================================================================================
UNITED STATES
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, 2005
[ ] 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 [X] 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
At May 10, 2005 there were 7,913,712 shares outstanding of the Registrant's no
par value Common Stock.
================================================================================
VALLEY FORGE SCIENTIFIC CORP.
INDEX TO FORM 10-Q
March 31, 2005
Page
Number
------
Part I - Financial Information
Item 1. Financial Statements:
Balance Sheets - March 31, 2005 (unaudited) and
September 30, 2004 (audited) 1
Unaudited Statements of Income for the six months
ended March 31, 2005 and March 31, 2004 2
Unaudited Statements of Cash Flows for the six months
ended March 31, 2005 and March 31, 2004 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 16
Item 4. Controls and Procedures 34
Part II - Other Information 35
(i)
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, September 30,
2005 2004
(Unaudited) (Audited)
------------ ------------
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 2,647,334 $ 2,322,559
Accounts receivable - net 837,704 646,224
Inventory 736,115 781,604
Loans receivable - stockholder/officer 14,100 41,792
Prepaid items and other current assets 185,175 104,619
Deferred tax assets 79,232 79,752
------------ ------------
Total Current Assets 4,499,660 3,976,550
Property, plant and equipment - net 180,952 147,967
Goodwill 153,616 153,616
Intangible assets - net 198,050 218,398
Loans receivable - stockholder/officer 25,259 --
Other assets 3,480 26,707
------------ ------------
Total Assets $ 5,061,017 $ 4,523,238
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $ 610,356 $ 245,828
Income taxes payable 47,038 6,491
Deferred revenue -- 5,750
------------ ------------
Total Current Liabilities 657,394 258,069
Deferred Tax Liability 15,313 15,743
------------ ------------
Total Liabilities 672,707 273,812
------------ ------------
Contingencies
Stockholders' Equity:
Preferred stock -- --
Common stock (no par, 20,000,000 shares authorized,
shares issued and outstanding at March 31, 2005 and
September 30, 2004 - 7,913,712) 3,528,530 3,528,530
Retained earnings 859,780 720,896
------------ ------------
Total Stockholders' Equity 4,388,310 4,249,426
------------ ------------
Total Liabilities and Stockholders' Equity $ 5,061,017 $ 4,523,238
============ ============
See accompanying notes to consolidated financial statements.
-1-
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the Three Months Ended For the Six Months Ended
March 31, March 31,
--------------------------- ---------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net Sales $ 1,816,029 $ 1,132,771 $ 3,228,405 $ 2,332,240
Cost of Sales 834,660 511,864 1,482,781 1,067,168
----------- ----------- ----------- -----------
Gross Profit 981,369 620,907 1,745,624 1,265,072
----------- ----------- ----------- -----------
Other Costs:
Selling, general and administrative 490,028 470,208 920,442 868,545
Merger related professional fees 71,946 -- 82,236 --
Research and development 138,750 127,013 346,445 240,908
Amortization 10,174 10,074 20,348 20,149
----------- ----------- ----------- -----------
Total Other Costs 710,898 607,295 1,369,471 1,129,602
----------- ----------- ----------- -----------
Income from Operations 270,471 13,612 376,153 135,470
----------- ----------- ----------- -----------
Other Income (Expense)
Settlement of lawsuit (150,000) -- (150,000) --
Interest income 8,818 5,369 16,924 11,038
----------- ----------- ----------- -----------
Total Other Income (Expense) (141,182) 5,369 (133,076) 11,038
----------- ----------- ----------- -----------
Income before Income Taxes 129,289 18,981 243,077 146,508
Provision for Income Taxes 58,826 11,402 104,193 65,950
----------- ----------- ----------- -----------
Net Income $ 70,463 $ 7,579 $ 138,884 $ 80,558
=========== =========== =========== ===========
Income per Share:
Basic income per common share $ 0.01 $ 0.00 $ 0.02 $ 0.01
=========== =========== =========== ===========
Diluted income per common share $ 0.01 $ 0.00 $ 0.02 $ 0.01
=========== =========== =========== ===========
Basic weighted average common shares outstanding 7,913,712 7,913,712 7,913,712 7,913,712
Diluted weighted average common shares outstanding 7,956,915 7,977,448 7,967,048 7,971,722
See accompanying notes to consolidated financial statements.
-2-
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
March 31,
----------------------------
2005 2004
------------ ------------
Cash Flows from Operating Activities:
Net income $ 138,884 $ 80,558
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 35,415 35,194
Interest accrued on loans and advances to
employees and related parties (1,092) (1,167)
Deferred income taxes 90 (15,549)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (191,480) (272,061)
Inventory 45,489 9,497
Prepaid items and other current assets (80,485) 54,398
Other assets 8,827 8,828
Increase (decrease) in:
Accounts payable and accrued expenses
and income taxes payable 405,075 63,356
Deferred revenue (5,750) 17,250
------------ ------------
Net cash provided by operating activities 354,973 (19,696)
------------ ------------
Cash Flows from Investing Activities:
Purchases of property, plant and equipment (33,723) (9,842)
Proceeds from repayments of loans to stockholder 3,525 5,000
------------ ------------
Net cash (used in) investing activities (30,198) (4,842)
------------ ------------
Net Change in Cash and Cash Equivalents 324,775 (24,538)
Cash and Cash Equivalents - Beginning of Period 2,322,559 2,305,556
------------ ------------
Cash and Cash Equivalents - End of Period $ 2,647,334 $ 2,281,018
============ ============
Schedule of non-cash operating and investing activities:
Use of deposit for acquisition of property,
plant and equipment $ 14,400 $ --
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Income taxes $ 65,356 $ 2,000
Interest -- --
See accompanying notes to consolidated financial statements.
-3-
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
NOTE 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. Collectively, VFSC and DEC are referred to herein as
the "Company".
On May 2, 2005, the Company entered into a merger agreement with Synergetics,
Inc. ("Synergetics"), a privately-held corporation, to combine the two
companies. Under the terms of the merger agreement, the stockholders of
Synergetics' will receive approximately 16 million shares of the Company's
common stock. As a result of the merger, the former stockholders of Synergetics
will represent approximately 66% of the Company's outstanding common stock on a
fully diluted basis. The merger is subject to the satisfaction of a number of
closing conditions, including stockholder and regulatory approvals.
NOTE 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 subsidiary. All significant intercompany accounts and transactions
have been eliminated in consolidation
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, 2004.
The statements of operations for the three and six months ended March 31, 2005,
are not necessarily indicative of results for the full year.
-4-
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Earnings per Share
- ------------------
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). Basic
earnings per share are computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding.
Diluted earnings per share reflect 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, which include convertible debentures, stock options, and warrants.
Recently Issued Accounting Standards
- ------------------------------------
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
replaces SFAS 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
and supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"). SFAS 123(R) requires companies to recognize
in their income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees. The Company is required to adopt
SFAS 123(R) beginning January 1, 2006. Grant-date fair value will be determined
using one of two acceptable valuation models. This Standard requires that
compensation expense for most equity-based awards be recognized over the
requisite service period, usually the vesting period; while compensation expense
for liability-based awards (those usually settled in cash rather than stock) be
re-measured to fair-value at each balance sheet date until the award is settled.
The Standard also provides guidance as to the accounting treatment for income
taxes related to such compensation costs, as well as transition issues related
to adopting the new Standard. The Company has been using the intrinsic value
method as set forth under APB No. 25 with no stock-based compensation cost
reflected in net earnings while complying with footnote disclosure requirements
of SFAS No. 123 setting forth the pro forma effect on net earnings of applying
fair value recognition to stock based awards. The Company is currently
evaluating the impact on its operations of the adoption SFAS 123(R).
In December 2004, the FASB issued SFAS No. 153, "Exchange of Non-monetary Assets
an amendment of APB Opinion No. 29." This Statement precludes companies from
using the "similar productive assets" criteria to account for non-monetary
exchanges at book value with no gain or loss being recognized. Effective for
fiscal periods beginning after June 15, 2005, all companies will be required to
use fair value for most non-monetary exchanges, recognizing gain or loss, if the
transaction meets commercial, substance criteria. The Company does not expect
this Standard to have a significant impact on its current consolidated financial
statements.
