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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _________ to ________.
Commission File Number 0-11392
SPAN-AMERICA MEDICAL SYSTEMS, INC.
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(Exact name of Registrant as specified in its charter)
South Carolina 57-0525804
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
70 Commerce Center
Greenville, South Carolina 29615
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (864) 288-8877
Not Applicable
Former name, former address and former fiscal year, if changed since last
report.
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 periods 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 ___
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practical date.
Common Stock, No Par Value - 2,511,400 shares as of April 30, 2001
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INDEX
SPAN-AMERICA MEDICAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - March 31, 2001 and September 30, 2000........................3
Statements of Income - three and six months ended March 31, 2001
and April 1, 2000........................................................4
Statements of Cash Flows - six months ended March 31, 2001 and
April 1, 2000............................................................5
Notes to Financial Statements - March 31, 2001................................6
Item 2. Management's Discussion and Analysis of Interim Financial
Condition and Results of Operations......................................9
Item 3. Market Risk.........................................................12
PART II. OTHER INFORMATION..................................................13
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES...................................................................14
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Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
SPAN-AMERICA MEDICAL SYSTEMS, INC.
BALANCE SHEETS
March 31, Sept. 30
2001 2000
(Unaudited) (Note)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 319,056 $ 587,663
Securities available for sale 4,753,263 4,402,770
Accounts receivable, net of allowances of $377,000
(2001) and $390,000 (2000) 4,040,717 4,291,586
Inventories (Note 2) 2,054,158 2,066,482
Prepaid expenses and deferred income taxes 408,527 380,423
----------- -----------
Total current assets 11,575,721 11,728,924
Property and equipment, net (Note 3) 3,251,441 3,346,200
Cost in excess of fair value of net assets acquired,
net of accumulated amortization of $954,054 (2001)
and $880,342 (2000) 1,997,842 2,071,554
Other assets (Note 4) 2,084,846 2,014,170
----------- -----------
$18,909,850 $19,160,848
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,487,936 $ 1,576,688
Accrued and sundry liabilities 938,707 1,481,541
----------- -----------
Total current liabilities 2,426,643 3,058,229
Deferred income taxes 168,000 168,000
Deferred compensation 1,019,307 1,031,038
Shareholders' equity
Common stock, no par value, 20,000,000 shares
authorized; issued and outstanding shares 2,511,400
(2001) and 2,503,400 (2000) 68,000 28,000
Retained earnings 15,227,900 14,875,581
----------- -----------
Total shareholders' equity 15,295,900 14,903,581
----------- -----------
Contingencies (Note 8)
$18,909,850 $19,160,848
=========== ===========
See accompanying notes.
Note: The Balance Sheet at September 30, 2000 has been derived from the audited
financial statements at that date.
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SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
------------------------------ ------------------------------
March 31, April 1, March 31, April 1,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales $ 6,492,892 $ 6,735,098 $13,637,155 $12,246,914
Cost of goods sold 4,608,182 4,800,917 9,572,667 8,633,277
----------- ----------- ----------- -----------
Gross profit 1,884,710 1,934,181 4,064,488 3,613,637
Selling and marketing expenses 1,167,483 1,071,048 2,421,665 2,128,422
General and administrative expenses 605,874 573,116 1,167,914 1,077,745
----------- ----------- ----------- -----------
1,773,357 1,644,164 3,589,579 3,206,167
----------- ----------- ----------- -----------
Operating income 111,353 290,017 474,909 407,470
Non-operating income:
Investment income 44,479 46,412 103,190 91,373
Royalty income and other 112,602 63,591 194,664 135,947
----------- ----------- ----------- -----------
157,081 110,003 297,854 227,320
Income before income taxes 268,434 400,020 772,763 634,790
Provision for income taxes 93,000 141,000 270,000 225,000
----------- ----------- ----------- -----------
Net income $ 175,434 $ 259,020 $ 502,763 $ 409,790
=========== =========== =========== ===========
Net income per share of common stock (Note 5)
Basic $ 0.07 $ 0.10 $ 0.20 $ 0.16
Diluted $ 0.07 $ 0.10 $ 0.20 $ 0.16
Dividends per common share $ 0.03 $ 0.025 $ 0.06 $ 0.050
Weighted average shares outstanding:
Basic 2,510,345 2,502,697 2,506,873 2,499,048
Diluted 2,541,829 2,502,697 2,525,688 2,499,048
See accompanying notes.
