,565
Commitments and Contingencies
Stockholders' Equity:
Preferred stock - -
Common stock (no par, 10,000,000 shares
authorized, 8,234,509 and 8,229,384 shares
issued and outstanding at March 31, 1999 and
September 30, 1998, respectively) 4,067,530 4,055,558
Retained earnings (deficit) (63,995) (30,912)
--------- ---------
Total Stockholders' Equity 4,003,565 4,024,646
--------- ---------
Total Liabilities and Stockholders' Equity $4,301,813 $4,204,211
========= =========
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VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(UNAUDITED)
<S> <C> <C>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
Net Sales $ 893,083 $ 848,083 $1,845,621 $1,684,530
Cost of Sales 492,171 449,113 990,057 893,746
--------- --------- --------- ---------
Gross Profit 400,998 398,970 855,564 790,784
Other Costs:
Selling, general and
administrative 342,348 359,622 712,102 741,820
Research and development 76,306 69,893 154,637 156,833
Amortization 22,920 22,556 45,840 45,111
--------- --------- --------- ---------
Total Other Costs 441,680 452,071 912,579 943,564
--------- --------- --------- ---------
Income (Loss) from Operations (40,682) (53,101) (57,015) (152,780)
Other Income:
Interest income 7,694 6,081 17,388 13,483
--------- --------- --------- ---------
Income (Loss) before Income Taxes (32,988) (47,020) (39,627) (139,297)
Provision for(Benefit of)
Income Taxes (6,345) (13,091) (6,574) (44,397)
--------- --------- --------- ---------
Net Income (Loss) $ (26,643) $ (33,929) $ (33,053) $ (94,900)
========= ========= ========= =========
Earnings (Loss) Per Share:
Basic earnings (loss) per
common share $ (.00) $ (.00) $ (.00) $ (.01)
========= ========= ========= =========
Diluted earnings (loss) per
common share $ (.00) $ (.00) $ (.00) $ (.01)
========= ========= ========= =========
Basic common shares outstanding 8,234,509 8,229,384 8,234,509 8,229,384
Diluted common shares outstanding 8,234,509 8,229,384 8,234,509 8,229,384
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VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31,
<S> <C> <C>
1999 1998
Cash Flows from Operating Activities:
Net loss $ (33,053) $ (94,900)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 68,167 68,506
Changes in assets and liabilities, net of
effect from:
Decrease (increase) in accounts receivable (406,780) 12,837
Decrease (increase) in inventory (110,907) 31,137
Decrease (increase) in recoverable income
taxes 4,636 (22,941)
Increase in deferred income tax benefit (16,397) (15,907)
Increase in prepaid items and other
current assets (60,977) (7,848)
Increase in accounts payable and accrued
expenses 113,496 90,996
Increase in income taxes payable 4,262 -
Increase (decrease) in deferred income
taxes payable 925 (5,547)
--------- ---------
Net cash provided by (used in) operating
activities (436,628) 56,333
--------- ---------
Cash Flows from Investing Activities:
Purchase of property, plant and equipment (15,335) (5,853)
--------- ---------
Net cash used in investing activities (15,335) (5,853)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from exercise of stock options 11,972 -
--------- ---------
Net cash provided by financing activities 11,972 -
--------- ---------
Net Increase(Decrease)in Cash and Cash Equivalents (439,991) 50,480
Cash and Cash Equivalents, beginning of period 873,757 632,904
--------- ---------
Cash and Cash Equivalents, end of period $ 433,766 $ 683,384
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Income taxes $ - $ -
========= =========
Interest $ - $ -
========= =========
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VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
1. Valley Forge Scientific Corp. ("VFSC") is engaged in the business of
developing, manufacturing and selling medical devices and products. The
accompanying financial statements consolidate the accounts of the parent
company and its wholly-owned subsidiaries, Diversified Electronics Co.,
Inc. and Valley Consumer Products, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation.
2. The September 30, 1998 balance sheet data was derived from audited
financial statements but does not include all disclosures required by
generally accepted accounting principles. In the opinion of management,
the accompanying unaudited financial statements contain all adjustments
necessary to present fairly the financial position as of March 31, 1999
and the statements of operations for the three and six months ended
March 31, 1999 and 1998 and the statements of cash flows for the six months
ended March 31, 1999 and 1998.
The statements of operations for the three and six months ended March 31,
1999 and 1998 are not necessarily indicative of results for the full year.
While the Company believes that the disclosures presented are adequate to
make the information not misleading, these financial statements should be
read in conjunction with the financial statements and accompanying notes
included in the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998.
3. Earnings per share are based on the weighted average number of common
shares outstanding including common stock equivalents.
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VALLEY FORGE SCIENTIFIC CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Results of Operations for the Three and Six Months Ended
March 31, 1999 Compared to the Three and Six Months Ended March 31,
1998.
Sales of $893,083 for the three months ended March 31, 1999
were 5% greater than sales of $848,083 for the three months ended
March 31, 1998 and sales of $1,845,621 for the six months ended
March 31, 1999 were 10% greater than sales of $1,684,530 for the six
months ended March 31, 1998. Johnson & Johnson Professional, Inc.
("J&J"), our principal customer, accounted for 97% of sales for the
three months, and 94% for the six months, ended March 31, 1999 as
compared to 94% for the three months, and 95% for the six months,
ended March 31, 1998.
Bipolar electrosurgical systems and irrigation systems
accounted for 42% of our sales for the three months, and 52% of our
sales for the six months, ended March 31, 1999. Disposable C/T Sets
and bipolar cords accounted for 54% of our sales for the three
months, and 45% of our sales for the six months, ended March 31,
1999. Disposable instrumentation sales, which principally reflected
sales in the field of gynecology, accounted for 4% of our sales for
the three and six months ended March 31, 1999.