-5-
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recently Issued Accounting Standards (Continued)
- ------------------------------------------------
In November 2004, the FASB issued Statement No. 151, "Inventory Costs, an
amendment of ARB 43, Chapter 4" ("SFAS 151"), to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage). ARB 43 allowed some of these "abnormal costs" to be
carried as inventory, whereas the new Standard requires that these costs be
expensed as incurred. This Statement is effective for fiscal years beginning
after June 15, 2005. The Company is currently evaluating what effect, if any,
this standard will have on its current consolidated financial statements.
In December 2004, the FASB issued FSP FAS 109-1, "Application of FASB Statement
No. 109, "Accounting for Income Taxes," to the "Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act of 2004" to
provide accounting guidance on the appropriate treatment of tax benefits
generated by the enactment of the Act. The FSP requires that the manufacturer's
deduction be treated as a special deduction in accordance with SFAS 109 and not
as a tax rate reduction. The Company is awaiting final tax regulations from the
IRS before completing its assessment of the impact of adopting FSP FAS 109-1 on
its current consolidated financial statements.
Stock-Based Compensation
- ------------------------
In December 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123." SFAS No. 148 amended SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amended the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 was effective for the Company as of
January 1, 2003. The Company has not elected a voluntary change in accounting to
the fair value based method. Accordingly, the adoption of SFAS No. 148 did not
have a significant impact on the Company's results of operations or financial
position.
-6-
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Stock-Based Compensation (Continued)
- ------------------------------------
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in subjective input assumptions can
materially affect the fair value estimated, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options. In addition, option pricing models require the input
of highly subjective assumptions, including expected stock price volatility.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. In accordance with
SFAS 123 and 148, only stock options granted after September 30, 1995, have been
included for the Company's pro forma information as follows:
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net income - as reported $ 70,463 $ 7,579 $ 138,884 $ 80,558
Less: total compensation expense
determined under fair value
based method - net of tax effect 18,586 45,142 18,586 45,142
------------ ------------ ------------ ------------
Pro Forma Net Income (Loss) $ 51,877 $ (37,563) $ 120,298 $ 35,416
============ ============ ============ ============
Pro Forma Income (Loss) Per Share:
Basic $ 0.01 $ 0.00 $ 0.02 $ 0.00
Diluted $ 0.01 $ 0.00 $ 0.02 $ 0.00
Revenue Recognition
- -------------------
Product revenue is recognized when the product has been shipped, which is when
title and risk of loss has been transferred to the customer.
-7-
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
NOTE 3 - DISTRIBUTION AGREEMENTS:
The Company sells its products to U.S. based national and international
distributors and dealers including those as described below:
Codman and Shurtleff, Inc. ("Codman")
- -------------------------------------
A significant part of the Company's sales were made pursuant to a distribution
agreement with Codman, an affiliate of a major medical company and the Company's
largest customer. The agreement provided for worldwide exclusive distribution
rights of neurosurgery products during the term. This distribution agreement
included minimum purchase obligations which were adjusted annually during the
term of the agreement. It also included a price list for the specified products,
which was fixed for a period of time, after which those prices were subject to
adjustment by the Company due to changes in manufacturing cost or technological
improvements to the products. On October 15, 2004, the Company executed a new
agreement with Codman for the period October 1, 2004 through December 31, 2005.
The agreement provided for exclusive worldwide distribution rights of the
Company's existing neurosurgery products in the fields of neurocranial and
neurospinal surgery until March 31, 2005, and non-exclusive rights in these
fields from April 1, 2005 through December 31, 2005. As of March 1, 2005 and on
May 6, 2005, the agreement was amended extending the period of exclusivity
through July 15, 2005. The agreement, as amended, also includes a price list for
the specified products, and a minimum purchase obligation of $1,000,000 per
calendar quarter, through July 15, 2005. There is no minimum purchase obligation
for the period July 15, 2005 through December 31, 2005. The agreement also
provides that the above-indicated periods of exclusive and nonexclusive
distribution rights can each be extended by mutual consent of the parties.
Codman did not satisfy its minimum purchase requirements for the three months
ended December 31, 2004 but did make up the deficiency by increasing its
purchases in the three months ended March 31, 2005.
Sales to Codman amounted to approximately $1,254,000 and $2,190,000 for the
three and six months ended March 31, 2005 and $975,000 and $2,001,000 for the
three and six months ended March 31, 2004, respectively. This represented 69%,
68%, 86% and 86% of net sales for the respective periods.
Stryker Corporation ("Stryker")
- -------------------------------
On October 25, 2004, the Company executed a Supply and Distribution Agreement
("the Agreement") with Stryker (a Michigan corporation) which provides for the
Company to supply to Stryker and for Stryker to distribute exclusively, on a
world-wide basis, a generator for the percutaneous treatment of pain. The
Agreement is for a term of five years after the first acceptance of the
generator by Stryker, which was on November 11, 2004.
-8-
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
NOTE 3 - DISTRIBUTION AGREEMENTS (CONTINUED):
Stryker Corporation ("Stryker") (Continued)
- -------------------------------------------
There is a minimum purchase obligation that is specified by "Agreement Year."
The first Agreement Year commenced on the date of the first acceptance by
Stryker of a generator product delivered by the Company as ready for commercial
sale, which was November 11, 2004, and ends on the last day of the calendar
quarter in which the first anniversary date of such inception date occurs. In
the first Agreement Year, Stryker is required to make minimum purchases of
$900,000 comprised of demonstration and commercial sales units. In the second
and third Agreement Years, Stryker is required to make minimum purchases in each
year of $500,000 of commercial sales units.
On or before the beginning of the last calendar quarter of the third Agreement
Year, and each Agreement Year thereafter, the Company and Stryker will conduct
good faith negotiations regarding the minimum purchase obligation for the next
Agreement Year. Also, during the first two months of the last calendar quarter
in any Agreement Year, the Company and Stryker will conduct good faith
negotiations regarding changes in prices that will take effect on the first day
of the ensuing Agreement Year. The Agreement also provides Stryker certain
rights for other new product concepts developed by the Company in both pain
control and expanded market areas. The Agreement contains various terms related
to the provision of repair services for the product by the Company and
maintenance of spare parts, the distributor's obligation to market the product,
to provide training to sales personnel, and other provisions.
Sales to Stryker for the three and six months ended March 31, 2005 amounted to
approximately $413,000 and $788,000, respectively. This represented 23% and 24%
of net sales for the respective periods.
NOTE 4 - OPTION AGREEMENT:
On October 22, 2004, the Company entered into an Option Agreement with Dr.
Leonard I. Malis, a director and stockholder of the Company, giving the Company
the right to purchase from Dr. Malis his Malis (R) trademark at any time over a
period of five years. The Company paid Dr. Malis $35,000 for the option and is
required to pay an annual fee before each anniversary of the option agreement
$20,000 for each of the first two anniversaries and increasing to $60,000 before
the fourth anniversary in order to keep the option in effect from year to year.
The exercise price of the option is $4,157,504 and would be paid with an initial
payment of $159,904 and the execution of a note payable to Dr. Malis for
$3,997,600, including interest. This note would be secured by a security
interest in the Company's rights to the Malis (R) trademark and certain of the
Company's patents.
-9-
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
NOTE 5 - SUPPLEMENTAL BALANCE SHEET INFORMATION:
Accounts Receivable - Net
- -------------------------
2005 2004
------------ ------------
(Unaudited) (Audited)
Accounts receivable $ 853,184 $ 661,704
Less: Allowances 15,480 15,480
------------ ------------
Accounts receivable - net $ 837,704 $ 646,224
============ ============
Inventory
- ---------
March 31, September 30,
2005 2004
------------ ------------
(Unaudited) (Audited)
Finished goods $ 106,945 $ 94,405
Work-in-process 215,449 396,810
Materials and parts 559,777 424,052
------------ ------------
882,171 915,267
Less: Allowances for slow moving
and obsolete inventory 146,056 133,663
------------ ------------
$ 736,115 $ 781,604
============ ============
-10-
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
NOTE 5 - SUPPLEMENTAL BALANCE SHEET INFORMATION (CONTINUED):
Property, Plant and Equipment - Net
- -----------------------------------
Useful Life March 31, September 30,
(Years) 2005 2004
------------ ------------ ------------
(Unaudited) (Audited)
Land -- $ 11,953 $ 11,953
Buildings and improvements 15 - 39 103,467 103,467
Furniture and fixtures 5 - 7 17,953 17,953
Laboratory equipment 5 - 10 422,344 378,159
Office equipment 5 186,762 185,530
Leasehold improvements 3 - 5 12,118 9,413
------------ ------------
754,597 706,475
Less: Accumulated depreciation
and amortization 573,645 558,508
------------ ------------
$ 180,952 $ 147,967
============ ============
Depreciation amounted to $7,354 and $7,388 for the three months ended March 31,
2005 and 2004, respectively, and $14,846 and $15,045 for the six months ended
March 31, 2005 and 2004, respectively.
