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, 2002 [ ] 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 8, 2002 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, 2002 Page Number Part I - Financial Information Item 1. Financial Statements: Balance Sheets -June 30, 2002 and September 30, 2001. 1 Statements of Operations for the three months and nine months ended June 30, 2002 and June 30, 2001. 2 Statements of Cash Flows for the nine months ended June 30, 2002 and June 30, 2001. 3 Notes to Financial Statements. 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 8 Part II - Other Information 14 (i) VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, September 30, ASSETS 2002 2001 - ------ ---- ---- (Unaudited) (Audited) Current Assets: Cash and cash equivalents $ 2,400,261 $ 1,500,622 Accounts receivable, net 310,986 605,150 Inventory 1,071,438 1,199,536 Prepaid items and other current assets 104,127 107,304 Deferred tax assets 96,691 104,380 --------- --------- Total Current Assets 3,983,503 3,516,992 Property, Plant and Equipment, Net 134,972 145,800 Goodwill 153,616 153,616 Other Intangible Assets, Net 310,382 349,360 Other Assets 4,489 5,446 --------- --------- Total Assets $ 4,586,962 $ 4,171,214 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current Liabilities: Accounts payable and accrued expenses $ 200,662 $ 191,786 Income taxes payable 167,959 91,400 ------- ------- Total Current Liabilities 368,621 283,186 Deferred Tax Liability 13,817 19,280 ------- ------- Total Liabilities 382,438 302,466 ------- ------- 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, 2002 and September 30, 2001) 3,748,724 3,748,724 Retained earnings 455,800 120,024 --------- --------- Total Stockholders' Equity 4,204,524 3,868,748 --------- --------- Total Liabilities and Stockholders' Equity $ 4,586,962 $ 4,171,214 ========= ========= ___________________ See accompanying notes. [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, 2002 2001 2002 2001 ---- ---- ---- ---- Net Sales $ 1,148,278 $ 1,554,642 $ 3,868,482 $ 3,871,552 Cost of Sales 545,872 750,679 1,859,422 1,903,629 --------- --------- --------- --------- Gross Profit 602,406 803,963 2,009,060 1,967,923 --------- --------- --------- --------- Other Costs: Selling, general and administrative 362,176 464,846 1,154,334 1,246,184 Research and development 70,842 83,733 242,895 277,474 Amortization 16,010 20,148 47,600 60,445 ------- ------- -------- -------- Total Other Costs 449,028 568,727 1,444,829 1,584,103 ------- ------- --------- --------- Income from Operations 153,378 235,236 564,231 383,820 Other Income (Expense), Net 8,349 6,431 12,881 30,651 ------- ------- ------- ------- Income before Income Taxes 161,727 241,667 577,112 414,471 Provision for Income Taxes 71,058 86,137 241,336 157,537 ------- ------- ------- ------- Net Income $ 90,669 $ 155,530 $ 335,776 $ 256,934 ======= ======= ======= ======= Earnings per Share: Basic earnings per common share $ 0.01 $ 0.02 $ 0.04 $ 0.03 ==== ==== ==== ==== Diluted earnings per common share $ 0.01 $ 0.02 $ 0.04 $ 0.03 ==== ==== ==== ==== Basic common shares outstanding 8,067,812 8,067,812 8,067,812 8,086,635 Diluted common shares outstanding 8,186,268 8,140,984 8,166,693 8,137,107 ____________________ See accompanying notes. [2] VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended June 30, 2002 2001 ---- ---- Cash Flows from Operating Activities: Net income $ 335,776 $ 256,934 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 63,125 88,905 Write-down of property, plant and equipment 5,300 - Reduction of allowance for loans and advances to employees (47,790) - Interest accrued on loans and advances to employees (2,089) (3,508) Changes in assets and liabilities, net of effect from: (Increase) decrease in accounts receivable 294,164 (243,279) (Increase) decrease in inventory 128,098 (273,665) Decrease in deferred tax assets 7,689 79,174 Increase in prepaid items and other current assets (2,769) (18,372) Decrease in other assets 957 1,781 Increase in accounts payable and accrued expenses and income taxes payable 85,435 155,020 Decrease in deferred tax liability (5,463) (15,587) ------- ------- Net cash provided by operating activities 862,433 27,403 ------- ------- Cash Flows from Investing Activities: Purchase of property, plant and equipment (9,997) (15,225) Purchase of intangible assets (8,622) - Proceeds from repayment of employee loans and advances 57,261 5,650 Loans and advances to employees (1,436) (3,000) ------- ------ Net cash provided by (used in) investing activities 37,206 (12,575) ------- ------ Cash Flows from Financing Activities: Repurchase of common stock - (110,706) ------- ------- Net cash used in financing activities - (110,706) ------- ------- Net Increase (Decrease) in Cash and Cash Equivalents 899,639 (95,878) Cash and Cash Equivalents, beginning of period 1,500,622 965,240 --------- ------- Cash and Cash Equivalents, end of period $ 2,400,261 $ 869,362 ========= ======= Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest $ - $ - ======== ======== Income taxes $ 166,050 $ 2,500 ======= ======== ____________________ See accompanying notes. [3] VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2002 1. DESCRIPTION OF BUSINESS 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 each of the years reported with these financial statements VCP has been inactive. Collectively, VFSC, DEC and VCP are referred to herein as the "Company". 