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, 2001
[ ] 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 otherjurisdiction 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 3, 2001 there were 8,067,812 shares outstanding of the Registrant's
no par value Common Stock.
VALLEY FORGE SCIENTIFIC CORP.
INDEX TO FORM 10-Q
June 30, 2001
Page
Number
Part I - Financial Information
Item 1. Financial Statements:
Balance Sheets - June 30, 2001 and September 30, 2000. 1
Statements of Operations for the three and nine months
ended June 30, 2001 and June 30, 2000. 2
Statements of Cash Flows for the nine months
ended June 30, 2001 and June 30, 2000. 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 10
(i)
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
ASSETS 2001 2000
---------- -----------
(Unaudited) (Unaudited)
Current Assets:
Cash and cash equivalents $ 869,362 $ 965,240
Accounts receivable, net 870,534 627,255
Inventory 1,451,512 1,177,847
Prepaid items and other assets 133,272 114,042
Deferred income tax asset 130,140 209,314
--------- ---------
Total Current Assets 3,454,820 3,093,698
Property, Plant and Equipment, Net 155,300 168,535
Intangible Assets, Net 521,755 582,200
Other Assets 5,865 7,646
--------- ---------
$4,137,740 $3,852,079
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 337,205 $ 182,185
------- -------
Total Current Liabilities 337,205 182,185
Deferred Income Tax Payable 5,074 20,661
------- -------
Total Liabilities 342,279 202,846
------- -------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock - -
Common stock (no par, 20,000,000 shares
authorized, 8,067,812 shares issued and
outstanding at June 30, 2001 and
8,151,862 at September 30, 2000) 3,748,724 3,859,430
Retained earnings 46,737 (210,197)
--------- ---------
Total Stockholders' Equity 3,795,461 3,649,233
--------- ---------
$4,137,740 $3,852,079
========= =========
See accompanying notes to these financial statements.
[1]
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended For the Nine Months Ended
June 30, June 30,
2001 2000 2001 2000
Net Sales $ 1,554,642 $ 1,262,207 $ 3,871,552 $ 3,078,261
Cost of Sales 750,679 644,544 1,903,629 1,637,180
--------- --------- --------- ---------
Gross Profit 803,963 617,663 1,967,923 1,441,081
--------- --------- --------- ---------
Other Costs:
Selling, general and
administrative 464,846 423,277 1,246,184 1,243,131
Research and development 83,733 101,385 277,474 273,275
Amortization 20,148 20,148 60,445 60,445
------- ------- --------- ---------
Total Other Costs 568,727 544,810 1,584,103 1,576,851
------- ------- --------- ---------
Income (Loss) from Operations 235,236 72,853 383,820 (135,770)
Other Income:
Interest income 6,431 7,925 30,651 26,437
----- ----- ------ ------
Income (Loss) before
Income Taxes 241,667 80,778 414,471 (109,333)
Provision for (Benefit of:)
Income Taxes 86,137 32,805 157,537 (28,475)
------- ------ ------- -------
Net Income (Loss) $ 155,530 $ 47,973 $ 256,934 $ (80,858)
======= ====== ======= ======
Earnings (Loss) Per Share:
Basic earnings (loss) per
common share $ 0.02 $ 0.01 $ 0.03 $ (0.01)
==== ==== ==== ====
Diluted earnings
(loss) per
common sahre $ 0.02 $ 0.01 $ 0.03 $ (0.01)
==== ==== ==== ====
Basic common shares
outstanding 8,067,812 8,187,465 8,086,635 8,205,821
Diluted common shares
outstanding 8,140,984 8,210,394 8,137,107 8,205,821
See accompanying notes to these financial statements.
[2]
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
June 30,
2001 2000
Cash Flow from Operating Activities:
Net income (loss) $ 256,934 $ (80,858)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 88,905 89,504
Changes in assets and liabilities, net
of effect from:
Increase in accounts receivable (243,279) (397,913)
Increase in inventory (273,665) (290,523)
Decrease (Increase) in deferred
income tax benefit 79,174 (22,721)
Increase in prepaid items and other
current assets (19,230) (31,673)
Decrease in other assets 1,781 265
Increase in accounts payable and
accrued expenses 155,020 151,204
Decrease in deferred income taxes
payable (15,587) -
------- -------
Net cash provided by (used in)
operating activities 30,053 (582,715)
------- -------
Cash Flows from Investing Activities:
Purchase of property, plant and equipment (15,225) (1,138)
Acquisition of other assets - (3,825)
------ -------
Net cash used in investment activities (15,225) (4,963)
------ -------
Cash Flows from Financing Activities:
Purchase and retirement of common stock (110,706) (120,731)
------- -------
Net cash used in financing activities (110,706) (120,731)
------- -------
Net Decrease in Cash and Cash Equivalents (95,878) (708,409)
Cash and Cash Equivalents, beginning of period 965,240 1,158,462
------- ---------
Cash and Cash Equivalents, end of period $ 869,362 $ 450,053
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Income Taxes $ - $ -
==== ====
Interest $ - $ -
==== ====
See accompanying notes to these financial statements.