-11-
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
NOTE 5 - SUPPLEMENTAL BALANCE SHEET INFORMATION (CONTINUED):
Goodwill and 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. No change
in the carrying amount of goodwill was made for the quarter ended March 31,
2005. The Company completed its annual impairment test during the quarter ended
March 31, 2005 and no impairment was identified.
Information regarding the Company's other intangible assets is as follows:
March 31, 2005 (Unaudited) September 30, 2004 (Audited)
-------------------------------------- --------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Value Amortization Net Value Amortization Net
---------- ---------- ---------- ---------- ---------- ----------
Patents, trademarks and
licensing agreements $ 573,804 $ 506,312 $ 67,492 $ 573,804 $ 503,678 $ 70,126
Proprietary know-how 452,354 311,622 140,732 452,354 304,082 148,272
Acquisition costs 55,969 55,969 -- 55,969 55,969 --
---------- ---------- ---------- ---------- ---------- ----------
$1,082,127 $ 873,903 $ 208,224 $1,082,127 $ 863,729 $ 218,398
========== ========== ========== ========== ========== ==========
Amortization expense of intangible assets amounted to $10,174 and $10,074 for
the three months ended March 31, 2005 and 2004, respectively, and $20,348 and
$20,149 for the six months ended March 31, 2005 and 2004, respectively.
Annual amortization expense is estimated to be $40,800 for fiscal 2005, $40,800
for fiscal 2006, $40,700 for fiscal 2007, $40,100 for fiscal 2008, $34,900 for
fiscal 2009 and $21,100 thereafter.
-12-
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
NOTE 6 - RELATED PARTY TRANSACTIONS:
Loans Receivable - Stockholder/Officer
- --------------------------------------
Loans receivable - stockholder/officer represent various loans to Jerry L.
Malis, a principal stockholder, director and officer of the Company. The loans
bear interest at rates of 4.83% to 6.97% and are payable in either quarterly
installments of $3,525 or annual installments of $14,100 until the principal and
accrued interest have been repaid. At March 31, 2005, loans receivable -
stockholder amounted to $39,359.
Loans receivable - stockholder/officer are partially secured by 5,833 shares of
the Company's common stock. At March 31, 2005, the pledged common stock has a
value of $7,933.
Operating Lease
- ---------------
The Company is leasing approximately 4,200 square feet of office and warehouse
space from a general partnership whose partners are Jerry L. Malis, Leonard I.
Malis (principal stockholders, directors and officers of the Company) and the
Francis W. Gilloway Marital Trust. The lease expires in June 2005. Rent expense
amounted to $15,467 and $30,934 for three and six months ended March 31, 2005,
respectively, and $15,017 and $30,033 for the three and six months ended March
31, 2004, respectively. At March 31, 2005, the Company was current on all rent
obligations to the related entity.
NOTE 7 - CONTINGENCIES:
Lawsuit
- -------
On September 19, 2002, the Company was served with a complaint that was filed in
the Superior Court of the State of Arizona, County of Maricopa, entitled Jeffrey
Turner and Cathryn Turner et al v. Phoenix Children's Hospital, Inc., et al, (CV
2002-010791) in which the Company was named as one of the defendants. The
plaintiffs were seeking damages from all defendants for permanent brain damage
suffered by a four-year old girl during a surgery that took place in June 2000.
The alleged damages sought by the plaintiffs against all parties were in excess
of the Company's product liability insurance policy limit of $1,000,000, and the
Company's net worth. The claim against the Company is a products liability
claim. The Company's product liability insurance carrier is providing the
Company's defense in this matter. This insurance coverage has a $10,000
deductible that applies to attorney fees and damages, which had been provided
for in other costs under selling, general and administrative expense for the
year ended September 30, 2002.
-13-
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
NOTE 7 - CONTINGENCIES (CONTINUED):
Lawsuit (continued)
- -------------------
In April 2005, this action was settled, subject to court approval, whereby the
Company, its insurance carrier and the plaintiffs executed a Settlement
Agreement and Release (the "Settlement"). As part of the Settlement, the
Company, without admitting liability, agreed to pay the plaintiff $150,000
whereby the Company was completely released and discharged from any past,
present or future claim resulting from this matter. Such amount has been accrued
and is reflected as an other cost in the statement of income and as accounts
payable and accrued expenses in the balance sheet.
Lease
- -----
The Company entered into a combination sublease and lease commencing on May 1,
2005 for a term of four and one-half years, for office, assembly and
manufacturing space in Upper Merion Township, Pennsylvania, with an initial
annual rental of $74,858, increasing to $129,437, plus annual operating
expenses.
NOTE 8 - EARNINGS PER SHARE:
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Income available to common stockholders $ 70,463 $ 7,579 $ 138,884 $ 80,558
========== ========== ========== ==========
Weighted average common shares
outstanding - basic 7,913,712 7,913,712 7,913,712 7,913,712
Net effect of dilutive shares issuable in
connection with stock plans 43,203 63,736 53,336 58,010
---------- ---------- ---------- ----------
Weighted average common shares
outstanding - diluted $7,956,915 $7,977,448 $7,967,048 $7,971,722
========== ========== ========== ==========
Earnings Per Share:
Basic $ 0.01 $ 0.00 $ 0.02 $ 0.01
Diluted $ 0.01 $ 0.00 $ 0.02 $ 0.01
-14-
VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
NOTE 8 - EARNINGS PER SHARE (CONTINUED):
Options to purchase 447,500 and 507,250 shares of common stock were outstanding
on March 31, 2005 and 2004, respectively. Of these shares, 404,297 and 443,514
shares were not included in the computation of diluted earnings per share for
the three months ended March 31, 2005 and 2004, and 394,164 and 449,240 of these
shares were not included in the computation of diluted earnings per share for
the six months ended March 31, 2005 and 2004, respectively, in accordance with
SFAS 128, as the issuance prices were in excess of the average market price for
the period.
NOTE 9 - SUBSEQUENT EVENT
The Company entered into an agreement to sell all of the property and certain
equipment of DEC, subject to certain contingencies, for $200,000. The estimated
income to be recognized by the Company is approximately $120,000, before moving
costs, closing costs and taxes.
-15-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion and analysis of Valley Forge Scientific
Corp.'s financial condition and results of operations for the quarterly periods
ended March 31, 2005 and 2004. This section should be read in conjunction with
the financial statements and related notes in Item 1 of this report and Valley
Forge Scientific Corp.'s annual report on Form 10-K for the year ended September
30, 2004, which has been filed with the Securities and Exchange Commission. This
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results may differ materially from
those anticipated in these forward looking statements as a result of many
factors including but not limited to those under the headings "Special Note
Regarding Forward Looking Statements" and "Factors That Might Affect Future
Results". Unless the context requires otherwise, references to "we", "us", "our"
and "Valley Forge Scientific" refer to Valley Forge Scientific Corp.
Overview
Valley Forge is a medical device company that develops, manufactures
and sells medical devices for use in surgery and other healthcare applications.
Our core business involves the sale of bipolar electrosurgical generators and
other generators, based on our DualWave(TM) technology, and complementary
instrumentation and disposable products.
Our current line of bipolar electrosurgical products are used in
neurosurgery and spine surgery and in dental applications. In the first quarter
of fiscal 2005, we commenced selling a lesion generator for the percutaneous
treatment of pain. We plan to expand the market for our products with the
introduction of our new multifunctional bipolar electrosurgical generator and
new proprietary single-use hand-switching bipolar instruments, new products
based on our proprietary lesion generator technology, and other products and
product refinements. Our new multifunctional bipolar electrosurgical system,
which is anticipated to be introduced in the market in fiscal 2005, is designed
to replace other surgical tools, such as monopolar electrosurgical systems and
lasers, in certain applications.