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Basis of Presentation - ----------------------------------------------------- The accompanying financial statements consolidate the accounts of VFSC and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts from prior years have been reclassified to conform to the current year presentation. The accompanying unaudited consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission and, therefore, do not include all information and footnote disclosures normally included in audited financial statements. However, in the opinion of management, all adjustments that are of a normal and recurring nature necessary to present fairly the results of operations, financial position and cash flows have been made. It is suggested that these statements be read in conjunction with the financial statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 2001. The statements of operations for the three months and nine months ended June 30, 2002 and 2001 are not necessarily indicative of results for the full year. Earnings (Loss) per Share - ------------------------- The Company computes earnings or loss per share in accordance with the Financial Accounting Standards Board Statement No. 128 "Earnings Per Share" (SFAS 128) which replaced 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 previous 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. Diluted earnings per share is computed based upon the weighted average number of common shares and dilutive common equivalent shares outstanding. [4] VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2002 (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recent Accounting Pronouncements - -------------------------------- In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (SFAS 141), "Business Combinations", which eliminates the pooling of interests method of accounting for all business combinations initiated after June 30, 2001 and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. As of July 1, 2001, the Company adopted this accounting standard. In addition, as of October 1, 2001, the Company early-adopted SFAS 142, "Goodwill and Other Intangible Assets", which addresses the financial accounting and reporting standards for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill no longer be amortized, and instead, be tested for impairment on a periodic basis. In conjunction with the adoption of the accounting standard, a transitional impairment test was completed, and no impairment was identified which required a cumulative effect of a change in accounting principle. In accordance with SFAS 142, the Company discontinued the amortization of goodwill effective October 1, 2001. A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusions of goodwill amortization, net of the related income tax effect, follows: For the For the Three Months Ended Nine Months Ended June 30, June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Reported net income $ 90,669 $ 155,530 $ 335,776 $ 256,934 Add: Goodwill amortization, net of tax - 4,389 - 13,167 ------ ------- ------- ------- Adjusted net income $ 90,669 $ 159,919 $ 335,776 $ 270,101 ====== ======= ======= ======= Basic and dilutive net income per share: Reported net income per share- basic and dilutive $ 0.01 $ 0.01 $ 0.04 $ 0.03 Add: Goodwill amortization, net of tax - - - - ---- ---- ---- ---- Adjusted net income per share basic and dilutive $ 0.01 $ 0.01 $ 0.04 $ 0.03 ==== ==== ==== ==== [5] VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2002 (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recent Accounting Pronouncements (Continued) - -------------------------------- In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of". The primary objectives of SFAS 144 are to develop one accounting model based on the framework established in SFAS 121 for long-lived assets to be disposed of by sale, and to address significant implementation issues. At this time, the Company is evaluating the impact of SFAS 144 on its financial position and results of operations. The Company will adopt SFAS 144 for its fiscal year beginning October 1, 2002. 3. GOODWILL AND OTHER INTANGIBLE ASSETS In accordance with SFAS 142, Goodwill has been reflected on the balance sheet separate from other intangible assets which continue to be amortized. The Company completed its transitional impairment test during the quarter ending March 31, 2002. No changes were required to be made to the carrying amount of goodwill. Information regarding the Company's other intangible assets is as follows: As of June 30, 2002 As of September 30, 2001 ------------------------------------- ---------------------------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Net Amount Amortization Net --------- ------------ --- --------- ------------ --- Patents, trademarks, logos, licensing agreements $ 569,010 $ 474,753 $ 94,257 $ 560,388 $ 449,771 $ 110,617 Proprietary know-how 452,354 236,229 216,125 452,354 213,611 238,743 Acquistion costs 55,969 55,969 - 55,969 55,969 - ------- ------- ------- ------- ------- ------- $1,077,333 $ 766,951 $ 310,382 $1,068,711 $ 719,351 $ 349,360 ========= ======= ======= ========= ======= ======= Amortization expense of other intangible assets was $16,010 and $15,759 for the three months ended June 30, 2002 and 2001, respectively, and $47,600 and $47,278 for the nine months ended June 30, 2002 and 2001, respectively. [6] VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2002 (Continued) 4. COMMITMENTS AND CONTINGENCIES During the quarter ended March 31, 2002, the Company, without admitting liabilities, entered into a settlement agreement relating to a litigation previously disclosed in the Company's financial statements for the 2001 fiscal year. Pursuant to the settlement, the Company paid the plaintiff $37,000, net of certain monies due from plaintiff, which is reflected in other costs under selling, general and administrative expenses. [7] VALLEY