Bipolar electrosurgical systems and irrigation systems
accounted for 60% of our sales for the three months, and 64% of
sales for the six months, ended March 31, 1998. Disposable C/T Sets
and bipolar cords accounted for 40% of our sales for the three
months, and 36% or our sales for the six months, ended March 31,
1998.
Gross profit was $400,998, or 45% of sales, for the three
months ended March 31, 1999 and $855,564, or 46% of sales, for the
six months ended March 31, 1999, as compared to gross profit of
$398,970, or 47% of sales, for the three months ended March 31,
1998 and $790,784, or 47% of sales, for the six months ended March
31, 1998. The change in the gross profit margin was primarily due to
a change in the product mix.
Selling, general and administrative expenses decreased by 5%
to $342,348 for the three months ended March 31, 1999 from $359,622
for the three months ended March 31, 1998 and decreased by 4% to
$712,102 for the six months ended March 31, 1999 from $741,820 for
the six months ended March 31, 1998. The decrease was primarily due
to a decrease in salary expense during the three and six months
ended March 31, 1999.
We continued our commitment to research and development.
Research and development expenses were $76,306 for the three months,
and $154,637 for the six months, ended March 31, 1999 as compared to
$69,893 for the three months, and $156,833 for the six months, ended
March 31, 1998. Research and development included the continued
development of the Malis Bipolar Lesion Generator and disposable
lesion electrodes, which we are preparing for sale to J&J. We also
completed development of our BiDent generator and the first group of
its disposable instrumentation for use in the field of dentistry
and completed and released to J&J the first five of eight
neurosurgical disposable instruments.
Our loss from operations decreased to $40,682 for the three
months, and decreased to $57,015 for the six months, ended March 31,
1999 as compared to a loss from operations of $47,020 for the three
months, and $152,780 for the six months, ended March 31, 1998. Our
benefit of income taxes was $6,345 for the three months, and $6,574
for the six months, ended March 31, 1999 as compared to $13,091 for
the three months ended March 31, 1998 and $44,397 for the six months
ended March 31, 1998.
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As a result of the foregoing, our net loss decreased to
$26,653 for the three months, and decreased to $33,929 for the six
months, ended March 31, 1999, as compared to a net loss of $33,929
for the three months, and $94,900 for the six months, ended March
31, 1998. Loss per basic and diluted common share was $0.00 for the
three and six months ended March 31, 1999 as compared to a net loss
per basic and diluted share of $0.00 for the three months ended
March 31, 1998 and $0.01 for the six months ended March 31, 1998.
Liquidity and Capital Resources
The primary measures of our liquidity are cash balances
(including short-term investments), accounts receivable and
inventory balances, as well as our borrowing ability. During the
six months ended March 31, 1999, our working capital increased by
$32,676 to $3,088,066.
We used $436,628 in operating activities for the first six
months of fiscal 1999 principally from an increase of $406,780 in
accounts receivable and an increase in inventory of $110,907, offset
by an increase in accounts payable and accrued expenses of $113,496
The increase in accounts receivable was primarily due to sales in
the later part of the quarter ended March 31, 1999. The increase in
inventory was primarily due to anticipated production demands in
subsequent quarters. Investing activities for the first six months
of fiscal 1999 used a total of $15,335 for the purchase of property
and equipment.
We received $11,972 from the exercise of employee stock
options during the three months ended March 31, 1999. Cash decreased
by $439,991 in the first six months of fiscal 1999, resulting in a
balance of $433,766 in our cash and cash equivalents at March 31, 1999.
For the six months ended March 31, 1998, we provided $56,333
from operating activities and used $5,853 for the purchase of
property and equipment.
We have no long-term debt. We believe that we have
available all funds needed for operations, research and development
and capital expenditures as they may arise in the future. However,
should it be necessary, we believe we could borrow adequate funds at
competitive rates and terms.
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. These 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 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. 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 Scientific Corp. ("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.
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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, 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 which Valley Forge has contracted to
distribute our products will achieve market penetration in the
surgical disciplines and markets outside of neurosurgery. Our
failure to 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 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.
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VALLEY FORGE SCIENTIFIC CORP.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
None.
(B) REPORTS ON FORM 8-K
The Registrant did not file any reports on Form 8-K during
the quarter ended March 31, 1999.
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<PAGE 9>
VALLEY FORGE SCIENTIFIC CORP.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
VALLEY FORGE SCIENTIFIC CORP.
Date: May 13, 1999 By: /s/ Jerry L. Malis
---------------------
Jerry L. Malis, President
(principal financial officer)
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted
from the Company's Form 10-Q for the quarter ended
March 31, 1999 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 433,766
<SECURITIES> 0
<RECEIVABLES> 1,317,938
<ALLOWANCES> 0
<INVENTORY> 1,315,887
<CURRENT-ASSETS> 3,336,994
<PP&E> 222,697
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,301,813
<CURRENT-LIABILITIES> 278,878
<BONDS> 0
0
0
<COMMON> 4,067,530
<OTHER-SE> (63,995)
<TOTAL-LIABILITY-AND-EQUITY> 4,301,813
<SALES> 893,083
<TOTAL-REVENUES> 0
<CGS> 492,171
<TOTAL-COSTS> 441,680
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (32,988)
<INCOME-TAX> (6,345)
<INCOME-CONTINUING> (26,643)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,643)
<EPS-PRIMARY> (.00)
<EPS-DILUTED> (.00)
</TABLE>