We believe our DualWave(TM) technology distinguishes our products from
our competitors. With appropriate technique, our bipolar electrosurgical systems
based on our DualWave(TM) technology 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 substantially
reducing damage to surrounding healthy tissue, the surgeon or dentist can work
safely in close proximity with nerves, blood vessels and bone. Our bipolar
electrosurgical systems can also be used in close proximity with metal implants
and in irrigated fields.
Merger Agreement with Synergetics, Inc.
- ---------------------------------------
On May 2, 2005, we entered into a merger agreement with Synergetics,
Inc., a privately-held corporation, that is involved in the development,
manufacture, distribution and sale of durable and disposable instruments for use
in retina surgery, neurosurgery and other microsurgery markets. Pursuant to the
-16-
terms of the merger agreement, Synergetics' shareholders will receive, in the
aggregate, approximately 16 million fully paid and nonassessable shares of
Valley Forge's common stock, no par value, or approximately 66% of Valley
Forge's then outstanding common stock on a fully diluted basis. Completion of
the merger is subject to several conditions, including approval by shareholders
of each company, effectiveness of a Form S-4 registration statement to be filed
with the Securities and Exchange Commission, and other customary closing
conditions. Additionally, the merger agreement may be terminated by Valley Forge
or Synergetics upon the occurrence or failure to occur of certain events,
including a failure of the merger to be consummated by September 30, 2005. In
the event of such termination, under certain circumstances, Valley Forge and
Synergetics may be required to pay each other a break-up fee of $1 million as
set forth in the merger agreement.
The merger agreement provides that the board of directors of Valley
Forge following the merger will consist of seven directors including two current
directors of each of Synergetics and Valley Forge and three additional
independent directors. Four of the seven directors will be independent.
Certain directors, executive officers and shareholders of Valley Forge
holding approximately 35 percent of outstanding shares of Valley Forge's common
stock and directors and executive officers of Synergetics holding approximately
19 percent of shares of Synergetics' common stock have agreed to vote in favor
of the merger, pursuant to voting agreements dated May 2, 2005. A majority of
the outstanding shares of the Valley Forge common stock, and two-thirds of the
outstanding shares of Synergetics' common stock, are required to approve the
merger.
Codman Agreement
- ----------------
For over 20 years, we have had worldwide exclusive distribution
agreements with Codman & Shurtleff, Inc. ("Codman"), a subsidiary of Johnson &
Johnson, Inc., to market our neurosurgery bipolar electrosurgical systems and
other products. On October 15, 2004, we entered into a new agreement with Codman
defining our business relationship from October 1, 2004 through December 31,
2005. This Agreement was amended effective March 1, 2005. On May 6, 2005, in
accordance with the terms of the amendment, we notified Codman that effective
July 15, 2005, Codman would be the nonexclusive worldwide distributor of our
existing products in the fields of neurocranial and neurospinal surgery until
December 31, 2005. Prior to July 15, 2005, Codman will continue to be the
exclusive worldwide distributor of our existing products in those fields.
Historically, we have derived a significant portion of our sales from sales to
Codman. For the three and six months ended March 31, 2005, 69% and 68%,
respectively, of our revenue was derived from sales to Codman, and for the
fiscal year ended September 30, 2004, 86% of our revenue was derived from sales
to Codman.
Strategy
- --------
Our goal is to be the global leader in the development of bipolar
medical devices and other products in specialty surgical and healthcare fields.
The key elements of our strategy include:
-17-
o Expanding the use of our new multifunctional bipolar electrosurgical
system into other surgical markets, such as, maxillofacial, ENT,
orthopedic and general surgery.
o Increasing revenues in the neurosurgery field with our new
multifunctional bipolar electrosurgical system.
o Expanding our product lines with new products and other applications of
our bipolar lesion technology.
Results of Operations
Results of Operations for the Three and Six Months Ended March 31, 2005
compared to the Three and Six Months Ended March 31, 2004.
Summary
Sales of $1,816,029, for three months, and $3,228,405 for the six
months, ended March 31, 2005 were 60% and 38% greater, respectively, than sales
of $1,132,771 and $2,332,240, respectively, for the three and six months ended
March 31, 2004. Operating income was $270,471 for the three months, and $376,153
for the six months, ended March 31, 2005 as compared to operating income of
$13,612 and $135,470, respectively, for the corresponding periods in fiscal
2004. Net income for the three months ended March 31, 2005 was $70,463 and
$138,884 for the six months end March 31, 2005, as compared to net income of
$7,579 and $80,558, respectively, for the corresponding periods in fiscal 2004.
Sales
Total Sales and Gross Profit on Sales:
Unaudited Unaudited
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- -------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Total sales: $1,816,029 $1,132,771 $3,228,405 $2,332,240
Cost of sales: 834,660 511,864 1,482,781 1,067,168
Gross profit on sales: 981,369 620,907 1,745,624 1,265,072
Gross profit as a percentage of sales: 54% 55% 54% 54%
The increase in sales in second quarter and first six months of the
2005 fiscal year as compared to the second quarter and first six months of the
2004 fiscal year reflects new sales to Stryker Corporation of a lesion generator
model we developed for the percutaneous treatment of pain, and increased sales
to Codman. Sales for our dental products increased for the second quarter of
fiscal 2005, but decreased for the first six months of 2005.
For the second quarter of fiscal 2005, sales to Codman accounted for
69% of our sales and sales to Stryker accounted for 23% of our sales, as
compared to 86% and 1%, of our sales, respectively, for the second quarter of
fiscal 2004. For the first six months of fiscal 2005, sales to Codman accounted
for 68% of our sales and sales to Stryker accounted for 24% of our sales, as
compared to 86% and 1% of our sales, respectively, for the first six months of
fiscal 2004.
-18-
During the second quarter and first six months of fiscal 2005, we had
sales to Stryker Corporation of $413,020 and $788,049, respectively, pursuant to
a supply and distribution agreement we entered into on October 25, 2004. There
was $15,000 in sales of this product during the second quarter of fiscal 2004.
The supply and distribution agreement is for a term commencing on November 11,
2004 and ending on March 31, 2009, under which Stryker has agreed to make
minimum purchases of approximately $900,000 in the first agreement year for a
combination of sales demonstration units and commercial sale units and minimum
purchases of approximately $500,000 per year for commercial sale units in the
each of the second and third agreement years. Minimum purchase requirements for
agreement years four and five are to be determined by the parties based on
market conditions and other factors. The agreement also provides Stryker certain
rights for other new product concepts developed by Valley Forge in both pain
control and expanded market areas. As we are already approaching the minimum
sales levels for the first agreement year, we anticipate lower levels of sales
to Stryker in the third and fourth quarters of fiscal 2005.
Sales of our neurosurgical products and related services to Codman &
Shurtleff, Inc. increased to $1,254,363 for the three months, and $2,190,132 for
the six months, ended March 31, 2005 as compared to sales of $975,012 for the
three months, and $2,000,977 for the six months, ended March 31, 2004. Under an
agreement we entered into with Codman, as amended, Codman will continue to be
the exclusive worldwide distributor of our existing products in the fields of
neurocranial and neurospinal surgery through July 15, 2005, and for the period
from July 15, 2005 to December 31, 2005, Codman will be a nonexclusive
distributor of our existing products in those fields. For the period from
October 1, 2004 to July 15, 2005, Codman has agreed to make minimum purchases of
$1 million per calendar quarter in order to maintain its exclusivity. Codman did
not satisfy its minimum purchase requirements for the three months ended
December 31, 2004, but made up this deficiency in purchase obligations by
increasing its purchases in the second quarter of 2005.
For the three and six months ended March 31, 2005, sales of the
Bident(R) Bipolar Tissue Management System for dental applications were $143,980
and $219,170, respectively, or 8% and 7% of sales, respectively, as compared to
$118,817, or 11% of sales, and $288,867, or 12% of sales, respectively, for the
corresponding periods in 2004. We are considering product modifications and
other strategies for our dental products.
Sales by Medical Field:
The table below sets forth our sales by medical field of "Generators,
Irrigators and Other Products" and "Disposable Products" for the three months
and six months ended March 31, 2005, and 2004. Sales of "Disposable Products" in
"Other fields" represent sales to Boston Scientific Corporation and direct sales
to hospitals.