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SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
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March 31, April 1,
2001 2000
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OPERATING ACTIVITIES:
Net income $ 502,763 $ 409,790
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 310,703 357,819
Provision for losses on accounts receivable 24,000 (35,000)
Decrease (increase) in cash value of life insurance 30,283 (41,586)
Deferred compensation (11,731) (10,862)
Changes in operating assets and liabilities:
Accounts receivable 231,376 (540,729)
Inventory 12,324 121,966
Prepaid expenses and other assets (87,455) 8,698
Accounts payable and accrued expenses (631,586) 452,496
----------- -----------
Net cash provided by operating activities 380,677 722,592
INVESTING ACTIVITIES:
Purchases of marketable securities (580,000) (890,000)
Proceeds from sales of marketable securities 225,000 --
Purchases of property, plant and equipment (87,882) (356,176)
Payments for other assets (55,958) (12,784)
----------- -----------
Net cash used for investing activities (498,840) (1,258,960)
FINANCING ACTIVITIES:
Dividends paid (150,444) (124,970)
----------- -----------
Decrease in cash and cash equivalents (268,607) (661,338)
Cash and cash equivalents at beginning of year 587,663 1,029,586
----------- -----------
Cash and cash equivalents at end of year $ 319,056 $ 368,248
=========== ===========
See accompanying notes.
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SPAN-AMERICA MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2001
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the six month
period ended March 31, 2001 are not necessarily indicative of the results that
may be expected for the year ended September 29, 2001. For further information,
refer to the Company's Annual Report on Form 10-K for the year ended September
30, 2000.
NOTE 2 - INVENTORIES
The components of inventories are as follows:
Mar. 31, 2001 Sep. 30, 2000
--------------- ---------------
Raw Materials $ 1,483,314 $ 1,564,539
Finished Goods 570,844 501,943
--------------- ---------------
$ 2,054,158 $ 2,066,482
=============== ===============
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, is summarized by major classification as
follows:
Mar. 31, 2001 Sep. 30, 2000
--------------- ---------------
Land $ 317,343 $ 317,343
Land improvements 240,016 240,016
Buildings 3,700,111 3,700,111
Machinery and equipment 5,651,537 5,565,181
Furniture and fixtures 535,127 533,601
Automobiles 9,520 9,520
Leasehold improvements 11,345 11,345
--------------- ---------------
10,464,999 10,377,117
Less accumulated depreciation 7,213,558 7,030,917
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$ 3,251,441 $ 3,346,200
=============== ===============
NOTE 4 - OTHER ASSETS
Other assets consist of the following:
Mar. 31, 2001 Sep. 30, 2000
--------------- ---------------
Patents, net of accumulated amortization
of $955,788 (Mar. 2001) and $901,437 (Sep. 2000) $ 389,293 $ 425,185
Cash value of life insurance policies 1,412,003 1,442,286
Other 283,550 146,699
--------------- ---------------
$ 2,084,846 $ 2,014,170
=============== ===============
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NOTE 5 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share in accordance with Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share."
Three Months Ended Six Months Ended
Mar. 31, 2001 Apr. 1, 2000 Mar. 31, 2001 Apr. 1, 2000
-------------- --------------- --------------- ---------------
Numerator for basic and diluted earnings per share:
Net income $ 175,434 $ 259,020 $ 502,763 $ 409,790
============== =============== =============== ===============
Denominator:
Denominator for basic earnings per share
weighted average shares 2,510,345 2,502,697 2,506,873 2,499,048
Effect of dilutive securities:
Employee and board stock options 31,484 0 18,815 0
-------------- --------------- --------------- ---------------
Denominator for diluted earnings per share:
Adjusted weighted average shares
and assumed conversions 2,541,829 2,502,697 2,525,688 2,499,048
============== =============== =============== ===============
Net income per share:
Basic $ 0.07 $ 0.10 $ 0.20 $ 0.16
Diluted $ 0.07 $ 0.10 $ 0.20 $ 0.16
NOTE 6 - OPERATIONS AND INDUSTRY SEGMENTS
The company reports on two segments of business: medical and custom products.
This industry segment information corresponds to the markets in the United
States for which the Company manufactures and distributes its polyurethane foam
and packaging products and therefore complies with the requirements of SFAS 131
"Disclosures about Segments of an Enterprise and Related Information."
