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, 2000
[ ] 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 11, 2000 there were 8,213,309 shares outstanding of the Registrant's no
par value Common Stock.
VALLEY FORGE SCIENTIFIC CORP.
INDEX TO FORM 10-Q
March 31, 2000
Page
Number
Part I - Financial Information
Item 1. Financial Statements:
Balance Sheets - March 31, 2000 and September 30, 1999. 1
Statements of Operations for the three and six months
ended March 31, 2000 and March 31, 1999. 2
Statements of Cash Flows for the six months
ended March 31, 2000 and March 31, 1999. 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)
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, September 30,
ASSETS
2000 1999
-------- -----------
(Unaudited) (Audited)
Current Assets:
Cash and cash equivalents $ 521,297 $1,158,462
Accounts receivable 804,252 540,456
Inventory 1,447,254 1,170,509
Prepaid items and
other current assets 141,342 98,932
Current portion of deferred
income tax benefit 254,315 193,035
---------- ---------
Total Current Assets 3,168,460 3,161,394
Property, Plant and Equipment, Net 187,249 205,443
Intangible Assets, net 622,497 662,794
Other Assets 4,812 4,812
--------- ---------
Total Assets $3,983,018 $4,034,443
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and
accrued expenses $ 258,536 $ 166,618
------- -------
Total Current Liabilities 258,536 166,618
Deferred Income Tax Liability 16,885 16,885
------- -------
Total Liabilities 275,421 183,503
------- -------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock - -
Common stock
(no par, 20,000,000 shares
authorized, shares issued and
outstanding at
March 31, 2000 - 8,213,309 and at
September 30, 1999 - 8,217,309) 3,992,313 4,006,825
Retained earnings (deficit) (284,716) (155,885)
--------- ---------
Total Stockholders' Equity 3,707,597 3,850,940
--------- ---------
Total Liabilities and
Stockholders' Equity $3,983,018 $4,034,443
========= =========
[1]
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
Net Sales $ 708,441 $ 893,169 $1,816,054 $1,845,621
Cost of Sales 411,742 492,171 992,636 990,057
------- ------- --------- --------
Gross Profit 296,699 400,998 823,418 855,564
------- ------- ------- -------
Other Costs:
Selling, general
and administrative 407,831 342,454 819,854 712,102
Research and development 104,758 76,306 171,890 154,637
Amortization 20,149 22,920 40,297 45,840
------- ------- --------- -------
Total Other Costs 532,738 441,680 1,032,041 912,579
------- ------- --------- -------
Income (Loss)
from Operations (236,039) (40,682) (208,623) (57,015)
Other Income:
Interest income 7,927 7,694 18,512 17,388
------- ------ ------- ------
Income (Loss)
before Income Taxes (228,112) (32,988) (190,111) (39,627)
Provision for (Benefit of)
Income Taxes (77,880) (6,345) (61,280) (6,574)
------- ------ ------- ------
Net Loss $(150,232) $ (26,643) $ (128,831) $ (33,053)
======= ====== ======= ======
Earnings (Loss) Per Share:
Basic earnings (loss)
per common share $ (.02) $ (.00) $ (.02) $ (.00)
=== === === ===
Diluted earnings (loss)
per common share $ (.02) $ (.00) $ (.02) $ (.00)
=== === === ===
Basic common shares
outstanding 8,213,309 8,234,509 8,214,006 8,234,509
Diluted common shares
outstanding 8,213,309 8,234,509 8,214,006 8,234,509
[2]
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED MARCH 31,
2000 1999
Cash Flows from Operating Activities:
Net loss $ (128,831) $ (33,053)
Adjustments to reconcile
net loss to net cash
used in operating activities:
Depreciation and amortization 59,629 68,167
Deferred income tax benefit (61,280) (16,397)
Changes in assets and liabilities,
net of effect from:
(Increase) decrease in
accounts receivable (263,796) (406,780)
Decrease (increase) in inventory (276,745) (110,907)
Decrease (increase) in recoverable
income taxes - 4,636
Increase in prepaid items and other
current assets (42,410) (60,977)
Increase in accounts payable
and accrued expenses 91,918 113,496
Increase in income taxes payable - 4,262
Increase (decrease) in deferred income
Taxes payable - 925
------- -------
Net cash used in operating activities (621,515) (436,628)
------- -------
Cash Flows from Investing Activities:
Purchase of property, plant and equipment (1,138) (15,335)
------- -------
Net cash used in investing activities (1,138) (15,335)
------- -------
Cash Flows from Financing Activities:
Repurchase of common stock (14,512) -
Proceeds from exercise of stock options - 11,972
------- -------
Net cash provided by (used in)
financing activities (14,512) 11,972
------- --------
Net Decrease in Cash and Cash Equivalents (637,165) (439,991)
Cash and Cash Equivalents, beginning of period 1,158,462 873,757
--------- -------
Cash and Cash Equivalents, end of period $ 521,297 $ 433,766
========= ========
Supplemental Disclosures of
Cash Flow Information:
Cash paid during the year for:
Interest $ - $ -
========= ========
Income taxes $ 2,500 -
========= ========
[3]
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 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.