-19-
For the Three Months For the Six Months
Ended Ended
March 31, March 31,
------------------------ ------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Generators, Irrigators
and Other Products
- ------------------
Neurosurgery field $ 733,174 $ 441,235 $1,214,199 $1,048,626
Dental field 125,767 104,590 187,276 256,630
Pain Control fields 412,500 15,000 787,500 15,000
---------- ---------- ---------- ----------
Total of all fields: $1,271,441 $ 560,825 $2,188,975 $1,320,256
========== ========== ========== ==========
Disposable Products
- -------------------
Neurosurgery field $ 450,296 $ 433,139 $ 862,106 $ 804,724
Dental field 18,213 14,227 29,532 32,237
Other fields 2,716 25,426 13,236 28,285
---------- ---------- ---------- ----------
Total of all fields: $ 471,225 $ 472,792 $ 904,874 $ 865,246
========== ========== ========== ==========
For the second quarter of fiscal 2005, 70% of our sales related to
sales of bipolar electrosurgical generators, irrigators and accessories as
compared to approximately 45% of our sales for the second quarter of fiscal
2004. Sales of disposable products accounted for approximately 26% of our sales
in the second quarter of fiscal 2005 as compared to approximately 44% of our
sales in the second quarter of fiscal 2004.
For the first six months of fiscal 2005, 68% of our sales related to
sales of bipolar electrosurgical generators, irrigators and accessories as
compared to approximately 52% of our sales for the first six months of fiscal
2004. Sales of disposable products accounted for approximately 28% of our sales
in the first six months of fiscal 2005, as compared to approximately 40% of our
sales in the first six months of fiscal 2004.
Cost of Sales
Cost of sales was 46% of sales for both the three and six months ended
March 31, 2005 as compared to 45% of sales for the three months, and 46% of
sales of the six months, ended March 31, 2004. Gross margin was 54% for both the
three and six months ended March 31, 2005 as compared to 55% for the three
months and 54% for the six months ended March 31, 2004. The higher gross margin
for the three months ended March 31, 2004, reflects a payment by Codman of
$57,938 to satisfy its minimum purchase obligations under the terms of a then
existing distribution agreement.
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.
-20-
Operating Expenses
Selling, general and administrative expenses were $490,028, or 27
percent of sales, for the second quarter of fiscal 2005 as compared to $470,208,
or 41 percent of sales, for the second quarter of fiscal 2004. For the first six
months of fiscal 2005, selling, general and administrative expenses were
$920,442, or 29 percent of sales, as compared to $868,545, or 37 percent of
sales, for the first six months of fiscal 2004. As further described in the
"Liquidity and Capital Resources" section below, we expect to incur moving and
other one-time expenses, as well as increased rent expenses, in connection with
moving our corporate offices, assembly, engineering and manufacturing operations
into a single facility during the third and fourth quarters of fiscal 2005.
We incurred professional fees in connection with the merger agreement
with Synergetics, Inc., which was entered into on May 2, 2005, of approximately
$72,000, for the second quarter of fiscal 2005, and approximately $82,000 for
the first six months of fiscal 2005. It is expected that these fees will
increase in the third and fourth quarters of fiscal 2005, as additional
professional fees and printing costs are incurred in connection with the merger.
Research and development expenses were $138,750, or 8% of sales, and
$346,445, or 11% of sales, respectively, for the three and six months ended
March 31, 2005 as compared to $127,013, or 11% of sales, and $240,908, or 10% of
sales, for the corresponding period in fiscal 2004. We will continue to invest
in research and development to expand our technological base for use in both
existing and additional clinical fields. Research and development expenses in
the second quarter and first six months of fiscal 2005 reflected the continued
development of our new multifunction bipolar electrosurgical generator and
instrumentation. In addition, research and development expenses for the six
months of fiscal 2005 reflect the completion of the lesion generator model,
currently being sold to Stryker.
Other Income (Expenses)
In the second quarter of fiscal 2005, we recorded an expense of
$150,000 , or approximately $.02 per share, in connection with the lawsuit
entitled Jeffrey Turner and Cathryn Turner v. Phoenix Children's Hospital, Inc.
, et al., in which Valley Forge was one of the defendants. As described in the
"Liquidity and Capital Resources" section below, a settlement agreement was
entered into in April 2005. As a result of the foregoing, we had other expenses
of $141,182, net of investment income, in the three months, and $133,076, net of
investment income, in the six months, ended March 31, 2005 as compared to
investment income of $5,369 for the three months, and $11,038 for the six
months, ended March 31, 2004.
Income Tax Provision
The provision for income taxes was $58,826 for the three months, and
$104,193 for the six months, ended March 31, 2005 as compared to $11,402 for the
three months, and $65,950 for the six months, ended March 31, 2004.
-21-
Net Income
Net income increased to $70,463 for the three months, and $138,884 for
the six months, ended March 31, 2005, as compared to net income of $7,579 for
the three months, and $80,558 for the six months, ended March 31, 2004. Basic
and diluted income per share was $0.01 for the three months, and $0.02 for the
six months, ended March 31, 2005 as compared to $0.00 for the three months, and
$0.01 for the six months, ended March 31, 2004.
Liquidity and Capital Resources
At March 31, 2005, we had $3,842,266 in working capital compared to
$3,718,481 at September 30, 2004 and $3,673,383 at March 31, 2004. The primary
measures of our liquidity are cash, cash equivalents, accounts receivable and
inventory balances. The cash equivalents are highly liquid with original
maturities of ninety days or less.
Cash provided by operating activities was $354,973 for the six months
ended March 31, 2005 as compared to cash used of $19,696 for the six months
ended March 31, 2004. The cash provided by operating activities was mainly
attributable to operating profits net of adjustments for non-cash items, an
increase in accounts payable of $405,075, and a decrease in inventory of
$45,489, partially offset by an increase in accounts receivable of $191,480 and
an increase in prepaid items and other current assets of $80,485.
In the first six months of fiscal 2005, accounts receivable net of
allowances increased by $191,480 to $837,704 at March 31, 2005 from $646,224 at
September 30, 2004. The increase in accounts receivable was principally due to
increased sales.
In the first six months of fiscal 2005, inventories decreased by
$45,489 to $736,115 at March 31, 2005 from $781,604 at September 30, 2004. The
decrease was primarily due to improved inventory management and increased sales.
The increase in accounts payable for the first six months of fiscal
2005 reflects our recording an expense of $150,000 in connection with the
lawsuit entitled Jeffrey Turner and Cathryn Turner v. Phoenix Children's
Hospital, Inc. , et al., in which Valley Forge was one of the defendants. In
April 2005, without admitting liability in this disputed claim, and as a
precondition to Valley Forge's merger agreement with Synergetics, Inc., a
settlement agreement and release was entered into, subject to court approval, in
which we agreed to pay $150,000 towards plaintiff's expenses incurred in the
lawsuit. The increase in accounts payable also reflects increases in material
purchases due to increased sales volume.
For the six months ended March 31, 2005, we used $33,723 for the
purchase of equipment and building improvements in connection with our
manufacturing operations. Net property and equipment increased to $180,952 at
March 31, 2005 as compared to $147,967 at September 30, 2004.
-22-
In August 2002, our Board of Directors terminated our then existing
stock repurchase plan and authorized a new repurchase plan to purchase up to
200,000 shares of our common stock. We did not purchase any of our stock in the
second quarter of fiscal 2005 pursuant to this plan. To date, we have
repurchased 154,100 shares of our common stock under the plan, leaving a balance
of 45,900 that is available for repurchase under the plan.
Subsequent to the end of the second quarter of fiscal 2005, we entered
into a combination sublease and lease, commencing on May 1, 2005, for a term of
four and one-half years, for approximately 13,500 square feet of office,
assembly, engineering and manufacturing space in Upper Merion Township,
Pennsylvania, with an initial annual rent of $74,858, increasing to $129,437,
plus annual operating expenses. We intend to move both our Philadelphia,
Pennsylvania manufacturing, engineering and assembly facility and our Oaks,
Pennsylvania offices into this facility in the third and fourth quarters of
fiscal 2005. In connection with this move, we will incur moving expenses as well
as other one-time expenses in connection with refitting the new facility to our
specifications.
In addition, subsequent to the end of the second quarter of fiscal
2005, our wholly-owned subsidiary, Diversified Electronics Company, Inc.,
entered into a contract of sale, subject to certain contingencies, for the sale
of our Philadelphia, Pennsylvania manufacturing, engineering and assembly
facility for a sales price of $200,000. The estimated income to be recognized by
Valley Forge upon sale is approximately $120,000, before moving costs, closing
costs and taxes.