The following table summarizes certain information on industry segments:
Three Months Ended Six Months Ended
Mar. 31, 2001 Apr. 1, 2000 Mar. 31, 2001 Apr. 1, 2000
-------------- --------------- --------------- ---------------
Net sales:
Medical $ 3,739,048 $ 3,777,093 $ 8,358,271 $ 7,521,907
Custom products 2,753,844 2,958,005 5,278,884 4,725,007
-------------- --------------- --------------- ---------------
Total 6,492,892 6,735,098 13,637,155 12,246,914
============== =============== =============== ===============
Operating profit (loss):
Medical 121,968 275,248 767,556 599,323
Custom products 142,378 128,040 (7,212) 8,212
-------------- --------------- --------------- ---------------
Total 264,346 403,288 760,344 607,535
Corporate expense (152,994) (113,271) (285,435) (200,065)
Other income 157,082 110,003 297,854 227,320
-------------- --------------- --------------- ---------------
Income before income taxes $ 268,434 $ 400,020 $ 772,763 $ 634,790
============== =============== =============== ===============
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Total sales by industry segment include sales from unaffiliated customers, as
reported in the Company's statements of income. In calculating operating profit,
non-allocable general corporate expenses, interest expense, other income, and
income taxes are not included, but certain corporate operating expenses incurred
for the benefit of all segments are included on an allocated basis.
NOTE 7 - RECENT PRONOUNCEMENTS
The Securities and Exchange Commission issued Staff Accounting Bulletin No. 101
on December 3, 1999. SAB 101 provides the staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. The
Company has applied the accounting and disclosure requirements of SAB 101. No
changes were required to its accounting policies as a result of this adoption.
NOTE 8 - CONTINGENCIES
From time to time the company is a defendant in legal actions involving claims
arising in the normal course of business. The company believes that, as a result
of legal defenses and insurance arrangements, none of these actions should have
a material adverse effect on its operations or financial condition.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
INTERIM FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the second quarter of fiscal 2001 decreased 4% to $6.5
million compared with $6.7 million in the second quarter of fiscal 2000. The
decline resulted from lower unit volumes of overlays, positioners and industrial
foam products. For the year to date in fiscal 2001, net sales increased 11% to
$13.6 million from $12.2 million in the same period last year. The increase in
net sales for the year to date resulted from higher unit volumes of therapeutic
mattresses for the medical market and mattress pads and pillows for the consumer
market.
Net income for the second quarter of fiscal 2001 declined 32% to
$175,400, or 7 cents a diluted share, compared with $259,000, or 10 cents a
diluted share, in the second quarter of fiscal 2000. The earnings decline during
the quarter was due to lower sales volume and increased spending to support our
sales, marketing and research and development efforts targeted primarily at the
medical business.
Net income for the year to date increased 23% to $502,800, or 20 cents
a diluted share, compared with $409,800 or 16 cents a diluted share, in the
first six months of fiscal 2000. The increase in earnings was due mostly to
higher sales volume and higher non-operating income in the first half of fiscal
2001.
The Company's total medical sales decreased by 1% to $3.74 million in
the second quarter this year from $3.78 million in the same quarter last year.
Medical mattress sales were up 16% in the second quarter as a result of healthy
demand for our Geo-Mattress product line. However, sales of overlays and
positioners were down by 16% each, relating to inventory management by one of
our key medical distributors. The company experienced accelerated orders for
overlays and positioners in November-December 2000 ahead of a January 1, 2001
price increase, followed by lower sales in January-February 2001 as the
distributor used its excess inventory. Order patterns have since returned to
normal levels. For the year to date in fiscal 2001, medical sales rose 11% to
$8.4 million from $7.5 million in the same period last year due to a 39%
increase in unit sales of mattresses which was partially offset by a 9% decline
in overlay sales. Management expects sales of medical products for the remainder
of fiscal 2001 to be similar to those of the same period in fiscal 2000.
Sales of custom products decreased by 7% during the second quarter to
$2.8 million from $3.0 million in the same period last year. Most of the decline
occurred in our industrial product lines which have been weak due to the slowing
economy. Sales of industrial products tend to be sensitive to economic cycles
and were soft during the first and second quarters. Partially offsetting the
decline in industrial sales were sales of consumer foam pads and pillows, which
increased 3% in the second quarter compared with the same quarter last fiscal
year. Year-to-date sales of custom products increased 12% to $5.3 million from
$4.7 million
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in the same period last year. The sales increases resulted from higher demand
for consumer mattress pads and pillows sold through our marketing partner,
Louisville Bedding Company. Management expects that custom product sales during
the remainder of fiscal 2001 will be similar to those of the same period in
fiscal 2000.