Note 2
The September 30, 1999 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, 2000 and the statements of
operations for the three and six months ended March 31, 2000 and 1999 and the
statements of cash flows for the six months ended March 31, 2000 and 1999.
The statements of operations for the three and six months ended March 31, 2000
and 1999 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, 1999.
Note 3
Earnings per share are based on the weighted average number of common shares
outstanding including common stock equivalents.
[4]
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, 2000
compared to the Three and Six Months Ended March 31, 1999.
Sales of $708,441 for the three months ended March 31, 2000 were 21%
less than sales of $893,169 for the three months ended March 31, 1999 and sales
of $1,816,054 for the six months ended March 31, 2000 were 2% less than sales
of $1,845,621 for the six months ended March 31, 1999. Codman & Shurtleff,
Inc. ("Codman"), our principal customer, accounted for 76% of sales for the
three months and 84% for the six months ended March 31, 2000.
One of the highlights of the second quarter of fiscal 2000 was the
initial release of a new line of disposable neurosurgical instruments designed
to be used with our Malis bipolar electrosurgical generators,which we sell to
Codman. Also, in the second quarter, we continued initial shipments of the
Bident Bipolar Oral Surgical System and associated procedure specific
instruments to our worldwide distributor, the Bident International, L.L.C.
division of the Garfield Refinery Company.
For the three months ended March 31, 2000, bipolar electrosurgical
systems and irrigation systems accounted for 44% of our sales; disposable
cord/tubing sets and bipolar cords accounted for 33% of our sales; and
disposable instrumentation accounted for 18% of our sales. For the six months
ended March 31, 2000, bipolar electrosurgical systems and irrigation systems
accounted for 56% of our sales; disposable cord/tubing sets and bipolar cords
accounted for 28% of our sales; and disposable instrumentation accounted for
10% of our sales.
Gross profit was $296,699, or 42% of sales, for the three months, and
$823,418, or 45% of sales, for the six months, ended March 31, 2000. Gross
profit for the three and six months ended March 31, 1999 was $400,998, or 45%
of sales, and $855,564, or 46% of sales, respectively
Selling, general and administrative expenses increased by 19% to
$407,831 for the three months, and by 15% to $819,854 for the six months, ended
March 31,2000 from $342,454 for the three months, and $712,102 for the six
months, ended March 31, 1999.
Research and development expenses increased by 37% to $104,758 for
the three months, and by 11% to $171,890 for the six months, ended March 31,
2000. These expenses reflect further development of generators for use in the
fields of ENT(ear, nose and throat), plastic and reconstructive surgery and
maxillofacial surgery.
We had a loss from operations of $236,039 for the three months, and
$208,623 for the six months, ended March 31, 2000 as compared to a loss from
operations of $40,682 for the three months, and $57,015 for the six months,
ended March 31, 1999. Interest income was relatively constant for the three
and six months ended March 31, 2000 as compared to the three and six months
ended March 31, 1999. The benefit of income taxes was $77,880 for the three
months, and $61,280 for the six months, ended March 31, 2000 as compared to a
benefit of income taxes of $6,345 for the three months and $6,574 for the six
months, ended March 31, 1999.
As a result of the foregoing, we had a loss of $150,232 for the three
months, and a loss of $128,831 for the six months, ended March 31, 2000 as
compared to a net loss of $26,643 for the three months, and $33,053 for the six
months, ended March 31, 1999. Loss per basic and diluted common share was $.02
for the three and six months ended March 31, 2000 as compared to a loss per
basic and diluted share of $.00 for the three and six months ended March 31,
1999.
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, 2000, our working
capital decreased by $84,852 to $2,909,924.
[5]
We used $621,515 in operating activities for the first six months of
fiscal 2000 principally from our net loss, an increase of $263,796 in accounts
receivable, an increase in inventory of $276,745, and an increase in prepaid
items and other current assets of $42,410, offset by an increase in accounts
payable and accrued expenses of $91,918. The increase in accounts receivable
and inventory was due to normal market conditions.
During the six months ended March 31, 2000, we used $1,138 for the
purchase of equipment. We also used $14,512 for the repurchase of 4,000 shares
of our common stock in the first quarter of fiscal 2000. Cash decreased by
$637,165 in the first six months of fiscal 2000, resulting in a balance of
$521,297 in our cash and cash equivalents at March 31, 2000.
For the six months ended March 31, 1999, we used $436,628 from operating
activities, we used $15,335 for the purchase of property and equipment and we
received $11,972 from the exercise of employee stock options.
Subsequent to the end of the March 31, 2000 quarter, we repurchased 28,900
shares of our common stock for $63,447 pursuant to a stock repurchase program
we announced on May 13, 1999. All 28,900 shares are in the process of being
retired. To date, we have purchased 50,100 shares pursuant to the stock
repurchase program. The stock repurchase program authorizes the repurchase of
up to 200,000 shares of our common stock.
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 or modified to make the necessary
modifications to be Year 2000 compliant.
The Company is continuing its process of formal communication with its
significant suppliers, customers and service providers to quantity 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
[6]
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 and disposable instrumentation or products
and disposable instrumentation recently released or 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.
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.
[7]
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.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits
None
(b) Current Reports of Form 8-K
None
[8]
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.
By:/s/ Jerry L. Malis
Jerry L. Malis, President
(principal financial officer)
[9]