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 June 30, 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 August 9, 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
June 30, 1999
Page
Number
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Balance Sheets - June 30, 1999 and September 30, 1998. 1
Statements of Operations for the three and nine months
ended June 30, 1999 and June 30, 1998. 2
Statements of Cash Flows for the nine months
ended June 30, 1999 and June 30, 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 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
ITEM 5. DEADLINE FOR SUBMISSION OF STOCKHOLDER PROPOSALS 9
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K 9
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VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
BALANCE SHEETS
<S> <C> <C>
JUNE 30, SEPTEMBER 30,
1999 1998
----------- -------------
(UNAUDITED) (AUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 834,734 $ 873,757
Accounts receivable - trade (net) 1,102,802 911,158
Inventory 1,246,987 1,204,980
Prepaid items and other current assets 102,367 68,996
Recoverable income taxes - 4,636
Current portion of deferred income tax benefit 180,015 152,983
-------- ---------
Total Current Assets 3,466,905 3,216,510
Property, Plant and Equipment, net of
Accumulated Depreciation 211,905 229,687
Intangible Assets, net of Accumulated
Amortization 684,780 753,542
Other Assets 4,472 4,472
--------- ---------
Total Assets $4,368,062 $4,204,211
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $ 219,454 $ 160,607
Income taxes payable 46,887 513
-------- --------
Total Current Liabilities 266,341 161,120
-------- --------
Deferred Income Taxes Payable 23,628 18,445
-------- --------
Total Liabilities 289,969 179,565
-------- --------
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 June 30, 1999 and
September 30, 1998) 4,051,134 4,055,558
Retained earnings (deficit) 26,959 (30,912)
--------- ---------
Total Stockholders' Equity 4,078,093 4,024,646
--------- ---------
Total Liabilities and Stockholders'
Equity $4,368,062 $4,204,211
========= =========
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<TABLE>
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(UNAUDITED)
<S> <C> <C>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
Net Sales $1,151,443 $1,122,371 $2,997,064 $2,806,901
Cost of Sales 562,586 602,954 1,552,643 1,496,700
--------- --------- --------- ---------
Gross Profit 588,857 519,417 1,444,421 1,310,201
--------- --------- --------- ---------
Other Costs:
Selling, general and
administrative 362,523 423,001 1,074,625 1,164,618
Research and development 83,122 72,471 237,759 229,304
Amortization 22,921 22,555 68,761 67,666
--------- --------- --------- ---------
Total Other Costs 468,566 518,027 1,381,145 1,461,588
--------- --------- --------- ---------
Income (Loss) from Operations 120,291 1,390 63,276 (151,387)
Other Income:
Interest income 6,367 6,436 23,755 19,919
--------- --------- --------- ---------
Income (Loss) before Income Taxes 126,658 7,826 87,03 (131,468)
Provision for (Benefit of)
Income Taxes 35,734 3,218 29,160 (41,179)
--------- --------- --------- ---------
Net Income (Loss) $ 90,924 $ 4,608 $ 57,871 $ (90,289)
========= ========= ========= =========
Earnings (Loss) Per Share:
Earnings (loss)
per common share $ .01 $ .00 $ .01 $ (.01)
========= ========= ========= ==========
Earnings (loss)
per common share -
assuming dilution $ .01 $ .00 $ .01 $ (.01)
========= ========= ======== ==========
Common shares outstanding 8,229,509 8,229,384 8,229,509 8,229,384
Common shares outstanding-
assuming dilution 8,229,509 8,229,384 8,229,509 8,229,384
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<TABLE>
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30,
<S> <C> <C>
1999 1998
---- ----
Cash Flows from Operating Activities:
Net income (loss) $ 57,871 $ (90,289)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 101,878 101,310
Changes in assets and liabilities, net of
effect from:
Increase in accounts receivable (191,644) (192,662)
Decrease (increase) in inventory (42,007) 108,284
Decrease (increase) in recoverable income taxes 4,636 (15,709)
Increase in deferred income tax benefit (27,032) (22,697)
Decrease (increase) in prepaid items and other
current assets (33,371) 17,227
Increase (decrease) in accounts payable and
accrued expenses 58,848 33,016
Increase in income taxes payable 46,374 -
Increase (decrease) in deferred income
taxes payable 5,183 (2,774)
-------- --------
Net cash used in operating
activities (19,264) (64,294)
-------- --------
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 -
Purchase and retirement of common stock (16,396) -
-------- --------
Net cash used in financing activities (4,424) -
-------- --------
Net Decrease in Cash and Cash Equivalents (39,023) (70,147)
Cash and Cash Equivalents, beginning of period 873,757 632,904
-------- --------
Cash and Cash Equivalents, end of period $ 834,734 $ 562,757
======== ========
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
JUNE 30, 1999 AND 1998
1. Valley Forge Scientific Corp. ("VFSC") is engaged in the business
of developing, manufacturing and selling medical devices and product
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 June 30, 1999 and the statements of operations for the three
and nine months ended June 30, 1999 and 1998 and the statements of
cash flows for the nine months ended June 30, 1999 and 1998.