The Company's gross profit level declined by 3% in the second quarter
of fiscal 2001 to $1.88 million from $1.93 million in the second quarter last
year. The decline was caused primarily by lower sales volume and slightly higher
labor expense. The gross margin percentage for the second quarter increased to
29.0% compared with 28.7% in the second quarter last year due to a slightly more
profitable product mix, in which medical sales represented a higher proportion
of total sales than custom products sales. The medical segment has a higher
gross margin than the custom products segment mainly because most of the
Company's medical products are patented and proprietary.
Year-to-date gross profit increased 12% to $4.1 million in the first
half of fiscal 2001 from $3.6 million for the same period last year. The
year-to-date gross margin percentage increased slightly to 29.8% in 2001
compared with 29.5% during the first six months of last fiscal year. The
increases in gross profit level and gross margin percentage resulted from higher
sales volume and a slight decrease in manufacturing overhead expense. Management
expects the Company's gross margin percentage for fiscal 2001 to be slightly
higher than that of fiscal 2000.
Sales and marketing expenses increased by $96,400 (9%) to $1.2 million
during the second quarter of fiscal 2001 compared with the same quarter last
year. For the year to date in fiscal 2001, these expenses increased $293,200
(14%) to $2.4 million in fiscal 2001 compared with $2.1 million for the same
period last year. For both the year-to-date and the quarter the majority of the
increases came in the areas of shipping costs, commissions, product development
expenses, and evaluation samples. Total sales and marketing expenses for fiscal
2001 are expected to be higher than those of fiscal 2000.
General and administrative expenses increased $32,800 (6%) for the
second quarter of fiscal 2001 to $605,900 compared with $573,100 in the second
fiscal quarter of last year. For the year-to-date in fiscal 2001, administrative
expenses increased $90,200 (8%) to $1.17 million compared with $1.08 million for
the same period in fiscal 2000. The increases for the second quarter and
year-to-date periods resulted from higher patent-related legal fees, bad debt
expense, and an unrealized loss on the cash value of variable equity life
insurance policies. Unrealized gains or losses on the cash value of life
insurance policies are recorded as reductions or increases in administrative
expenses. General and administrative expenses for fiscal year 2001 are expected
to be slightly higher than those of fiscal 2000.
Investment income decreased by 4% to $44,500 in the second quarter of
fiscal 2001 compared with $46,400 in the same quarter last year. For the first
six months of fiscal 2001 investment income increased by 13% to $103,200
compared with $91,400 in the same period last year. The increase for the
year-to-date was due to higher marketable securities balances during the period.
Royalty income and other increased 77% to $112,600 in the second quarter of
fiscal 2001 and rose 43% to $194,700 for the year-to-date as a result of
increased royalty
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income on a shielded syringe product licensed to Becton & Dickinson. Management
expects non-operating income for the remainder of fiscal 2001 to be slightly
lower than that of the same period in fiscal 2000.
During the first six months of fiscal 2001, the Company paid dividends
of $150,400 or 30% of net income for the year-to-date period. This amount
represented two quarterly dividends of $0.03 per share.
The statements contained in "Results of Operations" which are not
historical facts are forward-looking statements that involve risks and
uncertainties. Management wishes to caution the reader that these
forward-looking statements such as the Company's expectations for future sales
and expense levels compared with previous periods are forecasts. Actual events
or results may differ materially as a result of risks facing the Company. Such
risks include but are not limited to: (a) the loss of a major distributor of the
Company's products, (b) the inability to achieve anticipated sales volumes, (c)
changes in relationships with large customers, (d) the impact of competitive
products and pricing, (e) government reimbursement changes in the medical
market, (f) FDA regulation of medical device manufacturing, (g) raw material
cost increases, and other risks referenced in the Company's Annual Report on
Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from operations of $380,700 during the first
two quarters of fiscal 2001 compared with $722,600 in the same period last year.
The reduction in cash flow was caused mainly by a decrease in accrued expenses
related to payments for incentive compensation, income taxes, and property
taxes.