FORGE SCIENTIFIC CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q. Statements in this Management's Discussion and Analysis of Financial Conditions and Results of Operations 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 the Private Securities Litigation Reform Act of 1995. Actual events or results may differ materially as a result of the risks and uncertainties described herein and elsewhere including, but not limited to, those factors discussed in section entitled "ADDITIONAL CAUTIONARY STATEMENTS." We do not intend to update these forward looking statements. Overview We design, develop, manufacture and sell medical devices. Our core business is in our bipolar electrosurgical generators and related instrumentation, based on our patented DualWave(TM) technology. Our bipolar systems allow a surgeon or dentist to cut tissue in a manner that minimizes collateral damage to surrounding healthy tissue and to coagulate blood vessels quickly, safely and efficiently. By essentially eliminating damage to surrounding healthy tissue, the surgeon can work safely in direct contact with nerves, blood vessels, bone and metal implants. Our bipolar systems are designed to replace other surgical tools, such as monopolar systems, lasers and conventional instruments, used in soft tissue surgery. Our patented DualWave(TM) technology is applicable to many surgical markets. Our bipolar systems are currently used to perform many types of neurosurgery, spine surgery and dental surgery. We have entered into a worldwide exclusive distribution agreement with Codman & Shurtleff, Inc., a subsidiary of Johnson & Johnson, Inc., to market our neurosurgery bipolar systems. We also have entered into an exclusive distribution agreement with Bident International, L.L.C., an affiliate of Garfield Refinery, Inc., to market our Bident(R) dental bipolar system. Historically, we have derived a significant portion of our sales from our neurosurgery bipolar system. Sales revenue from our Bident(R) bipolar dental system commenced in fiscal year 2000. Our strategy includes expanding our patented DualWave(TM) technology in neurosurgery and other clinical areas. Our strategy also includes using our patented DualWave(TM) technology to drive sales of our complementary disposable handheld instruments and products. [8] Results of Operations Results of Operations for the Three and Nine Months Ended June 30, 2002 compared to the Three and Nine Months Ended June 30, 2001. Summary Sales of $1,148,278 for the three months ended June 30, 2002 were 26% less than sales of $1,554,642 for the three months June 30, 2001. Net income for the three months ended June 30, 2002 reached $90,669, compared to $155,530 for the three months ended June 30, 2001. Through June 30, 2002, we have been profitable for nine consecutive quarters. Sales of $3,868,482 for the nine months ended June 30, 2002 were slightly less than sales of $3,871,552 for the nine months ended June 30, 2001. Even though sales were essentially constant, net income for the nine months ended June 30, 2002 increased by 31% to $335,776 from the corresponding period in fiscal 2001. Revenues For the three months ended June 30, 2002, Codman & Shurtleff accounted for 99% of our sales, as compared to 87% of sales for the three months ended March 31, 2002 and 84% of our sales for the three months ended June 30, 2001. Sales of the Bident(R) bipolar dental system, made only a minimal contribution to total sales for the three months ended June 30, 2002 as compared to 15% of sales, for the three months ended June 30, 2001. For the nine months ended June 30, 2002, sales of dental products were 10% of sales, as compared to 22% of sales, for the nine months ended June 30, 2001. In January 2002, our dental marketing distributor, Bident International, LLC, departed from its direct sales marketing strategy, when it entered into an agreement with ESA Associates. Under this agreement, Bident International, LLC agreed to use dealer sales representatives as the primary means of selling our Bident(R) dental system and related instruments. Results from this agreement did not meet expectations, and sales to Bident International, LLC declined over the first nine months of 2002. As a result, Bident International, LLC recently returned back to using direct sales, as the primary means of selling our Bident(R) dental system and related instruments, while continuing to nurture the training and education of the ESA Associates' dealer sales representatives as a supplement to the direct sales efforts. We, therefore, do not expect sales of dental products to begin to benefit from this change until the first quarter of fiscal 2003. Sales of our Bident(R) dental products for the remainder of fiscal 2002 are therefore anticipated to continue to be at lower levels than in fiscal 2001. For the three months ended June 30, 2002, sales of bipolar electrosurgical generators, irrigators and accessories accounted for approximately 60% of our sales, and sales of disposable products accounted for approximately 34% of our sales as compared to 63% and 30% of our sales, respectively, for the three months ended June 30, 2001. We anticipate variations in our product mix from quarter to quarter, based on purchasing patterns of the principal distributors of our products. [9] Cost of Product Sales - --------------------- Cost of sales was $545,872 for the three months, and $1,859,422 for the nine months, ended June 30, 2002, as compared with cost of sales of $750,679 for the three months, and $1,903,629 for the nine months, ended June 30, 2001. The absolute dollar decrease in cost of sales for the three and nine months ended June 30, 2002 as compared to the three and nine