At March 31, 2005, we had cash and cash equivalents of $2,647,334. We
plan to finance our operating and capital needs principally with cash flows from
operations and existing balances of cash and cash equivalents, 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 funds we expend in marketing, selling and distributing
our products, the success in commercializing our existing products, development
and commercialization of products in other clinical markets, the ability of our
suppliers to continue to meet our demands at current prices, the status of
regulatory approvals and competition.
We have a line of credit of $1,000,000 with Wachovia Bank, N.A. 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 $3,400,000. Our current tangible net worth exceeds $3,400,000 at
March 31, 2005. As of March 31, 2005, there was no outstanding balance on this
line.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
-------------------------------------------------
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make judgments, assumptions, and estimates that affect
the amounts reported in the Consolidated Financial Statements and accompanying
notes. Note 1 to the Consolidated Financial Statements describes the significant
accounting policies and methods used in the preparation of the Consolidated
Financial Statements. Estimates are used for, but not limited to, the accounting
for the allowance for doubtful accounts and sales returns, inventory allowances,
warranty costs, contingencies and other special charges, and taxes. Actual
-23-
results could differ materially from these estimates. The following critical
accounting policies are impacted significantly by judgments, assumptions, and
estimates used in the preparation of the Consolidated Financial Statements.
Allowances For Doubtful Accounts, Sales Returns and Warranty Costs
We evaluate the collectibility of accounts receivable based on a
combination of factors. In circumstances where a specific customer is unable to
meet its financial obligations to us, we record an allowance against amounts due
to reduce the net recognized receivable to the amount that we reasonably expect
to collect. For all other customers, we record allowances for doubtful accounts
based on the length of time the receivables are past due, the current business
environment and our historical experience. If the financial condition of
customers or the length of time that receivables are past due were to change, we
may change the recorded amount of allowances for doubtful accounts in the
future. We record a provision for estimated sales returns and allowances on
product revenues in the same period as the related revenues are recorded. We
base these estimates on historical sales returns and other known factors. Actual
returns could be different from our estimates and the related provisions for
sales returns and allowances, resulting in future changes to the sales returns
and allowances provision. Our warranty obligation is affected primarily by
product that does not meet specifications within the applicable warranty period
and any related costs to repair or replace such products. Should our actual
experience of warranty claims differ from our estimates of such obligations, our
provision for warranty costs could change.
Inventories
Inventories, which consist of raw materials, work-in-process and
finished goods, and include purchased materials, direct and indirect labor and
direct and indirect manufacturing overhead, are stated at the lower of cost,
determined by the moving average method, or market. At each balance sheet date,
we evaluate inventories for excess quantities and identified obsolescence. Our
evaluation includes an analysis of historical sales levels by product and
projections of future demand, as well as estimates of quantities required to
support warranty and other repairs. To the extent that we determine there are
excess quantities based on our projected levels of sales and other requirements,
or obsolete material in inventory, we record valuation reserves against all or a
portion of the value of the related parts or products. If future demand or
market conditions are different than our projections, a change in recorded
inventory valuation reserves may be required and would be reflected in cost of
sales in the period the revision is made.
Amortization Periods
We record amortization of intangible assets using the straight-line
method over the estimated useful lives of these assets. We base the
determination of these useful lives on the period over which we expect the
related assets to contribute to our cash flows or in the case of patents, their
legal life, whichever is shorter. If our assessment of the useful lives of
intangible assets changes, we may change future amortization expense.
-24-
Deferred Tax Assets and Liabilities
Our deferred tax assets and liabilities are determined based on
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Deferred tax assets are reduced by a
valuation allowance when a determination is made that it is more likely than not
that a portion or all of the deferred tax assets will not be realized.
Loss Contingencies
We are subject to claims and lawsuits in the ordinary course of our
business, including claims by employees or former employees, with respect to our
products and involving commercial disputes. Except for the settlement of the
lawsuit, entitled Jeffrey Turner and Cathryn Turner v. Phoenix Children's
Hospital, Inc. , et al., our financial statements do not reflect any material
amounts related to possible unfavorable outcomes of claims and lawsuits to which
we are currently a party because we currently believe that such claims and
lawsuits are either adequately covered by insurance or otherwise indemnified,
and are not expected, individually or in the aggregate, to result in a material
adverse effect on our financial condition. However, it is possible that our
results of operations, financial position and cash flows in a particular period
could be materially affected by these contingencies if we change our assessment
of the likely outcome of these matters.
Goodwill Impairment
We perform goodwill impairment tests on an annual basis and as needed
if events or circumstances indicate that goodwill may have been impaired. In
response to changes in industry and market conditions, we may be required to
strategically realign our resources and consider restructuring, disposing, or
otherwise exiting businesses, which could result in an impairment of goodwill.
Impairment is measured by the difference between the recorded value of goodwill
and its implied fair value when the fair value of the reporting unit is less
than its net book value.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangible assets to be held
and used are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable.
Determination of recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the group of assets and their eventual
disposition. Measurement of an impairment loss for long-lived assets and certain
identifiable intangible assets that management expects to hold and use is based
on the fair value of the asset. Long-lived assets and certain identifiable
intangible assets to be disposed of are reported at the lower of carrying amount
or fair value less costs to sell.
-25-
Stock-Based Compensation
We account for stock-based employee compensation using the intrinsic value
method of accounting. Under this method, employee stock-based compensation
expense is based on the difference, if any, on the date of the grant between the
fair value of the Company's stock and the exercise price of the award. We
account for stock options issued to non-employees using the fair value method of
accounting, which requires us to assign a value to the stock options issued
based on an option pricing model, and to record that value as compensation
expense. We use the Black-Scholes option pricing model. If we were to account
for stock options issued to employees using the fair value method of accounting
rather than the intrinsic value method, our results of operations would be
significantly affected.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
-------------------------------------------------
The information provided in this Quarterly Report on Form 10-Q contain
in addition to historic information, "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 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 including:
o competitive, regulatory and market conditions;
o the performance of new products and the continued acceptance of current
products in the marketplace;
o the execution of strategic initiatives and alliances;
o disruptions caused by moving our assembly, engineering and
manufacturing facility;
o the market penetration by third parties who distribute and sell our
products;
o our ability to maintain a sufficient supply of products;
o product liability claims;
o the uncertainties associated with intellectual property protection for
our products;
o the possibility that the merger transaction with Synergetics will not
close or that the closing will be delayed due to the regulatory review
or other factors;
o the challenges and costs of combining the operations and personnel of
Synergetics with Valley Forge after a closing of the merger agreement;
o the ability to attract and retain highly qualified employees;
o competitive factors, including pricing pressures;
o reactions of customers of Valley Forge and Synergetics and end-users of
Valley Forge and Synergetics products to the merger transaction and
related risks of maintaining pre-existing relationships of Valley Forge
and Synergetics;
o adverse changes in general economic or market conditions;
-26-
o other one-time events;
o other important factors disclosed previously and from time to time in
Valley Forge's filings with the SEC; and
o other risk factors described in the sections entitled "Factors That
Might Affect Future Results" in this report.
Readers are cautioned not to rely on these forward looking statements.
We do not intend to update or revise these forward looking statements.
FACTORS THAT MIGHT AFFECT FUTURE RESULTS
----------------------------------------
The Medical Device Industry Is Highly Competitive, And We May Be Unable to
Compete Effectively with Other Companies.
In general, the medical technology industry is characterized by intense
competition. We compete with established medical technology and pharmaceutical
companies. Competition also comes from early stage companies that have
alternative solutions for the markets we serve or intend to serve. Many of our
competitors have access to greater financial, technical, research and
development, marketing, manufacturing, sales, distribution services and other
resources than we do. Further, our competitors may be more effective at
implementing their technologies to develop commercial products.
Our competitive position will depend on our ability to achieve market
acceptance for our products, develop new products, implement production and
marketing plans, secure regulatory approval for products under development, and
protect our intellectual property. We may need to develop new applications for
our products to remain competitive. Technological advances by one or more of our
current or future competitors could render our present or future products
obsolete or uneconomical. Our future success will depend upon our ability to
compete effectively against current technology as well as to respond effectively
to technological advances. Competitive pressures could adversely affect our
profitability.