The statements of operations for the three and nine months ended
June 30, 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 Nine Months Ended
June 30, 1999 Compared to the Three and Nine Months Ended June 30,
1998.
Sales of $1,151,443 for the three months ended June 30, 1999
were 3% greater than sales of $1,122,371 for the three months ended
June 30, 1998 and sales of $2,997,064 for the nine months ended June
30, 1999 were 7% greater than sales of $2,806,901 for the nine
months ended June 30, 1998. Johnson & Johnson Professional, Inc.
("J&J"), our principal customer, accounted for 98% of sales for the
three months, and 95% for the nine months, ended June 30, 1999.
In the latter part of the third quarter of 1999, we
commenced shipment of the first five styles of disposable bipolar
neurosurgical instruments to J&J pursuant to our existing
distributing agreement. Shipments of these styles of disposable
instruments, as well as four additional styles of instruments, are
expected to have a greater impact on revenue in the fourth quarter
of fiscal 1999.
Initial samples of the Bident bipolar electrosurgical
generators for use in the field of dentistry were shipped in the
latter part of the third quarter of 1999. While these shipments had
an insignificant effect on revenues for the third quarter of fiscal
1999, sales of additional sample units, as well as production units
of the generators and associated disposable bipolar electrosurgical
instruments, are expected to have a greater impact on revenue in the
fourth quarter of fiscal 1999.
Bipolar electrosurgical systems and irrigation systems
accounted for 52% of our sales for the three months and nine months
ended June 30, 1999. Disposable C/T Sets and bipolar cords
accounted for 39% of our sales for the three months, and 42% of our
sales for the nine months, ended June 30, 1999. Disposable
instrumentation sales, which reflected sales in the field of
gynecology and the commencement of sales in the field of
neurosurgery in the latter part of the third quarter of 1999,
accounted for 7% of our sales for the three months, and 5% of our
sales for nine months ended June 30, 1999.
Gross profit was $588,857, or 51% of sales, for the three
months ended June 30, 1999 and $1,444,421, or 48% of sales, for the
nine months ended June 30, 1999, as compared to gross profit of
$519,417, or 46% of sales, for the three months ended June 30, 1998
and $1,310,201, or 47% of sales, for the nine months ended June 30,
1998. The increase in the gross profit margin was primarily due to a
change in the product mix.
Selling, general and administrative expenses decreased by
14% to $362,523 for the three months ended June 30, 1999 from
$423,001 for the three months ended June 30, 1998 and decreased by
8% to $1,074,625 for the nine months ended June 30, 1999 from
$1,164,615 for the nine months ended June 30, 1998. The decrease was
primarily due to a decrease in salary expense during the three and
nine month periods ended June 30, 1999, primarily attributed to
Thomas J. Gilloway, Executive Vice President of the Company,
reducing the time devoted to the Company's business due to a medical
condition.
Research and development expenses increased by 15% to
$83,122 for the three months, and by 4% to $237,759 for the nine
months, ended June 30, 1999. Research and development included the
completion of development of the Malis Bipolar Lesion Generator and
certain disposable lesion electrodes.
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We had income from operations of $120,291 for the three
months, and $63,276 for the nine months, ended June 30, 1999 as
compared to income from operations of $1,390 for the three months
ended June 30, 1998 and a loss from operations of $151,387 for the
nine months ended June 30, 1998. Provision for income taxes was
$35,734 for the three months, and $29,160 for the nine months, ended
June 30, 1999 as compared to income taxes of $3,218 for the three
months ended June 30, 1998 and a benefit of income taxes of $41,179
for the nine months ended June 30, 1998.