months ended June 30, 2001 was due to greater manufacturing efficiencies, product mix and lower sales levels in the third quarter of fiscal 2002. Gross margin increased to 52% for the three and nine months ended June 30, 2002 as compared to 52% and 51%, respectively, for the three and nine months ended June 30, 2001. Increases in gross margin as a percentage of sales is attributable to changes in product mix and increased manufacturing efficiency. We cannot be sure that gross margins will remain at current levels or show improvement in the future due to the distribution channels used, product mix, and fluctuation in manufacturing production levels and overhead costs as new products are introduced. In addition, inefficiencies in manufacturing new products and the distribution channels utilized to sell those products may adversely impact gross margin. Operating Expenses - ------------------ Selling, general and administrative expense decreased in absolute dollars by over $102,000 to $362,176, or 32% of sales, for three months ended June 30, 2002, from $464,846, or 30% of sales, for the three months ended June 30, 2001. For the nine months ended June 30, 2002, selling, general and administrative expenses decreased by approximately $90,000 to $1,154,334, or 30% of sales, from $1,246,184, or 32% of sales, for the nine months ended June 30, 2001. The absolute dollar decrease in selling, general and administrative expenses for the three and nine months ended June 30, 2002 was primarily attributable to increased cost cutting efforts and reduction in administrative salaries. In the future, we anticipate that selling, general and administrative expenses will increase in absolute dollar amounts as we engage in additional business development activities. Research and development expenses for the three and nine months ended June 30, 2002 were approximately $13,000 and $35,000, respectively, less than expenditures for the corresponding periods in fiscal 2001. Research and development expenses were 6% of sales for the three and nine months ended June 30, 2002 as compared to 5% and 7% of sales, respectively, for the three and nine months ended June 30, 2001. We continue to invest in research and development to expand our patented technological base for use in both existing and additional clinical areas. On a quarter by quarter basis, our research and development expenses may vary. While research and development expenses are lower this quarter due to completion of various phases of projects, we are preparing for increased research and development expenditures in the fourth quarter and in fiscal 2003. Other Income/Expense, net - ------------------------- Other income and expense, net, was $8,349 for the three months, and $12,881 for the nine months, ended June 30, 2002 as compared to $6,431 for the three months, and $30,651 for the nine months, ended June 30, 2001. These changes were primarily attributable to a reduction in interest rates and an increase in non-operating expenses. At June 30, 2002, we had $2,400,261 in cash and cash equivalents as compared to $869,362 at June 30, 2001. [10] Income Tax Provision - -------------------- The provision for income taxes was $71,058 for the three months, and $241,336 for the nine months, ended June 30, 2002 as compared to a provision of $86,137 for the three months, and $157,537 for the nine months, ended June 30, 2001. Net Income - ---------- As a result of the foregoing, for the three months ended June 30, 2002 our net income was $90,669, or a 42% decrease from net income of $155,530 for the three months ended June 30, 2001. Net income of $335,776 for the nine months ended June 30, 2002, however, was 31% greater than net income of $256,934 for the nine months ended June 30, 2001. Basic and diluted income per share was $.01 for the three months, and $.04 for the nine months, ended June 30, 2002 as compared to $.02 for the three months, and $.03 for the nine months, ended June 30, 2001. Net income for the current fiscal year reflects an increase in gross margin and a decrease in our selling, general and administrative expenses and research and development expenses. Although we have been profitable on a quarterly basis since the third quarter of fiscal 2000, due to our operating history and numerous other factors, we cannot be sure that we can sustain revenue growth or profitability. Liquidity and Capital Resources - ------------------------------- At June 30, 2002, we had $3,614,882 in working capital compared to $3,233,800 at June 30, 2001. The primary measures of our liquidity are cash, cash equivalents, accounts receivable and inventory balances, as well as our borrowing ability. The cash and cash equivalents are highly liquid with original maturities of ninety days or less. Cash generated by operating activities was $862,433 for nine months ended June 30, 2002, which was mainly attributable to operating profits, a decrease in inventory of $128,098, a decrease in accounts receivable of $294,164 and an increase in accounts payable, accrued expenses and income taxes payable of $85,435. The decrease in accounts receivable was principally due to an improved collection process, timing of shipments and reduced sales levels for the third quarter of fiscal 2002. Inventories decreased by $128,098 during the nine months ended June 30, 2002 to a total of $1,071,438. Inventories were kept at these levels primarily to support existing and anticipated increasing sales activity. Cash generated by investing was $37,206 for the nine months ended June 30, 2002, which is mainly attributable to proceeds of $57,261 received from repayment of employee loans and advances. At June 30, 2002, we had cash and cash equivalents of $2,400,261. At June 30, 2002, we plan to finance our operating and capital needs principally with cash from sales, cash, cash equivalents, and related interest and existing capital resources, which we believe will be sufficient to fund our operations in the near future. However, should it be necessary, we believe we could borrow adequate funds at competitive rates and terms. Our future liquidity and capital requirements will depend on numerous factors, including the success in commercializing our existing products, development and commercialization of products in fields other than neurosurgery and the dental market, the ability of our suppliers to continue to meet our demands at current prices, the status of regulatory approvals and competition. [11] We have 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 us to have a tangible net worth of no less than $3,000,000. At June 30, 2002, there was no outstanding balance on this line. 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 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; (3) the future success of products and disposable instrumentation in the field of neurosurgery and the dental market; and (4) our ability to attract distributors for our products outside of neurosurgery and the dental market, and the acceptance and continued acceptance of our products in those markets. 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. You 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. Additional Cautionary Statements We Face Intense Competition - --------------------------- The markets for our current and potential products are intensely competitive. 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 - ------------------------ Our growth depends on the acceptance of our products in the marketplace, the market penetration achieved by the companies which we sell to, 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 contract with to distribute our products will continue to achieve market penetration in the field of neurosurgery and achieve market penetration in the dental market and other medical and surgical markets. Our failure to continue to introduce new products or gain wide spread acceptance of our products would adversely affect our operations. [12] We Depend on Attracting New Distributors for Our Products - --------------------------------------------------------- In order to successfully commercialize our products in new markets, we will need to enter into distribution arrangements with companies who can distribute our products in those fields successfully. 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 "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 our results of operations and financial condition. We Face Uncertainty Over Reimbursement - -------------------------------------- Failure by physicians, hospitals and other users of our products to obtain sufficient reimbursement from health care payors for procedures in which our products are used or adverse changes in governmental and private third-party payors' policies toward reimbursement for such procedures would have a material adverse effect on our business, financial condition, results of operations and future growth prospects. We May Be Unable to Effectively Protect Our Intellectual Property - ----------------------------------------------------------------- Our ability to compete effectively depends in part on developing and maintaining the proprietary aspects of our bipolar technology. We cannot assure you that the patents we have obtained, or any patents we may obtain, will provide any competitive advantages for our products. We also cannot assure you that those patents will not be successfully challenged, invalidated or circumvented in the future. In addition, we cannot assure you that competitors, many of which have substantial resources and have made substantial investments in competing technologies, have not already applied for or obtained, or will not seek to apply for and obtain, patents that will prevent, limit or interfere with our ability to make, use and sell our products either in the United States or in international markets. Patent applications are maintained in secrecy for a period after filing. We may not be aware of all of the patents and patent applications potentially adverse to our interests. We May Become Subject to a Patent Litigation - -------------------------------------------- The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights, and companies in the medical device industry have employed intellectual property litigation to gain a competitive advantage. We cannot assure you that we will not become subject to patent infringement claims or litigation or interference proceedings declared by the United States Patent and Trademark Office to determine the priority of invention. [13] 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 - ----------------------------------- Our results of operations may fluctuate significantly from quarter to quarter based on numerous factors including the following: * the introduction of new products; * the level of market acceptance of our products; * achievement of research and development milestones; * timing of the receipt of orders from, and product shipments to, our distributors; * timing of expenditures; * delays in educating and training our distributors' sales force; * manufacturing or supply delays; * product returns; and * receipt of necessary regulation approval. PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Current Reports on Form 8-K None [14] 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 12, 2002 By: /s/ Jerry L. Malis ----------------------- Jerry L. Malis, President (principal financial officer)