The largest competitor for our neurosurgical generator is the Valleylab
division of Tyco International Ltd. In addition, our product lines could compete
with smaller specialized companies or larger companies that do not otherwise
focus on neurosurgery. Our dental business is small compared to its principal
competitors, which sell laser devices. Our new multi-functional bipolar
electrosurgical system will compete with monopolar devices manufactured by the
Valleylab division of Tyco International Ltd. Our lesion generator for the
treatment of pain will compete with other manufacturers of generators. Finally,
in certain cases our products compete primarily against medical practices that
treat a condition with medications.
-27-
Our Business Depends Significantly On Key Relationships With Third Parties,
Which We May Be Unable To Establish And Maintain.
Our current business model depends on our entering into and maintaining
distribution or alliance agreements with third parties concerning product
marketing and sales. Our most important agreement is with the Codman &
Shurtleff, Inc., an affiliate of Johnson & Johnson, for the sale of our
neurosurgery products. Sales to Codman accounted for 69% of our sales for the
second quarter of fiscal 2005, 86% of our sales in fiscal 2004, and 92% of our
sales in fiscal 2003. Under the agreement, which we entered into with Codman, as
amended, our exclusive distributorship relationship will expire on July 15,
2005, and our nonexclusive distribution relationship will expire on December 31,
2005, unless otherwise agreed by the parties. Termination or nonrenewal of this
relationship would require us to develop other means to distribute our
neurosurgery products through other channels and could adversely affect our
sales, operations and growth. We do not currently have the internal means to
distribute our products.
Our ability to enter into agreements with third parties depends in part
on convincing them that our technology can help them achieve their goals and
execute their strategies. This may require substantial time, effort and expense
on our part with no guarantee that a relationship will result. We may not be
able to establish or maintain these relationships on commercially acceptable
terms. Our future agreements, or our marketing and selling efforts to sell our
products through other channels, may not ultimately be successful. Even if we
enter into distribution or alliance agreements, the contracting parties could
terminate these agreements, or these agreements could expire before meaningful
milestones are reached. The termination or expiration of any of these
relationships could have a material adverse effect on our business.
Much of the revenue that we may receive under third party distribution
or alliance agreements will depend upon our distributors' ability to
successfully introduce, market and sell our products. Our success depends in
part upon the performance by these distributors of their responsibilities under
these agreements or our ability to market or distribute our products through
other channels. Some distributors may not perform their obligations when and as
we expect. Thus, revenues to be derived from distributors may vary significantly
over time and be difficult to forecast. Some of the companies we currently have
distribution agreements with or are targeting as potential allies offer products
competitive with our products or may develop competitive production technologies
or competitive products without our participation, which could have a material
adverse effect on our competitive position.
Our Operating Results May Fluctuate
We have experienced operating losses at various times since our
inception. Our operating results, including components of operating results,
such as gross margin on product sales, may fluctuate from time-to-time which
could affect our stock price. Our operating results have fluctuated in the past
and can be expected to fluctuate from time-to-time in the future. Some of the
factors that may cause these fluctuations include, but are not limited to:
-28-
o the introduction of new product lines;
o product modifications;
o the level of market acceptance of our products;
o the timing of research and development expenditures;
o timing of the receipt of orders from, and product shipments to,
distributors and customers;
o timing of expenditures;
o changes in the distribution arrangements for our products;
o manufacturing or supply delays;
o the time needed to educate and train a distributor's sales force;
o costs associated with product introduction;
o product returns; and
o receipt of necessary regulation approvals.
Our Products May Not Be Accepted In The Market Or May Not Effectively Compete
With Other Products Or Technologies.
We cannot be certain that our current products or any other products
that we may develop or market will achieve or maintain market acceptance.
Certain of the medical indications that can be treated by our devices can also
be treated by other medical devices or by medical practices that do not include
a device. The medical community widely accepts many alternative treatments, and
certain of these other treatments have a long history of use.
We cannot be certain that our devices and procedures will be able to
replace those established treatments or that either physicians or the medical
community in general will accept and utilize our devices or any other medical
products that we may develop. For example, we cannot be certain that the medical
community will accept our new multifunctional electrosurgical generator and
proprietary hand-switching bipolar electrosurgical instruments over traditional
monopolar electrosurgical generators.
In addition, our future success depends, in part, on our ability to
develop additional products. Competitors may develop products that are more
effective, cost less, or are ready for commercial introduction before our
products. If we are unable to develop additional commercially viable products,
our future prospects could be adversely affected.
Market acceptance of our products depends on many factors, including
our ability to convince third party distributors and customers that our
technology is an attractive alternative to other technologies, to manufacture
products in sufficient quantities and at acceptable costs, and to supply and
service sufficient quantities of our products directly or through our
distribution alliances. In addition, limited funding available for product and
technology acquisitions by end users of our products, as well as internal
obstacles to end user approval of purchases of our products, could harm
acceptance of our products. The industry is subject to rapid and continuous
change arising from, among other things, consolidation and technological
improvements. One or more of these factors may vary unpredictably, which could
materially adversely affect our competitive position. We may not be able to
adjust our plan of development to meet changing market demands.
-29-
Changes In The Health Care Industry May Require Us To Decrease The Selling Price
For Our Products Or Could Result In A Reduction In The Size Of The Market For
Our Products, Each Of Which Could Have A Negative Impact On Our Financial
Performance.
Trends toward managed care, health care cost containment, and other
changes in government and private sector initiatives in the United States and
other countries in which we do business are placing increased emphasis on the
delivery of more cost-effective medical therapies that could adversely affect
the sale and/or the prices of our products. For example:
o there has been a consolidation among health care facilities and
purchasers of medical devices in the United States who prefer to limit
the number of suppliers from whom they purchase medical products, and
these entities may decide to stop purchasing our products or demand
discounts on our prices;
o major third-party payors of hospital services, including Medicare,
Medicaid and private health care insurers, have substantially revised
their payment methodologies, which has resulted in stricter standards
for reimbursement of hospital charges for certain medical procedures;
o Medicare, Medicaid and private health care insurer cutbacks could
create downward price pressure on our products;
o numerous legislative proposals have been considered that would result
in major reforms in the U.S. health care system that could have an
adverse effect on our business;
o there is economic pressure to contain health care costs in
international markets; and
o there have been initiatives by third-party payors to challenge the
prices charged for medical products that could affect our ability to
sell products on a competitive basis.
Both the pressures to reduce prices for our products in response to
these trends and the decrease in the size of the market as a result of these
trends could adversely affect our levels of revenues and profitability of sales.
We Will First Need Regulatory Approval To Market Our Products under Development.
We May Be Subject To Penalties And May Be Precluded From Marketing Our Products
If We Fail To Comply With Extensive Governmental Regulations.
Our research and development activities and the manufacturing,
labeling, distribution and marketing of our existing and future products are
subject to regulation by numerous governmental agencies in the United States and
in other countries. The Food and Drug Administration (FDA) and comparable
agencies in other countries impose mandatory procedures and standards for the
conduct of clinical trials and the production and marketing of products for
diagnostic and human therapeutic use.
Products we have under development are subject to FDA approval or
clearance prior to marketing for commercial use. The process of obtaining
necessary FDA approvals or clearances can take years and is expensive and full
of uncertainties. Our inability to obtain required regulatory approval or
clearance on a timely or acceptable basis could harm our business. Further,
approval or clearance may place substantial restrictions on the indications for
which the product may be marketed or to whom it may be marketed. Further studies
may be required to gain approval or clearance for the use of a product for
clinical indications other than those for which the product was initially
approved or cleared or for significant changes to the product.
-30-
Furthermore, another risk of application to the FDA relates to the
regulatory classification of new products or proposed new uses for existing
products. In the filing of each application, we are required to make a judgment
about the appropriate form and content of the application. If the FDA disagrees
with our judgment in any particular case and, for example, requires us to file a
premarket approval (PMA) application rather than allowing us to market for
approved uses while we seek broader approvals or requires extensive additional
clinical data, the time and expense required to obtain the required approval
might be significantly increased or approval might not be granted. Approved and
cleared products are subject to continuing FDA requirements relating to quality
control and quality assurance, maintenance of records, reporting of adverse
events and product recalls, documentation, and labeling and promotion of medical
devices.
The FDA as well as foreign regulatory authorities require that our
products be manufactured according to rigorous standards. These regulatory
requirements may significantly increase our production costs and may even
prevent us from making our products in amounts sufficient to meet market demand.