The Company's working capital increased by $478,400 or 6% during the
six months ended March 31, 2001 due primarily to a reduction in accrued
expenses. In addition, the current ratio increased to 4.8 at March 31, 2001 from
3.8 at fiscal year end 2000.
Accounts receivable, net of allowances, decreased by $250,900 or 6% to
$4.0 million at the end of the second quarter of fiscal 2001 compared with $4.3
million at the end of fiscal 2000. The decrease was due to normal monthly
fluctuations in accounts receivable levels. All of the Company's accounts
receivable are unsecured.
Inventory levels remained level at $2.1 million at the end of the
second quarter of fiscal 2001. Management expects inventory levels during the
remainder of fiscal 2001 to be similar to those of fiscal 2000.
Net property and equipment declined 3% during the first six months of
fiscal 2001. Capital expenditures of $87,900 were offset by normal depreciation
expense. Management expects capital expenditures during fiscal 2001 to be
similar to those of fiscal 2000. From time to time, the Company purchases
forward contracts for foreign currency to lock in exchange rates for future
payments on manufacturing equipment ordered by the Company. The foreign exchange
contracts are used to eliminate foreign currency fluctuations during the
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6-9 month period between the time the order is placed and the time of the final
payment. Realized gains and losses, if any, are included in the cost of the
related equipment. Unrealized gains and losses on open contracts are not
material to the Company's results of operations or financial condition.
The Company's trade accounts payable decreased by $88,800 or 6%
compared with fiscal year end 2000, reflecting normal monthly fluctuations.
Accrued and sundry liabilities decreased by $542,800 or 37% compared with fiscal
year end 2000 as a result of decreases in accrued incentive compensation, income
taxes payable, and accrued property taxes.
Management believes that funds on hand and funds generated from
operations are adequate to finance operations and expected capital requirements
during fiscal 2001.
IMPACT OF INFLATION
Inflation was not a significant factor for the Company during the
second quarter of fiscal 2001. However, management believes that raw material
cost increases are likely to occur during the remainder of fiscal 2001 due to
anticipated polyurethane foam price increases. The Company will attempt to
recover the potential cost increases through higher sales prices on its
products. However, because of market competition, there can be no assurance that
we will be able to fully offset the anticipated higher material costs.
Consequently, the Company's profit margin could be adversely affected to the
extent that we are unable to pass these increased costs along to our customers
or to otherwise offset cost increases.
ITEM 3. MARKET RISK
The Company's market risk exposure is the potential loss arising from
changes in interest rates and its impact on investment securities. As of March
31, 2001, the Company held $4.8 million in securities available for sale. These
securities consisted primarily of bonds called "variable rate demand notes" or
"low floaters," which are issued by corporations or municipalities and are
backed by bank letters of credit. The interest rates on the bonds are floating
rates, which are reset weekly based on market rates for comparable securities.
The bonds have varying maturities but can be liquidated by the Company at
anytime with seven day's notice. Using the level of securities available for
sale at quarter end, a 1% change in interest rates for a full year would change
after tax earnings by approximately $48,000.
In addition, the Company's other assets at March 31, 2001 included $1.4
million in cash value of life insurance. The cash value is invested either in a
fixed income life insurance contract or in portfolios of The Prudential Series
Fund, Inc. (the "Fund"). The fixed account options are similar to fixed income
bond funds and are therefore subject to interest rate and company risk. The Fund
portfolios invest in common stocks and bonds in accordance with their individual
investment objectives. These portfolios are exposed to stock market and interest
rate risk similar to comparable mutual funds. Management is unable to quantify
this risk, but we believe that normal market and interest rate fluctuations
(such as those seen in the last 15 years) would not have a material effect on
the financial position of the Company.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is from time to time party to various legal actions arising
in the normal course of business. However, management believes that as a result
of legal defenses and insurance arrangements with parties believed to be
financially capable, there are no proceedings threatened or pending against the
Company that, if determined adversely, would have a material adverse effect on
the business or financial position of the Company.
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. Exhibits & Reports on Form 8-K
(a) None.
(b) None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPAN-AMERICA MEDICAL SYSTEMS, INC.
/s/ Richard C. Coggins
----------------------
Richard C. Coggins
Chief Financial Officer
/s/ James D. Ferguson
---------------------
James D. Ferguson
President and Chief Executive Officer
DATE: May 11, 2001
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