[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, 2000 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, 2001 and the statements of operations for the
three and nine months ended June 30, 2001 and 2000 and the statements of cash
flows for the nine months ended June 30, 2001 and 2000.
The statements of operations for the three and nine months ended June 30, 2001
and 2000 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, 2000.
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 Nine Months Ended June 30,
2001 Compared to the Three and Nine Months Ended June 30, 2000.
Revenues
Sales of $1,554,642 for the three months ended June 30, 2001 were 23%
greater than sales of $1,262,207 for the three months ended June 30, 2000,
while sales of $3,871,552 for the nine months ended June 30, 2001 were 26%
greater than sales of $3,078,261 for the nine months ended June 30, 2000. The
increase in sales was primarily attributable to an increase in the volume of
sales of our neurosurgical products and our dental products.
Sales to Codman & Shurtleff, Inc. ("Codman") amounted to $1,309,330
for the three months ended June 30, 2001, a 15% increase over sales for
the three months ended June 30, 2000. Codman, which distributes our
products in the field of neurosurgery, accounted for 84% of sales for
three months, and 76% of sales for the nine months, ended June 30,
2001, as compared to 90% of sales for the three months, and 87% of sales for
the nine months, ended June 30, 2000.
Bident International, L.L.C. ("Bident"), accounted for 15% of our sales in
the three months, and 22% of sales in the nine months, ended June 30, 2001. For
the three months ended June 30, 2001, sales to Bident, the distributor of our
products in the dental market, amounted to $238,360, which represented an
increase of approximately 288% from sales for the three months ended June 30,
2000. Sales to Bident for the third quarter of fiscal 2001 accounted for 15% of
our sales while sales to Bident for the nine months ended June 30, 2001 were
22% of our sales. The differing percentage of sales to Bident reflect normal
quarterly fluctuations in sales, which we will experience from time to time.
The following table sets forth the percentage of our sales generated by
the principal types of products we sell.
Three Months Ended Nine Months Ended
6/30/01 6/30/00 6/30/01 6/30/00
Bipolar electrosurgical systems 63% 55% 55% 57%
and irrigation system
Disposable cord/tubing sets 27% 27% 29% 29%
and bipolar cords
Disposable instrumentation 3% 16% 10% 13%
[5]
Sales of disposable instruments were lower in the third quarter due
to quarterly fluctuations in product mix, which we will experience from time
to time.
Cost of Sales
Cost of sales for the three months ended June 30, 2001 was $750,679, which
was 17% greater than the cost of sales for the three months ended June 30,
2000. Gross profit was $803,963, or 52% of sales, for the three months ended
June 30, 2001, as compared to gross profit of $617,663, or 49% of sales, for
the three months ended June 30, 2000. Changes in cost of sales and gross profit
margins were principally due to changes in product mix.
Cost of sales for the nine months ended June 30, 2001 was $1,903,629,
which was 16% greater than the cost of sales for the nine months ended June 30,
2000. Gross profit was $1,967,923, or 51% of sales, for the nine months ended
June 30, 2001, as compared to gross profit of $1,441,081, or 47% of sales, for
the nine months ended June 30, 2000. Changes in cost of sales and gross profit
margin were principally due to changes in product mix.
Operating Expenses
Selling, general and administrative expenses increased by 10% to $464,846
for the three months, and increased by less than 1% to $1,243,131 for the nine
months, ended June 30, 2001. Selling, general and administrative expenses are
anticipated to increase in the fourth quarter of fiscal 2001 to support
increased sales levels.
Research and development expenses decreased by 17% to $83,733 for the
three months, and increased by 2% to $277,474 for the nine months, ended June
30, 2001. We will continue our commitment to research and development in future
quarters.
Operating Income/Income Tax Provision
We had income from operations of $235,236 for the three months ended June
30, 2001 as compared to $72,853 for the three months ended June 30, 2000.
Interest and other income amounted to $6,431 for the three months ended June
30, 2001, as compared to $7,925 for the three months ended June 30, 2000. The
provision for income taxes was $86,137 for the three months ended June 30, 2001
as compared to $32,805 for the three months ended June 30, 2000.
We had income from operations of $383,820 for the nine months ended June
30, 2001 as compared to a loss from operations of $135,770 for the nine months
ended June 30, 2000. Interest and other income amounted to $30,651 for the nine
months ended June 30, 2001 as compared to $26,437 for the nine months ended
June 30, 2000. The provision for income taxes was $157,537 for the nine months
ended June 30, 2001 as compared to a tax benefit of $28,475 for the nine months
ended June 30, 2000.