If we change our approved manufacturing process, the FDA may need to review the
process before it may be used. Failure to develop our manufacturing capability
may mean that even if we develop promising new products, we may not be able to
produce them profitably, as a result of delays and additional capital investment
costs. In addition, failure to comply with applicable regulatory requirements
could subject us to enforcement action, including product seizures, recalls,
withdrawal of clearances or approvals, restrictions on or injunctions against
marketing our product or products based on our technology, and civil and
criminal penalties.
Our Intellectual Property Rights May Not Provide Meaningful Commercial
Protection For Our Products And Could Adversely Affect Our Ability To Compete In
The Market.
Our ability to compete effectively depends in part, on our ability to
maintain the proprietary nature of our technologies and manufacturing processes,
which includes the ability to obtain, protect and enforce patents on our
technology and to protect our trade secrets. We own patents that cover
significant aspects of our products. Certain of our patents have expired and
others will expire in the future. In addition, challenges may be made to our
patents and, as a result, our patents could be narrowed, invalidated or rendered
unenforceable. Competitors may develop products similar to ours that our patents
do not cover. In addition, our current and future patent applications may not
result in the issuance of patents in the United States or foreign countries.
Further, there is a substantial backlog of patent applications at the U.S.
Patent and Trademark Office, and the approval or rejection of patent
applications may take several years.
-31-
Our Competitive Position Depends, In Part, Upon Unpatented Trade Secrets Which
We May Be Unable To Protect.
Our competitive position is furthermore dependent upon unpatented trade
secrets. Trade secrets are difficult to protect. We cannot assure you that
others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets, that
our trade secrets will not be disclosed, or that we can effectively protect our
rights to unpatented trade secrets.
In an effort to protect our trade secrets, we generally require our
employees, consultants and advisors to execute proprietary information and
invention assignment agreements upon commencement of employment or consulting
relationships with us. These agreements typically provide that, except in
specified circumstances, all confidential information developed or made known to
the individual during the course of their relationship with us must be kept
confidential. We cannot assure you, however, that these agreements will provide
meaningful protection for our trade secrets or other proprietary information in
the event of the unauthorized use or disclosure of confidential information.
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.
It May Be Difficult To Replace Some Of Our Suppliers.
Outside vendors, some of whom are sole-source suppliers, provide key
components and raw materials used in the manufacture of our products. For
example, we currently subcontract the manufacturing of our disposable cord and
tubing sets with a single manufacturer. Although we believe that alternative
sources for many of these components and raw materials are available, any supply
interruption could harm our ability to manufacture our products until a new
source of supply is identified and qualified. In addition, an uncorrected defect
or supplier's variation in a component or raw material, either unknown to us or
incompatible with our manufacturing process, could harm our ability to
manufacture products. We may not be able to find a sufficient alternative
supplier in a reasonable time period, or on commercially reasonable terms, if at
all, and our ability to produce and supply our products could be impaired. If we
were suddenly unable to purchase products from one or more of our suppliers, we
could need a significant period of time to qualify a replacement, and the
production of any affected products could be disrupted. While it is our policy
to maintain sufficient inventory of components so that our production will not
be significantly disrupted even if a particular component or material is not
available for a period of time, we remain at risk that we will not be able to
qualify new components or materials quickly enough to prevent a disruption if
one or more of our suppliers ceases production of important components or
materials.
-32-
If Our Manufacturing Facility Was Damaged And/Or Our Manufacturing Processes
Interrupted, We Could Experience Lost Revenues And Our Business Could Be
Adversely Affected.
We manufacture our bipolar generators and irrigators at one facility.
Damage to this facility due to fire, natural disaster, power loss,
communications failure, unauthorized entry or other events could cause us to
cease development and manufacturing of some or all of these products. Although
we maintain property damage and business interruption insurance coverage on this
facility, we may not be able to renew or obtain such insurance in the future on
acceptable terms with adequate coverage or at reasonable costs.
Managing The Move Into Our New Manufacturing, Assembly, Engineering and Office
Space May Affect Our Ability To Meet Product Delivery Requirements.
We have recently entered into a combined sublease and lease for
approximately 13,500 square feet of assembly, engineering, manufacturing and
office space in Upper Merion Township, Pennsylvania and anticipate moving our
entire operations during the third and fourth quarters of fiscal 2005. Moving
our operations may result in a significant disruption in our assembly,
manufacturing, inventory, shipping, engineering and research and development
abilities and further result in erosion of our anticipated revenues and
earnings. Many matters could affect the move, including the time required to
ready our new facility, the time required to plan and execute the move, our
ability to quickly resume operations in the new facility and the additional
burden on our management team to plan and complete this relocation.
We May have Product Liability Claims and Our Insurance May Not Cover All Claims
Our products involve a risk of product liability claims. We may not be
able to obtain insurance for the potential liability on acceptable terms with
adequate coverage or at reasonable costs. Any potential product liability claims
could exceed the amount of our insurance coverage or may be excluded from
coverage under the terms of the policy. Further, our insurance may not be
renewed at a cost and level of coverage comparable to that then in effect.
The Market Price of Our Stock May be Highly Volatile
During the first two quarters of fiscal 2005 and during fiscal 2004 and
2003, our common stock has traded in a range of $1.05 and $2.40 per share. The
market price of our common stock could continue to fluctuate substantially due
to a variety of factors, including:
o our ability to successfully commercialize our products;
o the execution of new agreements and material changes in our
relationships with companies with whom we contract;
o quarterly fluctuations in results of operations;
o announcements regarding technological innovations or new commercial
products by us or our competitors or the results of regulatory approval
filings;
o market reaction to trends in sales, marketing and research and
development and reaction to acquisitions;
o sales of common stock by existing stockholders; and
o economic and political conditions.
-33-
Historically, The Trading Volume For Our Common Stock Has Been Limited.
Our common stock is thinly traded in comparison to companies with
greater market capitalization. As a result, large sell trades, negative news and
general economic pressures on the stock market can have an impact on the price
of our common stock that is more pronounced than securities of other issuers
with larger listed stock volume or higher prices per share. Further, our common
stock has a limited float. A large percentage of our outstanding common stock is
held by management and insiders, so the float is limited and the stock is much
less liquid.
The Loss Of Key Personnel Could Harm Our Business.
We believe our success depends on the contributions of a number of our
key personnel, including Jerry L. Malis, our President and Chief Executive
Officer. If we lose the services of key personnel, those losses could materially
harm our business. We do not maintain any significant key person life insurance
on Mr. Malis.
Item 4. CONTROLS AND PROCEDURES
Our management, including our Chief Executive Officer/Principal
Financial Officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures as of March 31, 2005. Based on that
evaluation, our management, including our Chief Executive Officer/Principal
Financial Officer, has concluded that our disclosure controls and procedures are
effective. During the period covered by this report, there was no change in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
-34-
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31.1 Certification of the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.1 Certification of the Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Current Reports on Form 8-K
On January 26, 2005, Valley Forge Scientific Corp. filed a
report on Form 8-K regarding the resignation of certifying
accountant and the engagement of a new certifying accountant.
On February 14, 2005, Valley Forge Scientific Corp. filed a
report on Form 8-K regarding an earnings press release.
On February 16, 2005, Valley Forge Scientific Corp. filed a
report on Form 8-K regarding the appointment of a principal
officer.
On March 15, 2005, Valley Forge Scientific Corp. filed a
report on Form 8-K regarding an amendment to an agreement with
Codman & Shurtleff, Inc.
Subsequent to the end of the quarter, Valley Forge Scientific
Corp. made the following filings:
On May 4, 2005, Valley Forge Scientific Corp. filed a report
on Form 8-K regarding a merger agreement with Synergetics,
Inc.
On May 11, 2005, Valley Forge Scientific filed a report on
Form 8-K regarding an amendment to an agreement with Codman &
Shurtleff, Inc.
-35-
VALLEY FORGE SCIENTIFIC CORP.
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALLEY FORGE SCIENTIFIC CORP.
Date: May 13, 2005 By: /s/ JERRY L. MALIS
-------------------------------------
Jerry L. Malis, President and
Chief Executive Officer
(principal financial officer)
-36-
VALLEY FORGE SCIENTIFIC CORP.
For Quarterly Period Ended March 31, 2005
FORM 10-Q
EXHIBIT INDEX
Exhibit 31.1 Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of the Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
-37-