As a result of the foregoing, we had net income of $90,924
for the three months, and $57,871 for the nine months, ended June
30, 1999 as compared to net income of $4,608 for the three months
ended June 30, 1998, and a net loss of $90,289 for the nine months
ended June 30, 1998. Income per basic and diluted common share was
$.01 for the three months and nine months ended June 30, 1999 as
compared to income per basic and diluted common share of $.00 for
the three months ended June 30, 1998 and a loss per basic and
diluted share of $.01 for the nine months ended June 30, 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
nine months ended June 30, 1999, our working capital increased by
$145,174 to $3,200,564.
We used $19,264 in operating activities for the first nine
months of fiscal 1999 principally from an increase of $191,644 in
accounts receivable and an increase in inventory of $42,007, offset
by an increase in accounts payable and accrued expenses of $58,848,
an increase in income taxes payable of $46,374 and the Company's net
income, as adjusted for noncash items. The increase in accounts
receivable was due to normal market conditions. Investing
activities for the first nine months of fiscal 1999 used a total of
$15,335 for the purchase of property and equipment.
During the nine months ended June 30, 1999, we received
$11,972 from the exercise of employee stock options. In addition,
during the three months ended June 30, 1999, we repurchased 5,000
shares of our common stock for $16,396 pursuant to a stock
repurchase program we announced on May 13, 1999. All 5,000 shares
are in the process of being retired. Cash decreased by $39,023 in
the first nine months of fiscal 1999, resulting in a balance of
$834,734 in our cash and cash equivalents at June 30, 1999.
For the nine months ended June 30, 1998, we used $64,294 for
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.
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 are being implemented to make the necessary
modifications to be Year 2000 compliant by December 1999. The
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<PAGE 7>
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 is continuing its process of formal
communication with its significant suppliers, customers and service
providers to quantity the effects of their noncompliance. The
Company's goal is to complete all phases of its review and to be
Year 2000 compliant by December 1999. 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 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, 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 continue to achieve market penetration
in the field of neurosurgery and 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.
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<PAGE 8>
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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<PAGE 9>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------
At the Annual Meeting of Shareholders held on June 30, 1999,
the following matters were adopted by the margins indicated:
1. The following directors were elected for a one year
term until their successors are duly elected and
qualifies:
Jerry L. Malis: FOR 6,377,088; AGAINST 277,486; Abstain 0
Thomas J. Gilloway FOR 6,377,088; AGAINST 277,486; Abstain 0
Leonard I. Malis FOR 6,376,588; AGAINST 277,986; Abstain 0
Bruce L. Murray FOR 6,376,888; AGAINST 277,686; Abstain 0
Bernard H. Shuman FOR 6,376,588; AGAINST 277,986; Abstain 0
Robert H. Dick FOR 6,377,088; AGAINST 277,486; Abstain 0
2. To amend the Company's Articles of Incorporation 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.
FOR 6,392,104
AGAINST 209,570
ABSTAIN 52,900
ITEM 5. DEADLINE FOR SUBMISSION OF STOCKHOLDER PROPOSALS
The deadline for submission of stockholder proposals
pursuant to Rule 14a-18 under the Securities Exchange Act of 1934,
as amended ("Rule 14a-8"), for inclusion in the Company's proxy
statement for its 2000 Annual Meeting of Stockholders is September
30, 1999. After December 14, 1999, notice to the Company of a
stockholder proposal submitted otherwise than pursuant to Rule 14a-8
will be considered untimely, and the person named in proxies
solicited by the Board of Directors of the Company for its 2000
Annual Meeting of Stockholders may exercise discretionary authority
voting power with respect to any such proposal as to which the
Company does not receive timely notice.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(A) EXHIBITS
None
(B) CURRENT REPORTS ON FORM 8-K
Form 8-K, dated May 13, 1999, listing Item 5 - Other Events,
regarding the news release that Board of Directors had
authorized the repurchase of up to 200,000 of the Company's
shares of common stock, no par value.
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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: August 9, 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
June 30, 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> JUN-30-1999
<CASH> 834,734
<SECURITIES> 0
<RECEIVABLES> 1,102,802
<ALLOWANCES> 0
<INVENTORY> 1,246,987
<CURRENT-ASSETS> 3,466,905
<PP&E> 211,905
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,368,062
<CURRENT-LIABILITIES> 266,341
<BONDS> 0
0
0
<COMMON> 4,051,134
<OTHER-SE> 26,959
<TOTAL-LIABILITY-AND-EQUITY> 4,368,062
<SALES> 1,151,443
<TOTAL-REVENUES> 0
<CGS> 562,586
<TOTAL-COSTS> 468,566
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 126,658
<INCOME-TAX> 35,734
<INCOME-CONTINUING> 90,924
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 90,924
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