[6]
Net Income
As a result of the foregoing, we had net income of $155,530 for the three
months, which was 224% greater than net income of $47,973 for the three months
ended June 30, 2000. Net income for the nine months ended June 30, 2001 was
$256,934 as compared to a net loss of $80,858 for the nine months ended June
30, 2000. Income per basic and diluted common share was $.02 for the three
months, and $.03 for the nine months, ended June 30, 2001 as compared to income
per basic and diluted common share of $.01 for the three months ended June 30,
2000 and a loss per basic and diluted common share of $.01 per share for the
nine months ended June 30, 2000.
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, 2001, our
working capital increased by $206,102 to $3,117,615.
We provided $30,053 in operating activities for the first ninemonths of
fiscal 2001. During this nine month period, our accountreceivables increased by
$243,279 primarily due to an increase in sales, and our inventory increased by
$273,665 primarily due to purchases needed for anticipated sales in future
quarters. In addition, we increased our accounts payable and accrued expenses
by $155,020.
During the nine months ended June 30, 2001, we used $110,706 for the
repurchase of 84,050 shares of our common stock pursuant to a stock repurchase
program which was continued in April 2000. All 84,050 shares have been retired
or are in the process of being retired. As of June 30, 2001, we purchased a
total of 166,697 shares of common stock pursuant to the repurchase program. We
did not repurchase any stock in the third quarter of fiscal 2001. Under the
repurchase program, we are authorizedto purchase up to 200,000 shares of our
common stock.
Cash decreased by $95,878 in the first nine months of fiscal 2001,
resulting in a balance of $869,362 in our cash and cash equivalents at June 30,
2001.
For the nine months ended June 30, 2000, we used $582,715 from operating
activities and used $120,731 for the repurchase of shares of our common stock.
During that period cash decreased by $708,409.
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. Statements which express that we believe, anticipate, expect, or
plan to as well as other statements which are not historical fact, are forward
looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended. These forward looking statements include, but are not
[7]
limited to statements about: (1) anticipated sales and expense levels in the
future; (2) market acceptance of our products; (3) any competitive advantage we
may have as a result of our installed base of electrosurgical generators in the
field of neurosurgery; (4) our belief that our products exceed industry
standards or favorably compete with other companies= new technological
advancements; (5) the success of certain recently introduced products and
disposable instrumentation and products and disposable instrumentation
scheduled to be released in the near future for use in neurosurgery, other
surgical disciplines, and the dental market; and (6) our ability to attract
distributors for our products outside of neurosurgery. 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. We do 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 our
financial results.
Additional Cautionary Statements
We Face Intense Competition
The markets for our current and potential products are intensely
competitive. These markets include neurosurgery, gynecology, urology,
arthroscopy, plastic surgery, dentistry, ENT and maxillofacial surgery and
general and laparoscopic surgery. 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 could render
our products obsolete or uncompetitive in these markets.
Our Growth Depends on Introducing New Products and the Market Penetration by
Third Party Distributors
Valley Forge's growth depends 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 we introduce, or
have introduced, will be widely accepted by the marketplace, or that companies
which we have 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.
We Depend on Attracting New Distributors for Our Products
In order to successfully commercialize our products in the fields of
general and laparoscopic surgery, arthroscopy, gynecology, urology, plastic
surgery, pain management, thoracic surgery, ENT and maxillofacial surgery, we
will need to enter into distribution arrangements with companies who can
distribute our products in those fields successfully. The commercial success of
our products outside the field of neurosurgery is thus uncertain.
[8]
Our Products are Extensively Regulated Which Could Delay Product Introduction
or Halt Sales
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 our manufacturing facilities to ascertain compliance with
Agood 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 our
results of operations and financial condition.
We Face 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 andinstrumentation. These customers are expected to continue to demand
lower prices in the future. We 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.
We May have Product Liability Claims
Our products involve a risk of product liability claims. 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.
Our Operating Results May Fluctuate
We have experienced operating losses since our inception, and only as of
June 30, 2001 has our retained earnings reached $46,737. Our results of
operations may fluctuate significantly from quarter to quarter based on
numerous factors including the following:
* the introduction of new product lines;
* the level of market acceptance of our products;
* achievement of research and development milestones;
* timing of the receipt of orders and product shipments;
* timing of expenditures; and
* receipt of necessary regulation approvals.
[9]
PART II. OTHER INFORMATION
Item 5. OTHER EVENTS
On June 13, 2001, Louis Uchitel was appointed as a member of our Board of
Directors as well as a member of the Compensation Committee and the Audit
Committee.
One June 30, 2001, Bernard H. Shuman retired and resigned as a member of
our Board of Directors.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Current Reports on Form 8-K
None
[10]
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 7, 2001 By: /s/ Jerry L. Malis
Jerry L. Malis, President
(principal financial officer)